El Salvador’s Bitcoin Experiment: Two Years On – Key Insights and Future Prospects

Briefing Notes

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Summary

El Salvador’s bold experiment with Bitcoin, two years after adopting it as legal tender, has led to significant financial inclusion gains, but also exposed challenges such as price volatility and the limited use of Bitcoin for high-value transactions. In this October 4, 2023 Kitco News episode, Tristan Thoma, who was engaged in helping to develop the country’s Bitcoin infrastructure, discusses the successes and ongoing challenges of integrating Bitcoin into everyday life, highlighting its potential to reshape financial systems globally. The lessons from El Salvador’s experiment are now drawing the attention of other countries considering similar paths.

Take-Home Messages

1. Bitcoin adoption has revolutionized financial inclusion in El Salvador, raising the percentage of citizens with access to digital financial services from 30% to over 70%.
2. Bitcoin remittances have reduced transaction costs, providing a seamless option for Salvadorans abroad to send money home.
3. Volatility remains a threat, affecting Bitcoin's stability as a daily-use currency, but technical solutions may stabilize this over time.
4. Interoperability between Bitcoin and traditional banking systems has been a key achievement, ensuring compliance and ease of use.
5. Other nations are watching El Salvador’s progress closely, and some may follow its model to promote financial inclusion and economic growth.

Overview

In this Kitco News broadcast, Tristan Thoma provides an in-depth look at El Salvador’s adoption of Bitcoin as legal tender and the country’s progress over the past two years. Since Bitcoin’s adoption in 2021, El Salvador has seen a remarkable increase in financial inclusion, with over 70% of the population now using the Chivo Wallet or other Bitcoin wallets. This is a dramatic improvement from the 30% who had access to financial services before the law was enacted. Thoma credits this success to both government initiatives and the involvement of technology providers like AlphaPoint, which ensured the system’s interoperability with legacy financial institutions.

Thoma acknowledges that Bitcoin has been adopted for both microtransactions and larger purchases, but its use for high-value transactions, such as real estate, remains limited. Remittances have been one of Bitcoin’s most important use cases, allowing Salvadorans abroad to send money home more easily and affordably. Educational initiatives, like those led by Mi First Bitcoin, have also played a key role in teaching citizens how to use the technology.

Despite the progress, Bitcoin’s price volatility presents a major challenge for its role as a stable transactional currency. Thoma emphasizes that the system is designed to provide users with “empowerment and optionality,” allowing them to choose between using Bitcoin or traditional financial tools. He also points out that El Salvador’s model is drawing attention globally, with countries in Latin America and Africa exploring similar initiatives.

Stakeholder Perspectives

• Government of El Salvador: The government views Bitcoin adoption as a tool to increase financial inclusion, promote tourism, and stimulate economic growth. The 30% increase in tourism and 10% GDP growth attributed to Bitcoin are key indicators of success.
• Bitcoin Users in El Salvador: Many users appreciate the ability to use Bitcoin for everyday transactions and remittances, but concerns about price volatility persist. Continued education and technical improvements are needed to maintain trust.
• International Financial Institutions: Organizations like the IMF remain skeptical, raising concerns about Bitcoin’s volatility and its potential impact on financial stability. They are monitoring the situation for broader regulatory implications.
• Countries Considering Bitcoin Adoption: Several nations in Latin America and Africa are exploring Bitcoin adoption, with particular interest in how Bitcoin can improve financial inclusion and resilience. They are closely observing El Salvador’s experience for lessons on integrating Bitcoin with traditional financial systems.

Implications

El Salvador’s Bitcoin experiment offers valuable insights for policymakers, financial institutions, and global stakeholders. The most immediate benefit has been increased financial inclusion, with millions of previously unbanked citizens now able to access digital financial services. However, Bitcoin’s price volatility continues to pose risks for its use in everyday transactions. The government will need to explore mechanisms for stabilizing Bitcoin’s role as legal tender, potentially through pegged or hybrid solutions that minimize the impact of market fluctuations.

