from Elena Obukhova, Founder & CEO at FAS | Fintech advisory services
The historic day that Bitcoin became an official currency in El Salvador and an official foreign currency for the rest of the world began with the Bitcoin price correction. Correction is never new to the crypto community. This time around, however, the majority of crypto folks viewed this as a personal insult and an orchestrated attack on Bitcoin.
Nayib Bukele, a president of El Salvador, said on his Twitter: “El Salvador has just bought 200 new coins. We now hold 400 #Bitcoin, ”referring to a discount on the market in his subsequent posts. On Tuesday (8th) they already held 550 Bitcoins.
The entire global crypto community watched El Salvador on that historic day. On the 7th and the following days, people went to big chains like Starbucks, McDonald’s and various local stores to pay with Bitcoin and post it on their social media. The crypto community was full of excitement, I could see that on my Twitter.
There were also some opposing moves before and after Bitcoin officially became legal tender. Some people claimed that they would pay for this reform with their taxes. There were several protests in the country.
Volatility is a relative term
I always say that volatility is a relative term. Currency cannot be volatile unless we compare it to something else. Imagine if all world prices, salaries and bills were in Bitcoin. Would it be volatile then? However, when it comes to the global market of buying goods from outside the country and doing business in foreign currencies, the volatility of the local currency can have a detrimental effect on businesses. Especially when it comes to small businesses and micro traders.
So far, Bitcoin is not the only official currency in El Salvador, the US dollar will also remain. Bitcoin helps the country to minimize its dependence on the US dollar and to have huge benefits for the economy in the long term. With a dual currency system, however, we are back to the volatility discussion. With all traders and businesses settling in US dollars, accepting Bitcoin can come with the price depending on the day and market conditions. If all billing were in Bitcoin, businesses and micro-traders would be less sensitive to price fluctuations on a daily basis. Also, given Bitcoin’s deflationary nature, they could enjoy currency appreciation over the long term.
When we talk about innovative financial solutions in industrialized countries, it is never the same as in developing countries. In El Salvador, according to Findex 2017 data, only 30% of adults had access to a formal account, which meant 70% of the population without a bank account. The internet penetration forecast (Statista) is 49%, which means that half of the people do not have access to the internet. There is already a larger segment of the population who can access financial services through the crypto market compared to people with access to formal financial products.
El Salvador also introduced a Chivo (slang for “cool”) bitcoin payment app that experienced some technical glitches when people tried to log in or check out at cafes / restaurants. As with every app launch, there were people who had a negative experience due to some technical issues and people who were very excited to use the Lightning network and pay with Bitcoin in Starbucks or local cafes in seconds.
It is important to understand that El Salvador is the country with the lowest per capita income in Latin America. The majority of people did not use formal financial products and were left without bank details. The financial literacy rate was 21% in 2017 (World Bank) compared to developed economies, in which 37% to 60% of people live with financial literacy. Argentina, for example, where the crypto adoption rate is one of the highest in Latin America, had a financial literacy rate of 28%.
I had worked with financial products for the underserved populations of Southeast Asia during my time at the UN, and introducing something new without proper education and explanation is always fraught with difficulties. At the same time, I’ve always believed that cryptocurrencies are the cure for financial inclusion and underserved populations. For example, people in rural areas of Myanmar do not have access to ATMs. All machines are miles away. Imagine how difficult it is to get money from an ATM when you have to walk for miles through the mud during rainy and typhoon seasons. It is not an everyday experience and so much of the formal economy is becoming the cash economy. At the same time, I found that every household has access to at least one phone that is connected to the Internet. That makes it extremely easy to access the crypto market without having to go anywhere.
In my previous articles, I discussed use cases for Bitcoin and cryptocurrencies in Latin America within the cash economy and outside the public sector. People choose Bitcoin over their national currencies for a variety of reasons, including inflation protection, access to financial services, remittances, loans, etc.
Coming back to the El Salvador case, I think this is one of the most exciting government-level experiments that can improve people’s lives and increase financial inclusion. The whole crypto community is watching with sheer excitement. Nayib Bukele brought the unofficial economy into the public sector, opening up more opportunities for the non-banks and for the country’s economy in general.
Not all good ideas work in practice, and the greatest part of success is always implementation. Start day didn’t go as smoothly as everyone expected, but when did we ever have a smooth start day for something? El Salvador’s GDP is $ 27 billion if we compare it to Apple and its market cap of $ 2.46 trillion. Apple’s new products aren’t always perfect, why do we expect Chivo to run so smoothly?
At the end of the day, the main puzzles El Salvador would have to solve are:
1) Financial education and literacy. It’s important to explain to people what Bitcoin actually is and how it can help them with wire transfers, daily transactions, and access to financial products.
2) Settlements. I mentioned earlier that using a dual national currency system can come at a cost, not for the government and the rich, but for the poor. Micro merchants, small vendors, and individuals are exposed to currency fluctuations and risk the Bitcoin price falling if they have to settle in US dollars.
3) frame for payments in cryptocurrency, transfers, billing and accounting. It should be simple, accessible, and run smoothly.
The real story is being written today and it’s exciting for the entire crypto space. I will continue to watch how the situation evolves and share more updates and insights later. Also plan to visit El Salvador in person in the coming months.