This week the Guardian reported that a “tumultuous few weeks” awaits El Salvador as it prepares to become the first country to adopt Bitcoin as legal tender on Tuesday.
In August a research note by Bank of America enthused about the new law’s ability to reduce the cost of cross-border transactions (remittances account for 20% of El Salvador’s GDP), increase digital penetration in a country where 70% of people still do not use banks, and attract foreign investment as a first mover in cryptocurrency adoption. Since then, however, the verdict from international financial organisations — and El Salvadorans themselves — has turned decidedly pessimistic. “The law was adopted extremely quickly, without a technical study or a public debate,” says Ricardo Castañeda, a local economist. “I don’t think the president has fully understood the implications of the law, its potential to cause serious macroeconomic problems and convert the country into a haven for money laundering.”
The regulatory framework for adoption has yet to be published and there are rumours of delays to the Chivo app. Bankers in the capital say they have received calls from anxious clients threatening to withdraw their deposits rather than risk exposure to the volatile cryptocurrency markets. The ratings agency Moody’s downgraded El Salvadoran debt over fears of “weakened governance” evidenced by the new law, and the IMF — with which the government is negotiating a $1bn loan — published a blogpost highlighting the risks of adopting crypto as national currency. “The shift from euphoria to scepticism has been very fast,” says Castañeda.
The potential benefits identified by the Bank of America are probably overstated. A paper by Johns Hopkins University says the cost of remittances via Bitcoin will be higher than traditional methods, and a July survey found that nearly two-thirds of El Salvadorans would not be open to accepting payment in Bitcoin. Eric Grill, CEO of Chainbytes, which produces Bitcoin ATMs, told the Guardian that his plan to relocate manufacturing to El Salvador had faced serious challenges in sourcing parts. Local geothermal energy experts say Bukele’s plan to power energy-intensive Bitcoin mining activities from the country’s volcanoes are wildly optimistic.
Reuters offered an update on Thursday. “In the main handicraft market of El Salvador’s capital, traders complain that with a week to go before bitcoin becomes legal tender, no officials have come to explain how it will work or what benefits it may bring.”
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