The launch of bitcoin as the official currency by El Salvador on 7 September was considered a landmark event in the development of the cryptocurrency. Instead, it will go down as a crappy experiment that ran into convulsions at the very beginning. The Central American nation, primarily known for its ideological struggles during the Cold War, came into the global spotlight by becoming the first country in the world to adopt bitcoin as legal tender. But its state-backed Chivo Wallet app, to enable the use of these digital tokens, was not available on the popular app store. It took a tweet on Twitter by El Salvador’s President Nayib Bukele—his displeasure is evident in the ‘angry’ emoji to be downloaded. Then, as soon as a rush started, the app faltered and bug-fixers had to be called. These twists accompanied the social media rush, causing the dollar value of bitcoin to crash (about 20% at one point), taking other cryptos along. An El Salvadoran who sent bit-money home from the US may have noticed that his family had little access to it. Information on the flow should have exposed the dangers of this route. But the leader of El Salvador was not to be deterred.
A defiant Bukele described the fall as an opportunity to “buy the dip” and took aim at the crypto-skeptic International Monetary Fund for saving El Salvador “a million in printed paper”, even as a sarcastic thank you. That his government bought 150 units. Bitcoin in a show of support. His point sounded hollow as the app glitches persisted, but he may be right about a fix at some point. After all, the supply of bitcoin is reputedly limited by its software design. This is also its main attraction, as it cannot be removed from human stupidity – as fans of the original concept see it – through oversupply by central bankers. For a small country with a gross domestic product (GDP) of just $27 billion in 2019, running its own currency is troubling. Indeed, smaller economies are often advised to peg their currencies to the US greenback. Many local residents were using US dollars or crypto anyway, the latter because inward remittances, which make up more than 22% of its economy, were increasingly turning to crypto to avoid the high wire-transfer fees of regular channels. . By adopting an online currency that costs nothing to transfer across borders, El Salvador expects annual savings of $400 million on remittance fees. Financial inclusion through digital wallets was another goal: Chivo is preloaded by the state with $30 bitcoin each year. It is a universal basic income, an idea that all countries should explore.
The problem with El Salvador’s adoption of expensive digital payments is its means of choice. Bitcoin will not be cheaper than over-mining, but its limit on units also makes it a store-of-value rather than a good instrument of exchange. As its demand increases, so does its conversion value, and vice versa; And thanks to speculation, high volatility is assured. This week was not very volatile. There are other hidden risks as well. Should China crack down on the carbon exit of bitcoin mining, for example, crypto markets will receive a harsh blow. For transactional use, however, currency stability is important. Unless El Salvador and its expatriates can eliminate fiat currency from their lives, the widespread use of bitcoin could lead to price chaos and damage its economy from time to time. Of course, it is not impossible for a country to run on crypto. Stablecoins can solve volatility as a problem. Central bank digital currencies are promising in this context as well. El Salvador’s move was a brave one, but its first stumbling block is unlikely to be its last.
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