As of Tuesday, Bitcoin will be an official national currency in El Salvador alongside the US dollar.
To use the cryptocurrency, Salvadorans need to download an electronic wallet. Using the government approved wallet will give them $ 30 worth of bitcoin. Businesses must accept Bitcoin as long as they have internet access and can do so. You will still be taking American dollars. In the past six months, the value of a bitcoin has fluctuated by as much as $ 30,000. So a lot can go wrong.
We asked George Selgin, who heads the Center for Monetary and Financial Alternatives at the Cato Institute, what was behind President Nayib Bukele’s decision to accept Bitcoin. The following is an edited transcript of our conversation.
Georg Selgin: I think he’s pretty sincere. I think it qualifies as bitcoin [maximalist], and that’s how they want to see the whole world with Bitcoin. In this respect, in my opinion, his efforts correspond to his ideals. But I think it is also the case that he is primarily addressing the younger voters in El Salvador, who, by the way, are not necessarily the ones who have to accept Bitcoin in business because they are not current business. But I think it’s really a philosophical or ideological move and not entirely cynical. However, I have serious doubts that Salvadorans will do better because with all the hype and popularity, Bitcoin is not a very good medium of exchange. This is why most of the people don’t use it for this purpose. It is popular enough as an investment vehicle, although very risky, but it has not caught on for most types of transactions. Transfers from abroad are the biggest exception, but there, too, usage is low compared to other transfer media.
Jed Kim: Can you explain wire transfers and their arguments for adopting Bitcoin?
Selgin: Well, wire transfers are just transfers of money from one country to another, and they can be very expensive. Part of this is exchange rate fees. But it is also due to the lack of coordination between the various governments. And so you have a whole range of different transactions between banks in one country and then in another country. At each stage, the banks take a small part of the action. Those fees have come down sharply for more conventional transfers, but Bitcoin can be a very competitive way of sending transfers with the right kind of ancillary software, so it has this advantage. However, I don’t think the Bitcoin law is really relevant here as it doesn’t make the transfers themselves cheaper. What it does is enable people who receive bitcoin from overseas in El Salvador to spend it directly on things instead of getting dollars and then spending them. That is the main difference that would matter. But surveys suggest that most people would rather just transfer dollars and spend them.
George Selgin (courtesy of the Cato Institute).
Kim: Bitcoin is so volatile. How is the country’s central bank preparing for this change and possibly inflation?
Selgin: You have set up a trust fund. You have a trust fund starting at $ 150 million, which really isn’t a lot of money. And they set up a swap house. Basically, traders can get dollars at the value of the sale right away. You will not take any chances. But the barter house will take that risk if the value of the bitcoins changes before they can sell the bitcoins they received for dollars. Then if it goes down, the difference comes from the trust fund. If Bitcoin increases in value, the trust fund will increase in value. The problem is that people will be trading Bitcoin for dollars more often if they think Bitcoin is going down than if it is going up.
Kim: How are we supposed to know if it’s working? What should we watch out for?
Selgin: Of course, the number of people who sign up to download the official Chivo wallet is a very important indicator. I think we would look for evidence that app downloads have been high and the exchange fund is active. And of course we will likely hear about it when they run out of money. I think they need to put it on another tax bill.
Kim: There was a small surf town in El Salvador that was something of a pilot program for it. What can we learn from the process?
Selgin: First of all, this facility was a completely voluntary facility. They gave attending people willing to accept bitcoin in trade, they gave them some money, I think everyone was a little over $ 30 and they got a lot of people to sign up and so bitcoin became widely accepted. It must be said, however, that many people who participated in this experiment have since dropped out. There are many peddlers, and especially smaller traders, who are using dollars again, despite an incentive that was slightly more tempting than the $ 30. Let’s also remember that this was a private establishment. So if you sign up and take the amount, it doesn’t mean the government can track every purchase you make. Dealers who, for whatever reason, rely on the government not knowing about every sale have a reason to be reluctant to sign up for this official nationwide program.
Kim: What does this say about attitudes towards Bitcoin and other cryptocurrencies?
Selgin: It illustrates the fact that there are two worlds here: There is the world of the Bitcoin maxis and enthusiasts. And then there is the much larger number of people who don’t want to touch this stuff. They don’t want anything to do with it. And that divides the Bitcoin community itself, as many of them are very much against the government forcing people to use money, including the money they happen to like.
Stickers on the side of an ice cream van in San Salvador on September 1st indicate that the seller does not accept bitcoins. (Marvin Recinos / AFP via Getty Images)
Related Links: More Insights from Jed Kim
Making Bitcoin your national currency is one thing, but you need to make sure people can use it. The internet connection will be crucial. Reuters found a 2020 study that said El Salvador has 45% connectivity, the second lowest internet penetration of 20 countries in Latin America and the Caribbean. It is said that barely 10% of people in rural areas have an internet connection.
Many articles have been written about the move from El Salvador to Bitcoin and the potential for chaos there. I especially liked the lede from an article in the Wall Street Journal a few weeks ago. It says: “In less than two weeks, El Salvador will be the first country to introduce Bitcoin as its national currency. Nobody knows what’s next. One thing that might be next? Conflict with the IMF, with which El Salvador is negotiating a $ 1.3 billion aid program. “
The Bitcoin experiment in El Salvador started in a small surf town called El Zonte. An anonymous donor dropped a shipload of money, and pioneers set out to build a bitcoin economy. If you want to see it in action, you can check out a video that Vice posted. Lots of Bitcoin signage everywhere.
Finally, you’ve probably heard that Bitcoin is very energy-intensive. The New York Times has an article that has some numbers and graphs on it. Bitcoin uses more electricity than Finland, a nation of 5.5 million people. In 2009, when Bitcoin was basically worthless, it took a house a few seconds of energy to mine one. Today it would be nine years.