The newest trend in the financial sector, cryptocurrency, has made a significant step toward widespread acceptance through the El Salvadorian government’s decision to make bitcoin legal tender in the country. According to CNN, the currency was officially introduced to the country during the week of September 7 and was marked by the government officially purchasing bitcoin.
Forbes explains that cryptocurrency is an alternative currency created on the blockchain system. Blockchain is a relatively new technology that allows monetary transactions to exist on one “universal ledger” in an online cloud. This system was first used as an anti-money laundering device, but since the innovation of digital or “crypto” currencies, blockchain has been used as the basis for digital currencies to exist. If one owns bitcoin, for example, it is held not physically, but in a virtual “wallet” that can only be accessed through a unique username and password. Every bitcoin wallet in existence is connected to blockchain, allowing for every bitcoin transaction to be tracked in this universal ledger. The value of Bitcoin floats freely against the U.S. dollar, like any foreign currency, and is currently valued at about $50,000 to one Bitcoin.
Despite the recency of the rollout, Reuters explains that El Salvador’s plan is already encountering some problems. The government has offered incentives of $30 USD worth of Bitcoin for those who create a virtual wallet. However, this has had mixed effects, as distrust has led to many converting the incentivized bitcoin into U.S. dollars and essentially “cashing out” of the new system entirely. Reuters continues that the government has created an app, called Chivo, to facilitate the use of Bitcoin within the country, which has encountered technical difficulties.
Looking past the initial bumpy rollout of the new system, the country stands to gain if the system proves sustainable. Each year, El Salvadorans lose over $400 million in remittances, according to The Financial Times. Jaime Garcia, a Salvadoran man living in Canada, was interviewed by CNBC and testified to the enormous fees he pays to send money to his family in El Salvador. His provider, Western Union, charged him nearly $13 for every $100 he sent his family. Western Union also has a waiting period of about three days before the money can be accessed in El Salvador. However, the real problems lie in receiving the money. Garcia told The Financial Times that the citizens must take a bus to an office building to collect their physical money. Knowing the location of these places, gangs loiter near these buildings and attempt to rob anyone who comes out with money. Last year, the people of El Salvador transferred over $6 billion into the country, representing 23 percent of the entire nation’s GDP.
The new bitcoin process is supported by people such as Garcia, who believe that the use of the app, Chivo, will allow them to skirt the remittance fees and allow for direct and safe monetary exchange. President Nayib Bukele, who pushed to pass the bitcoin initiative through Congress, has supported this process by arguing that savings on remittance payments, the attraction of investment into the country, and the ability to reach a population where only 30 percent have official bank accounts, would all work to benefit the economy. Chivo will allow for citizens to scan a QR code and send a direct bitcoin payment to the vendor they are patronizing. Bukele believes this will bring the excluded 70 percent into economic transactions and drive growth. Regardless of the results, central bankers, government officials, and pro-crypto citizens from around the world will be watching the developments coming out of El Salvador.