Bitcoin in El Salvador
El jewel of Central America, El Salvador, captivates all who visit this country with its breathtaking landscapes, chains of volcanoes, the rich aroma of its delectable coffee, and the allure of pristine beaches.
However, beneath the surface of its natural beauty lies a tapestry of economic challenges El Salvador has grappled with for decades. With an economy heavily reliant on international remittances, a majority of its population unbanked, and the absence of a sovereign currency, the nation faces many economic pain points.
đź”’ Enhance your self-custody Theya, a collaborative multisig vault.
Yet, challenges extend well beyond their economic woes. Woven into El Salvador’s history are tales of a brutal civil war, the struggle against political corruption, and the battle against violent gangs that have painted this small Central American country as one of the most dangerous in the world.
Following the 2021 election, winds of change swept across the horizon. Nayib Bukele, leader of the Nuevas Ideas Party, was elected president of El Salvador, marking a first-time departure from the previous civil war governments who had rotated power since the 1980s. By introducing sweeping changes aimed at revolutionizing their economy and prioritizing public safety, Bukele has set El Salvador on a newfound path.
In September 2021, El Salvador became the world’s first country to adopt Bitcoin as legal tender. Previously, the dollar served as the primary currency of El Salvador which posed both advantages and disadvantages to the people of El Salvador. On the one hand, it gives Salvadorans easier access to the world's strongest and most stable currency. On the contrary, it subjugates the population of El Salvador to the whims of U.S. politics and monetary policy decisions.
As part of their Bitcoin initiative, the government of El Salvador introduced Chivo wallet — a digital wallet allowing citizens to transact and save in Bitcoin. To encourage the adoption of Bitcoin, Salvadorans were even granted a $30 bonus when opening a Chivo wallet for the first time. While the wallet has faced criticisms, it represents a significant step in building the digital infrastructure needed to support a Bitcoin economy.
The overarching goal of adopting Bitcoin in El Salvador was geared towards fostering financial inclusion where traditional banks had failed. According to an article from Forbes, while a mere 29% of Salvadorans have bank accounts, within a month of adopting Bitcoin as legal tender, 3 million Salvadorans opened a Chivo Wallet, amounting to 49% of the population. Thanks to Bitcoin’s digital nature, anyone with a smartphone and an internet connection can access Bitcoin, making it much more accessible than traditional banking. Today, more Salvadorans have a Bitcoin wallet than a bank account.
Michael Rihani, Bitcoin product lead at CashApp illustrated this eloquently:
“It took 20 years for 1.8 million Salvadorans to have a bank account. It took 20 days for 2.2 million Salvadorans to have a Bitcoin wallet.”
Another reason for the adoption of Bitcoin as legal tender was to disrupt the current remittances model in the country. According to CNBC, remittances from abroad account for nearly a quarter of El Salvador’s GDP, amounting to 70% of the population receiving them. In other words, sending money from abroad back home to El Salvador is a lifeline for most of the population.
Remittances via institutions like Western Union charge outrageous fees and face long waits, imposing challenges on a population that cannot afford them. To further complicate things, it is not uncommon for gang members to wait around the physical locations of remittance offices, waiting to rob unsuspecting Salvadorans of their hard-earned money.
The Chivo wallet aims to soften this pain point by offering Salvadorans a digitally native way to send money. Leveraging the power of Bitcoin, a Salvadoran abroad can remit money back home to their family within minutes and at zero cost. While it may take a while for Chivo to attain a majority adoption for remittances in the country, the digital infrastructure now exists and it represents a significant humanitarian improvement.
Additionally, the government of El Salvador has diversified into Bitcoin mining, harnessing the geothermal energy from its volcanoes. Volcano Energy, the state-owned Bitcoin mining firm announced $1 billion in commitments to build a 241 megawatt (MW) Bitcoin mine powered by solar and wind. These efforts combined diversify El Salvador’s economy and make them a substantial player on the global Bitcoin stage.
The adoption of Bitcoin in El Salvador also introduced other unintended benefits. Foreign investment has increased in El Salvador following their adoption of Bitcoin. In September 2023, Google and El Salvador announced a $500 million strategic partnership. This seven-year partnership is geared towards making El Salvador a technology hub of Central America. It represents a significant move from Google, highlighting the newfound stability and potential El Salvador possesses.
Salvadoran Bonds have also performed admirably since the adoption of Bitcoin as legal tender. Bonds from El Salvador posted 70% returns in mid-2023, the best among emerging market dollar bonds. This rally has drawn the attention and investment of JPMorgan and settled fears of El Salvador’s “Bitcoin experiment” showing El Salvador is ready and capable of paying its debts.
Similarly, tourism in El Salvador has witnessed a surge in recent years, thanks in part to Bitcoin, but also the crackdown on gangs from the current government administration. A recent report from Santander stated tourism in El Salvador was on the rise due to increased security and the adoption of Bitcoin as legal tender. The report found tourism has risen 30% year-over-over, much of that coming from increased visits from U.S. citizens.
El Salvador’s bold move to adopt Bitcoin as legal tender undeniably sets the stage for a promising future. Navigating through a history marked by economic challenges and societal struggles, the nation has embraced a transformative approach under President Bukele’s leadership. The adoption of Bitcoin aimed at addressing financial inclusion and remittance challenges also sparked unintended positive consequences.
The introduction of the Chivo wallet rapidly gained traction, with millions of Salvadorans adopting this digital alternative to traditional banking in a fraction of the time it took for conventional banking to reach the masses. El Salvador's foray into Bitcoin mining, leveraging its abundance of geothermal energy and strategic partnerships with entities like Google reflects a diversified approach to economic development. The rise in foreign investment, impressive bond performance, and a notable boost in tourism further underline the newfound stability and potential that El Salvador possesses.
This success of El Salvador’s “Bitcoin experiment” has debunked initial skepticism and silenced doubts for the time being. Following their adoption of Bitcoin, El Salvador stands as a testament to the transformative powers of innovative policies. El Salvador is not merely adapting to change but is actively shaping its own path — one of economic empowerment, technological advancement, and a brighter future for its populace. While nothing is certain, the nation’s journey into Bitcoin exemplifies the potential for small nations to chart their own course to prosperity through strategic, forward-thinking initiatives.