It’s been hyped since conception as a disrupter, a grass-roots currency backed by and beholden to no sovereignty for its value. Created by anyone with the technological capability to “mine” its possibilities, bitcoin has become a medium of exchange, increasingly accepted as cash. It has become a store of value, trading as a commodity on global exchanges. And now it has become a coin of the realm, adopted by El Salvador as its official currency.
El Salvador. Not the U.S., China, the European Union, India, or in fact any member of the G7, G8, or G20, not an economic power or exporter or a developed or wealthy nation. We would expect a groundbreaking change to come from such major players, and perhaps only after much deliberation, negotiation, and diplomacy, as with the creation of the euro, for example.
El Salvador is a country of only 6.5 million people, with another 2.5 million living abroad, due to many years of poverty, corruption, and war. After several decades of economic dependence on exports--first of indigo (dye) and then of coffee--El Salvador has been trying to recover by diversifying its economy. Now, the country exports more textiles, toilet paper, plastic lids, and flavored water.
Still, its economy depends most on remittances, on money sent home from Salvadorans living abroad: in a real sense, its major export is its labor force. In 2020, those remittances totaled about $6 billion, or about 25 percent of the nation’s GDP. And, according to the Salvadoran government, the ease of remittance transactions from abroad is a prominent reason to adopt bitcoin as its currency.
To launch this effort, the Salvadoran government is spending about $225 million, including distribution of $30 worth of bitcoin to everyone who adopts the government’s official e-wallet app. Transactions of all kinds, and, presumably, all transactions can then be paid for using the app. This assumes, of course, that users have a smart phone and can afford internet access.
According to the Wall Street Journal, 80% of all citizens are skeptical, especially as the government will be privy to all transactions through its distributed wallet and app. Many are concerned about bitcoin’s volatility as a commodity—it was down 17 percent in the day after El Salvador’s announcement—and thus its value. Many are concerned about potential hacking. And, as taxpayers, many are concerned about the government’s large investment in the currency.
Bitcoin is not entirely new to El Salvador, with an estimated 35,000 current users, and the country has not used a currency of its own since 2001, when it adopted the USD as the official currency. But the Salvadoran government is the first to officially adopt a cryptocurrency as its legal tender.
Bitcoin famously evolved as a “peer-to-peer” currency, neither minted nor managed by any sovereign economy. Theoretically and historically, both were critical to controlling an economy and thus protecting its ability to generate wealth, so governments from earliest recorded history have hastened to do so.
The creation myth is well-known: in 2008, a paper appeared from an as-yet unidentified author, then an open-source app appeared, and the mining began. It spread globally, although not without pushback and attempts at regulation. China has outlawed cryptocurrency mining, for example, and others have tried to regulate and/or tax its use.
One major concern is that cryptocurrencies can be owned pseudonymously, that is, ownership is assigned to a bitcoin address, not a name. Thus, there is fear that cryptocurrencies can be quite conveniently used to move money by everyone from traffickers to terrorists to corrupt bureaucrats, easily evading regulated currency flows and traceable bank accounts, to say nothing of taxes.
This “bottom-up” currency (r)evolution has wide appeal to many—from academics to anarchists to venture capitalists—for political, social, economic, and just practical transactional reasons, but because it happens outside of sovereign control, it has not, so far, appealed to governments. It is in keeping that the first government to officially embrace it operates with little global or even internal economic power. El Salvador has little to lose by ceding its currency sovereignty, especially since that sovereignty has been limited to choosing the US dollar.
Will the adoption of cryptocurrencies by other sovereignties accelerate now, or will this prove to be a misguided attempt at economic empowerment? The most developed economies, with the most to lose, will almost certainly be the last to the party, if indeed it continues. And if bitcoin fails as a sovereign currency, will that hasten its end or enhance its insurgent appeal?