Financial inclusion

70% of Salvadorans are unbanked, and Bitcoin – which requires only a smartphone with internet connection – was widely expected to boost financial inclusion. And it did: three weeks after the wallet launch, President Bukele tweeted that 2.1 million of Salvadorans were actively using the government-backed Chivo wallet. By January 2022, official figures reported 2.8 million domestic downloads, i.e. over two-thirds of the country’s adult population.

However, it seems like the adoption is yet to become sustainable. A study by the National Bureau of Economic Research (Cambridge, MA) that surveyed 1’800 Salvadorans in April 2022 found that only 68% of the respondents knew about Chivo, 78% of those who knew tried to download it, and of those who downloaded, only 40% continued to use it after having spent the $30 government bonus. If the poll is representative of the country, it would mean that only about 21% of Salvadoran adults use Chivo. Why is it so?

The study, as well as numerous street polls and interviews, names lack of education as the main reason for a sluggish adoption, followed by distrust in the government (Chivo is custodial) and Bitcoin volatility. What’s more, only 64% of Salvadorans have access to a mobile phone with internet.

Does it mean that Bitcoin law failed? Not so fast. Smartphone penetration and educational efforts take time – sometimes a lot of it – but they eventually progress. With education, Salvadorans can also realize that they have a plethora of non-custodial wallets, which do not depend on the government, and stablecoins as a crypto solution to protect against volatility.

 

Developing a crypto industry

The boldness of the Bitcoin law and the explicit support of crypto from President Bukele and his cabinet lured crypto enthusiasts from all over the world to El Salvador. According to Bloomberg, since the law adoption, over 60 crypto companies have been registered in the country, from mining to payment services to DeFi projects.

“Adopting Bitcoin” conference in San Salvador was attended by over 50k people last November, and the “44-nation Bitcoin Conference” in May 2022 gathered central bankers from 44 (mostly developing) countries.

However, the global economic situation and a crypto crash curbed some of the enthusiasm. “Bitcoin city”, an ambitious project of a crypto hub powered by cheap and clean volcano energy, was supposed to be financed by $1 billion BTC-backed bonds that El Salvador planned to issue in March 2022. It was since postponed.

 

Investing in Bitcoin

El Salvador did not only create conditions for crypto; according to President Bukele’s tweets, the country has bought 2’381 BTC for its treasury at an average price of around $45k. Market crash has divided this investment by two, but only nominally.

How bad is that? A paper loss of around 0.6% of the country’s annual budget is not that dramatic. Furthermore, the whole Bitcoin experiment was realized at a relatively low cost: $107 million of Bitcoin for treasury, $150 million “Bitcoin trust” created to ensure BTC-USD convertibility, and approximately $100 million of infrastructure (Chivo wallet and ATMs) and incentives ($30 bonus) cost only 4.4% of the annual budget.

 

International reaction

Probably the highest cost of the Bitcoin law was the falling out with the IMF. El Salvador has been trying to get a $1.3 billion loan since early 2021, but with little success, and Bitcoin adoption did not improve things. IMF is a vocal crypto detractor, and it has been trying to strong-arm El Salvador into abolishing the law since it was adopted. To no avail so far: President Bukele defends his country’s right to make its own economic choices, calling the IMF’s rationale (and mission) into question.

It is uncertain if the loan would have been granted without the Bitcoin law, but the chances are much smaller with it.

 

All in all, it might be too early to judge the impact that Bitcoin adoption had on El Salvador. It will take time to see the benefits of Bitcoin enjoyed by the Salvadorans, as well as measure the economic development created by foreign investments. However, considering the costs, the risk-reward ratio of the Bitcoin bet (IMF’s loan notwithstanding) is very low. Let’s wait and see how it plays off.

 

Written by D.Center