Like millions of Salvadorans, chauffeur Ricardo López has spent the past few weeks trying to get his head around bitcoin. Once the digital currency becomes legal tender this week, he is not sure he will accept it, but if he does he will convert it immediately into US dollars.
“They say the price varies and that it’s a bit like the stock market,” the 37-year-old said. “Most people are afraid because of the lack of information.”
Twenty years after it adopted the US dollar as its national currency, El Salvador will on Tuesday become the first country in the world to make bitcoin legal tender.
In a plan spearheaded by the Central American nation’s populist president Nayib Bukele, citizens will be able to shop, pay taxes and buy land using the volatile cryptocurrency.
Proponents say it will cut the fees Salvadorans pay to send home remittances — which represent one-quarter of the country’s gross domestic product — promote financial inclusion for those without bank accounts and facilitate access to a potentially high-yielding asset.
Critics say the rushed plan could cost poorer Salvadorans when the price falls, raise costs for banks and insurers, provide a shield for money launderers and risk economic stability.
Rating agency Moody’s downgraded the country’s debt rating in part because of the law. The IMF — currently in talks with the government over a new loan — said adopting cryptocurrency as legal tender could destabilise prices and put the financial system at risk.
With a week to go, polls show the majority of Salvadorans are against the idea, and on the streets of the capital, few said they were prepared to switch to using the digital currency.
Small, sporadic protests by groups from pensioners to unions took place through the week, and a digital specialist who had spoken out against the plan was detained by police without an arrest warrant.
“I don’t know anything about it and I don’t want to learn either, I’m one of those people who says: no way, I won’t use it,” said Guadalupe Escobar, 35, who sells bread at a roundabout in the capital San Salvador.
Out of employees and owners from more than 20 different enterprises surveyed by the Financial Times in San Salvador — from informal street food stands to coffee shops chains — three said they knew they would accept bitcoin. The rest had not started preparing or rejected the idea.
Bukele’s government is rolling out a digital bitcoin wallet called “Chivo” — slang for “cool” — in the coming days with $30 in bitcoin free for every user. Across the country, Chivo ATMs will allow consumers to buy bitcoin or convert it into cash with the government absorbing commission costs.
The move has excited cryptocurrency advocates abroad. Juan Pablo Thieriot, chief executive of Uphold, a digital platform that enables payments and trading in cryptocurrencies, national currencies and precious metals, said El Salvador’s move made “a ton of sense”.
This was because the dollarised country needed better alternatives to dodge the negative effects of the US government’s giant stimulus package on the currency.
“You see something like a . . . six or eight trillion [dollar] debasement exercise where most of the benefit is going to US citizens . . . and you are not the beneficiary of that,” he told the FT. “You would logically look for something else.”
The country’s large retail businesses are preparing to accept bitcoin and expect a September bump in sales from the extra liquidity, said Leonor Selva, executive director of private sector association ANEP, but what will happen beyond that is unclear.
“The government is preparing more of a brand or product launch than public policy,” Selva said.
In response to questions, the government said it would publish more information in the coming days.
The inspiration for the bold move was a project called Bitcoin Beach in El Zonte, a laid-back surf town a 50-kilometre drive from the capital, where tourists and locals are already using the cryptocurrency.
In 2019, an anonymous US crypto “early adopter” began funding community work paid in bitcoin in the town and now a team of mostly young Salvadorans works to promote its use.
Idalia Mejia sells pupusas — a popular Salvadoran corn patty often filled with cheese or meat — in bitcoin in the town and thinks it is good for attracting clients, but tries not to hold on to it. “I have lost out when it’s gone down,” the 49-year-old said. “I prefer not to have it.”
In the past year, the price of bitcoin has soared from about $10,000 to more than $60,000 and it is currently worth a little under $50,000.
Jorge Valenzuela, one of the project leaders, estimates that about half the town’s residents use it. Some save it, he said, but for others it is convenient for transactions in a nation where 70 per cent lack access to financial services.
Across the country, anyone with access to technology will by law have to accept bitcoin from Tuesday, although the three pages of government regulations do not mention penalties for non-compliance.
Apart from the initial incentive, the Chivo wallet will allow immediate conversion into dollars, backed by a recently approved $150m fund. Some economists question whether that is big enough, and say that a fall in the price of bitcoin would put the government under broader fiscal pressure.
“If, for example, taxes are paid in cryptoassets, while expenditures remain primarily in dollars, there would be significant pressure on the exchange market, and on the level of international reserves,” Torino Capital said in a note.
El Salvador’s central bank did not respond to a request for comment.
Steve Hanke, an economics professor at Johns Hopkins University who has advised emerging market nations on currency issues, said bitcoin made it virtually impossible for banks to comply with “know your customer” rules, and that the country risked a red flag from the anti-money laundering Financial Action Task Force.
“It isn’t a currency, it’s a very speculative asset,” said Hanke, a longtime advocate of dollarisation. “There is a lot of risk associated with bitcoin and that risk will be borne by the taxpayers.”
Additional reporting by Michael Stott in London
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