El Salvador & Bitcoin

Bitcoin becomes legal tender in El Salvador, after President Nayib Bukele of El Salvador signed it into law last week.

June 14, 2021

By: Bobby Casey, Managing Director GWP

el salvador bitcoin El Salvador has a bumpy history when it comes to balancing freedom and civil liberties with political corruption and a heavy gang presence.

The general population has no cultural objection to different religions, beliefs, free speech or a free press. But the government is often at odds with violent gangs. So if you ask, “Is El Salvador a free country?” the answer would be, “Privately, yes. Publicly, be careful.”

The greatest inconsistencies from the government appears to be in the courts. Their congress appoints their judges; and more recently, they also dismissed several of them. What their constitution guarantees, and how that actually plays out are two entirely different things.

It’s not unheard-of that government leaders meet with gang leaders to make deals in the same way US leaders meet with labor union leaders. That’s should give some indication of the stronghold gangs have in these countries.

The gangs are so bad, Salvadorans are fleeing to the US to get away. El Salvador isn’t alone in this. Honduras is seeing this as well.

Whether it was President Nayib Bukele’s policies and dealings or just the gangs changing their tactics for unrelated reasons, annual homicides dropped from 1,630 to 697.

Is the current Bukele administration great? No. I think he’s learning what he’s up against, and starting to understand why things never changed much under each previous administration though.

From what I’ve heard him say, he is young and optimistic.

From 1892 to 2001, El Salvador’s currency was the “colon”. In 1931, El Salvador left the gold standard, and since 2001, their official currency was the US dollar. Adopting the dollar was supposed to attract more investments

It’s no secret that the US dollar is on some pretty shaky ground. The massive inflationary tactics, coupled with what is being called “de-dollarization“, makes the USD less than desirable.

Every time the Federal Reserve prints money, it’s been decided who gets that initial wealth burst, and odds of El Salvador being on that list are about as slim as any random American citizen. When the dollar is inflated, it hurts Salvadorans too.

Just last week, a new milestone in Salvadoran monetary history was hit: the Millennial president signed into law Bitcoin becoming legal tender in the country of El Salvador. This doesn’t make him a paragon of freedom, but it does make him forward-thinking enough to not sink with the dollar.

While the young president doesn’t expect all the economic woes and inequalities to be solved by the adoption of Bitcoin, he does expect creating some distance between the USD and El Salvador will mitigate some issues.

He is pushing past the international community’s trepidation and cynicism. Some accuse him of using this Bitcoin legislation as a distraction from the purge of judges he and his cohorts imposed not long ago.

While that could be true, El Salvador has several pain-points. I’ll suspend judgment on the ousting of the judiciary, but the gang violence and poverty weighing on that country are dire. That is not a matter of opinion, but a matter of fact.

The inflation of the dollar isn’t helping them either, and they have to recover from not just the impact the pandemic had on El Salvador directly, but also what happened to them indirectly by way of the US.

Other criticisms, of course, include illicit activities such as money laundering, and weapon and drug sales. But Bukele rightly points out that those things are done in every currency, and the problem isn’t really crypto but the activity itself.

Roughly one-fifth of the Salvadoran GDP is made up of foreign remittances:

Remittances surpassed $5.6 billion [in 2019], dwarfing the $724 million El Salvador received in foreign investment and topping the $4.8 billion worth of goods that the country exported.

When US Hispanic unemployment soared passed 20% in 2020, remittances plummeted by 40%.

The Bukele administration has a lot of explaining and campaigning ahead of them. As a populist president, the main impetus behind this effort boils down to the inclusive nature of crytpo: Bitcoin isn’t just for the rich, it’s for everyone.

A few key takeaways from the coverage last week:

  • El Salvador will develop a government Bitcoin wallet which will be free to all in El Salvador on an opt-in basis. People are free to use any wallet they choose, however.

  • Their government is likewise committed to building out their internet infrastructure to promote connectivity to Bitcoin.

  • All merchants must accept Bitcoin; they cannot refuse payment made in that cryptocurrency any more than they can refuse the USD. This includes the government itself as taxes can also be paid in Bitcoin.

  • The US dollar remains the exclusive unit of account for corporate balance sheets.

  • Commercial contracts can be settled in Bitcoin where previously denominated in USD.

  • A government trust fund to be created, with an initial estimate of a $150 million, to ease BTC exchange risk to small merchants (opt-in only).

  • Anyone who invests 3 Bitcoin in El Salvador is eligible for permanent residency.

  • With peer-to-peer transfers, remittance commissions will go from 30% to almost zero.

  • While the government isn’t thinking about getting involved in mining directly, it intends to do things to promote it. President Bukele has a plan for clean, geothermal energy from volcanoes.

El Salvador has partnered with Strike to help with the roll out of Bitcoin adoption. Strike is an app that allows people to spend and send crypto like Bitcoin. Their El Salvador office is located in El Zonte, a fishing and farming community on the Pacific coast of El Salvador that also happens to be known for its challenging surf.

El Zonte is also endearingly called Bitcoin Beach.

In that town, many are buying and selling in Bitcoin and have been for some time. Until now, the acceptance of Bitcoin as legal tender was entirely voluntary. Strike is helping to reach the near 70% unbanked population of El Salvador.

The hope is that Bitcoin will bring investment to the country, as well as jobs. Perhaps between the combined effort to reduce violent crime, and the spurring of economic activity, the emigration out of El Salvador will come down. Longer term, Bukele hopes to be an encouraging and empowering example to other countries to follow suit.

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