Bitcoin Law implementation in El Salvador met with widespread rejection
Amidst criticisms and doubt, Bitcoin began circulating as “unrestricted legal currency” in El Salvador on September 7, an obligatory method of payment and exchange.
According to a poll published September 2 by the University of El Salvador José Simeón Cañas (UCA), the imposition of the cryptocurrency, promoted by President Nayib Bukele and fast-tracked by the ruling party-majority in the Legislative Assembly, is opposed by eight out of ten Salvadorans.
Dissatisfaction with the implementation of Bitcoin as legal tender has also been reflected in protests organized by diverse sectors of civil society and the popular movement in rejection of the policy.
Bukele claims that the cryptocurrency will benefit the country’s economy and be useful for a variety of transactions, including the transfer of remittances from Salvadorans abroad. However, experts have questioned the decision, warning that Bitcoin’s high volatility and unregulated nature could present serious risks, given that its value, backed by nothing, depends on speculation.
For analyst Cèsar Villalona, “Bitcoin will not address [El Salvador’s] fiscal problems because [the country] cannot issue them as loans to the government.” Instead, the crypto-asset will only serve to “launder ill-gotten funds and make money off the Bitcoin ATMS and speculation.”
Villalona states that, even with Bitcoin’s circulation, “the government is going to have to reduce its costs or increase taxation” to cover the deficit for the year. He added that, for the Bukele government, “the only fiscal policy is public debt, taking on more loans and spending money,” especially “to increase the military budget, which in just this year has been increased by $50 million.”
Additionally, Villalona points out that if the law approved in June goes into effect as written, the impact “could be major chaos,” given that it would alter “price stability and the stability of the exchange rate,” warning, “We are headed into a casino […] This will change everything; if the law goes into effect as written, there will be terrible instability in the economy.”
To date, the Bukele administration has requested approximately $200 million in public funds for Bitcoin’s implementation, while reforming the 2021 budget to make cuts to the Ministries of Health, Education, Public Works, Economy and Justice totaling $136 million that will be used to cover basic public expenditures, including to pay for salaries, goods and services, and to cover propane gas subsidies.
Several international institutions, including the International Monetary Fund (IMF) and the Interamerican Development Bank, have also raised red flags regarding the risks of adopting cryptocurrency as legal tender. Prior the Bitcoin Law’s passage, the government was negotiating an IMF agreement that included a series of economic and fiscal adjustments, now stalled by the announcement of the new policy.
According to Villalona, with public debt near 92% of the Gross National Product, “if the dependency on the dollar is greatly reduced, imports will also be drastically reduced. This will make debt payments much more difficult. Consider that 65% of imports are raw materials and capital goods. A decrease [in imports] could affect domestic production capacity, resulting in a decrease in production and an increase in unemployment.”
Although the new Bitcoin Law establishes that “every economic agent must accept Bitcoin as a form of payment,” President Bukele has insisted repeatedly that its use will be optional; this contradicts declarations previously made by the executive legal counsel, Javier Argueta, who said in a television interview that businesses that don’t use the government’s app, “Chivo Wallet,” and which refuse to conduct transactions in Bitcoin, will be subject to penalties.
The government also announced that it will offer an incentive of the equivalent of $30 in Bitcoin to each person who downloads the wallet app and that it would install 200 ATMs that could be used in conjunction with the app. Both initiatives are to be financed as part of the Bitcoin Trust approved by the legislature.
On September 6, Bukele announced via Twitter that the country had purchased 200 new Bitcoins, bringing the government’s total to 400, without explaining the source of the funds to acquire them.
Convened by a diverse group of organizations, hundreds of people took to the streets in protest on September 7 to oppose the law’s implementation with slogans like, “We don’t want Bitcoin in El Salvador” and “Bitcoin = Corruption,” among other demands related to halting militarization and authoritarianism under Bukele.
According to a poll published by LPG Datos, “76.6% of Salvadorans believe that the best thing for the country would be to use a single currency; among those, 78% indicated that it should be the U.S. dollar, 8% the colon (El Salvador’s original national currency) and 2.8% either the dollar or bitcoin.”