By Ambassador Ariel Andrade,
A few days ago, on June 5 at the Bitcoin 2021 conference, President Nayib Bukele made a pre-recorded announcement that caused a local media hysteria with a huge worldwide echo: El Salvador would be the first country in the world to adopt Bitcoin as legal tender. On June 8, just three days after that statement, the Bitcoin Bill was approved by the Legislative Assembly, denoting that in three months approximately, El Salvador will implement this initiative. How El Salvador came to this decision and what are its local implications, are two topics worth exploring, in order to facilitate to our friends in India why El Salvador is doing this.
Legal tender in El Salvador
The use of means of exchange in the current territory of El Salvador can be traced back to pre-Columbian times, specifically to the rise of the Mayan civilization, when cocoa beans were used as a reference value for exchange between native peoples.
After the Spanish conquest, the use of the Real coined in Spain and later, the Macaco or Morlaco minted in Peru and Mexico, became the means of exchange par excellence.
After Independence in 1821, the Peso de Plata was first introduced, which would later become the Salvadoran Real, and from 1892 (in commemoration of the fourth centenary of Christopher Columbus arriving in America), in the Salvadoran Colón.
Simultaneously, they largely used the Fichas de Finca (farm tokens) which were private means of exchange, issued directly by landowners to pay workers on the coffee farms, and which they then used to buy products in the stores of the same farms, completing a cycle of severe exploitation. These were banned in 1934.
The Colón was the only legal tender in El Salvador until January 1, 2001, when through the Ley de Integración Monetaria (monetary integration bill), a dollarization process was completed. Although Colón is still a legal tender, the US dollar was rapidly adopted as the main legal tender.
Since then, a fierce political and academic debate about how dollarization deepened the economic dependence on the United States and the need of returning to its own currency to recover the monetary policy lost when adopting the US dollar, had repeatedly emerged.
Cryptocurrencies and Bitcoin in El Salvador
Although cryptocurrencies are relatively recent, the interest in them in El Salvador has been present for several years, especially in the academic field and in the field of trading.
However, there is a noteworthy precursor to the use of Bitcoin in El Salvador: The Bitcoin Beach project (bitcoinbeach.com/) which is located in El Zonte (3,000 inhabitants), a small coastal village well known as an important beach and surf destination.
This project dates back to early 2019, when through a large “anonymous” donation of Bitcoins; they started to develop a sustainable ecosystem for the use of Bitcoin at the grass-root level, having in mind that users would be people and small businesses excluded from the financial system (no bank accounts, no credit cards).
The project has trained people on the use of applications based on the second layer technology Lightning Network, to perform micro-payments using Bitcoin: grocery stores, restaurants, barber shops, nail salons, hardware stores, local water and energy companies, etc.
Likewise, they transferred Bitcoins to several teenagers to stimulate their attendance at school and in sports activities, as well as to 600 families to meet basic needs, especially during the COVID 19 lockdown. In fact, the lockdown widely stimulated the local exchange of goods and services through Bitcoins.
One of the more appealing fields is remittances, especially from the United States, which when done over the traditional system depend on commissions and specialized entities. It should be noted that in 2020, El Salvador received a little more than USD 5.9 billion in remittances.
The growing fame of the project due its disruptive nature, did not go unnoticed and many of its promoters, such as Jack Mallers (Strike CEO, a digital wallet firm), quickly came into contact with El Salvador’s government, which led to the rapid evolution from the local initiative to a national one.
It should be noted that although Bitcoin Beach is a disruptive initiative, it is not the first time that El Salvador has tried to carry out financial inclusion through alternative currency systems.
In 2006, with the support of the Social Trade Organisation (socialtrade.org/), a socio-economic network was established in the town of Suchitoto based on a means of payment called UDIS (solidarity exchange units in Spanish), which was an acceptable voucher among their members. This project did not last long but it set an important precedent.
The national debate
News about El Salvador adopting Bitcoin as legal tender came as a surprise to the vast majority of the Salvadoran population, as much as it has been in the international arena.
Unlike dollarization, when there were rumors before its introduction and a heated academic and political debate had already begun around it; this time there were no major indications other than a couple of visits by Jack Mallers to the Bitcoin Beach project and to promote the launch of the Strike app, as well as the sponsorship of the national surfing team in the recent ISA World Surfing Games, and some premonitory messages via Twitter.
This, tied to the deep antagonism between followers and critics of President Bukele, has led to this bill being received with highly politicized opinions. On the one hand, those who consider that this will lead to the collapse of the economic system, and those who consider that it is a panacea that will solve all the economic problems.
In between, there is a wide set of opinions, both favorable and unfavorable, from various perspectives: commercial, financial, tax, technology, etc. Below this, lies most of the people to whom this debate is alien and to whom even the concept of cryptocurrencies is unintelligible.
The main concerns revolve around the use of the US dollar as unit of account and the instability of the exchange rate (affecting international trade), its use a means of payment from the government to its suppliers (wages, public debt and retirement funds), accountability of users, money laundering, adaptation of the private financial system, internal technology gap and Internet access, cost of energy for mining Bitcoins, etc.
In contrast, there is the possibility of moving towards the adoption of a Centralized Digital Currency (as many countries are assessing) while advancing in the use of a recognized cryptocurrency such as Bitcoin, and becoming a destination of investments related to cryptocurrencies (led by the offering to develop a mining hub based on geothermal energy), among others.
Outlook
It is difficult to foresee what will happen in the short and medium term, because it is still in a very early phase. Once the bill has been passed, the process of rolling it out must start, which will include a detailed regulation, for which a 90 days period has been planned.
In the same way, the private financial system must dictate guidelines to lead its implementation in the last mile to the population.
The reaction of the international financial system should also be expected, especially the International Monetary Fund, with whom the country is negotiating an agreement for USD 1.3 billion.
However, these are very interesting moments that will undoubtedly be of great interest in the future for the entire international community, which sooner rather than later will have to assume the inevitable reality of digitizing the economy, an aspect in which India is a pioneer and should be an important partner in the process initiated by El Salvador.
Also, the dollarization process that took place in the early 2000’s will be for sure a strong base on how to and how not to unfold the bitcoinization process.
(The author is former Ambassador of El Salvador to India & Managing Director of Grupo 108. The opinions expressed in this article are the sole responsibility of the author and do not reflect the official position or policy of Financial Express Online. He can be reached at: arielandrade@108ca.com)
