When the government of El Salvador proposed a bill that would make Bitcoin legal tender and allow the central bank of El Salvador to hold Bitcoin as a treasury asset, few people could have anticipated the result. The announcement was well prepared by Jack Mallers, the founder of Strike, who had been working on building low-cost payment rails on the back of the lightning network, a payment channel infrastructure operating on the Bitcoin blockchain.
The bill passed through the legislative bodies, and following the usual protests, as well as some shadow boxing from the International Monetary Fund, regarding the disposition of loans for the country, El Salvador officially introduced Bitcoin as legal tender. What followed was a three-stage process:
- El Salvador gave each citizen a stimulus of $30 USD worth of Bitcoin for opening a Chivo Wallet account (this is now worth $34 USD, thanks to the increase in BTC value)
- Businesses in El Salvador are now required to accept Bitcoin as a means of payment
- On the day of the announcement, El Salvador initially purchased USD20 million worth of Bitcoin for treasury purposes with their central bank balance sheet
We are now 30 days into this journey and experiment. Bitcoin has already changed the lives of many, in developed as well as developing countries, and can in itself be seen as one of the greatest monetary experiments of mankind. Nonetheless, it has reached a new level with sovereign states and their central banks adopting Bitcoin as a currency and exploring its potential.
Since introducing Bitcoin as legal tender, a number of crucial developments and milestones have taken place:
- El Salvador has reached over 3 million regular Chivo users
- The Central Bank of El Salvador has now bought a total of 700 Bitcoin worth almost $40million USD
- El Salvador has generated Bitcoin gains of $4million USD since enacting the law
- El Salvador has mined its first Bitcoin using volcanic energy
- The citizens of El Salvador are net Bitcoin savers, introducing more capital into the system than they withdraw
- Daily remittance volumes already amount to $2million USD, representing $730millionUSD annualized
With a population of 6.8 million, at one time in the not so distant past, 70% of El Salvador’s population was unbanked. Today, El Salvador has managed to onboard over three million people onto the Chivo wallet, a new financial system running on top of Bitcoin, which is likely to replace the legacy financial system in place today. It has taken Bitcoin 30 days to outperform what the traditional financial system failed to achieve over 30 years. It is also interesting to note that El Salvador’s GDP consists of 20% remittances, which usually come at a cost of up to 50% using old-world systems like bank transfer via SEPA or Swift, or remittance like Western Union and Moneygram, taken in fees by the centralized processors of these payments. Blockchain-based infrastructure like the Bitcoin and Lightning networks bring these costs down to almost zero. If the remittance cost for Salvadorans was reduced to zero, this would instantly increase the GDP of El Salvador by 20%, or USD5billion.
What happens next?
It is likely that El Salvador will over time experience the same substantial wealth creation as other parts of the world did through Bitcoin adoption, and this wealth will be put to very fruitful use in an economy generally considered to be ‘low-cost’. Overall, 65 countries are pegging their currency to the US Dollar; five US territories and 7 sovereign countries even use the US Dollar as their official currency. It does not come as a surprise that El Salvador, as one of the countries using the US Dollar as their principal currency, is among the earlier Bitcoin adopting countries. In times of excessive money printing, the countries that use the US Dollar, but are far away from the printing press are likely to experience only drawbacks and not reap any rewards.
It already seems that El Salvador is well on its way to becoming the first nation-state to widely adopt Bitcoin, and has shown an unparalleled success in financial inclusion that the world has rarely seen before.
Adoption in El Salvador in numbers:
Opinion editorial by Sebastian Markowsky, the CSO of Coinsource.