For other countries considering Bitcoin adoption, El Salvador’s experience highlights both the opportunities and the challenges of integrating Bitcoin into a national financial system. While the technical achievements in ensuring interoperability with traditional banks are commendable, the broader success of Bitcoin adoption will depend on addressing regulatory, educational, and economic challenges.

Note how different the contrast in the view expressed in this podcast episode with that of academics conducting research (with potentially serious flaws).

Future Outlook

El Salvador’s Bitcoin journey will continue to unfold as the government seeks to expand Bitcoin’s role in the economy. One area of focus will be addressing the volatility issue to make Bitcoin more reliable for both microtransactions and high-value purchases. Additionally, as more countries consider Bitcoin adoption, El Salvador may serve as a blueprint for integrating Bitcoin with legacy financial systems while ensuring compliance with international regulations.

Global interest in Bitcoin adoption is growing, with several countries in Latin America and Africa exploring the potential for using Bitcoin to boost financial inclusion and economic resilience. El Salvador’s successes and challenges will provide critical lessons for these nations, helping them navigate the complexities of adopting a decentralized currency at the national level.

Information Gaps

• How can Bitcoin further improve access to financial services for the unbanked in El Salvador beyond current levels? This question remains crucial for future research, as full financial inclusion has yet to be achieved. Identifying strategies to reach the remaining unbanked population is key to maximizing Bitcoin's impact.
• How can El Salvador mitigate the risks of Bitcoin price volatility affecting everyday transactions? Volatility remains one of the biggest threats to Bitcoin’s stability as legal tender. Understanding how other mechanisms can help stabilize its use is an important research area for both El Salvador and other adopting nations.
• What lessons can other countries learn from El Salvador’s integration of Bitcoin with existing financial infrastructure? As Bitcoin adoption spreads, future research should focus on what specific technical, regulatory, and economic measures are needed to successfully integrate Bitcoin into diverse national contexts.
• What factors are limiting the use of Bitcoin for larger purchases, such as real estate, in El Salvador? Despite its potential, Bitcoin’s use for high-value transactions remains limited. Investigating these barriers and finding ways to overcome them will unlock further economic opportunities.
• How can Bitcoin remittances further reduce costs and increase efficiency for cross-border transactions? Bitcoin remittances have already reduced fees, but further research could identify additional ways to optimize this process, making it a more viable alternative to traditional remittance channels.

Broader Implications

Global Financial Inclusion

El Salvador’s success in boosting financial inclusion through Bitcoin provides a model for other developing nations to offer digital financial services to the unbanked. Countries with limited access to traditional banking could benefit from adopting similar Bitcoin systems. This could drive broader adoption in regions like Africa and Southeast Asia.

Bitcoin's Role in Remittances and Cross-Border Payments

Bitcoin’s low-cost structure has the potential to revolutionize remittances, reducing fees and improving efficiency for cross-border transactions. Countries heavily dependent on remittances could see significant economic benefits from adopting Bitcoin. This could disrupt traditional money transfer services globally.

Bitcoin as a National Economic Tool

With proper stabilization mechanisms, Bitcoin could evolve from microtransactions to high-value uses like real estate and infrastructure investments. Countries facing currency instability may adopt Bitcoin to protect their economies. Bitcoin might even become a reserve asset for governments seeking to diversify financial holdings.

Geopolitical and Regulatory Influence

As more countries explore Bitcoin adoption, there could be significant geopolitical and regulatory challenges with international financial institutions. Bitcoin’s decentralized nature could create friction with global financial systems, especially as countries balance Bitcoin with CBDCs. These shifts will push broader discussions about Bitcoin’s role in the world economy.

Bitcoin and Technological Infrastructure

El Salvador’s integration of Bitcoin with traditional banking systems demonstrates how decentralized currencies can complement existing financial networks. This success could push global innovation in blockchain security and regulatory compliance. Other nations might build similar frameworks to ensure secure, compliant Bitcoin transactions.