Evaluating Bitcoin as Legal Tender in El Salvador: Insights and Implications
In this blog post, we dig into the study "Are cryptocurrencies currencies? Bitcoin as legal tender in El Salvador" by Alvarez, Argente, and Van Patten, published in Science. Read on to explore the key findings from our review.
The 2023 article,"Are cryptocurrencies currencies? Bitcoin as legal tender in El Salvador," explores the adoption of Bitcoin and the Chivo Wallet app in El Salvador. Despite significant government incentives, adoption rates were low, highlighting key barriers such as privacy concerns and limited financial inclusion. The authors assert that their findings challenge the feasibility of cryptocurrencies as a medium of exchange and have implications for Central Bank Digital Currencies (CBDCs).
In our summary and review of this article, we provide and address:
- Study information and links
- Who might be interested in this research, and why?
- A plain-English article overview
- Our critique of the paper
Study Information
Article Citation:
- Alvarez, F., Argente, D., Van Patten, D., 2023. Are cryptocurrencies currencies? Bitcoin as legal tender in El Salvador. Science 382, eadd2844.
Keywords
- Bitcoin adoption
- Chivo Wallet
- Legal tender
- El Salvador
- Bitcoin usage
- Financial inclusion
- Digital payments
- Central Bank Digital Currencies (CBDCs)
- Monetary policy
- Blockchain analysis
Relevant Links:
- Full article (paywalled): https://doi.org/10.1126/science.add2844
- Supplementary information (includes full survey design, delivery details, and interesting charts and information on Bitcoin adoption in El Salvador; open access): https://www.science.org/doi/suppl/10.1126/science.add2844/suppl_file/science.add2844_sm.pdf
- Preprint (paper prior to revisions required by Science; open access): https://bfi.uchicago.edu/wp-content/uploads/2022/04/BFI_WP_2022-54.pdf
- Context: David Argente explains his research on how people adopt new payment technologies (Yale Economic Growth Center feature)
Stakeholder Perspectives
Who might be interested in this research, and why?
- Industry Leaders: Concerned about the low Chivo wallet adoption rates and potential financial instability. They support digital innovation but are wary of privacy and security issues that could impact consumer trust and business operations.
- Policymakers: Interested in the implications for financial inclusion and economic impact. They need to balance incentives with economic sustainability and ensure that digital currencies align with broader financial policies.
- Regulators: Focused on ensuring compliance and security. Privacy concerns and the establishment of robust regulatory frameworks are critical areas of interest to protect consumers and maintain financial stability.
- Investors: Cautiously optimistic about digital currencies but concerned about adoption barriers and the long-term viability of Bitcoin as a medium of exchange. They seek clarity on the regulatory environment and potential returns on investment.
- Technology Community: Supportive of technological advancements in digital currencies. They emphasize the need for user-friendly interfaces, secure systems, and the potential for blockchain technology to revolutionize financial transactions.
Article Overview
Background
The introduction of Bitcoin as legal tender in El Salvador represents a groundbreaking monetary experiment. On September 7, 2021, the Salvadoran government enacted the Bitcoin Law, making Bitcoin a legal form of payment alongside the US dollar. This initiative aimed to enhance financial inclusion, generate jobs, and facilitate remittances. The government launched the Chivo Wallet app, providing users with a $30 bonus and zero transaction fees to incentivize adoption.
El Salvador's population had limited access to traditional banking services, with over 70% unbanked and most transactions conducted in cash. The government anticipated that Bitcoin and the Chivo Wallet would provide a digital payment solution, particularly during the COVID-19 pandemic, which increased the need for contactless payment methods. Despite these incentives, the adoption of Bitcoin as a medium of exchange remained low.
The study conducted a nationally representative survey of 1800 households and analyzed blockchain transaction data to assess the adoption and usage patterns of Bitcoin and the Chivo Wallet. The findings revealed that while awareness of the Chivo Wallet was high, actual usage was minimal. Privacy and transparency concerns were significant barriers, and the adoption was primarily among the already wealthy and banked population, contradicting the hypothesis that cryptocurrencies could benefit the unbanked and poor.
Outlook
The study identifies significant information gaps that need to be addressed to enhance the adoption of digital currencies. Key areas of focus include developing effective privacy solutions that balance transparency and anonymity, simplifying user interfaces to reduce technological barriers, and targeting unbanked populations to ensure inclusive benefits. Addressing these gaps is crucial for developing strategies that foster broader adoption and trust in digital currencies.
Policymakers should prioritize comprehensive regulatory frameworks to ensure secure and compliant digital currency systems. Technological improvements and innovative solutions are essential to enhance user experience and overcome adoption barriers. Future research should explore the long-term economic impact of digital currencies, the role of sociocultural factors in adoption, and the potential for digital currencies to provide financial inclusion and economic stability.
Key Assertions
- Bitcoin's adoption in El Salvador highlights significant barriers, including privacy concerns and limited financial inclusion, which challenge the feasibility of cryptocurrencies as a widely adopted medium of exchange.
- Comprehensive regulatory frameworks and technological improvements are essential for the successful integration of digital currencies, ensuring secure and compliant systems that foster trust and broader adoption.
- The study emphasized the need for targeted strategies to address adoption barriers and enhance the economic impact of digital currencies.
Critique
There are several potential weaknesses to this study, some of which are quite standard when considering interview-based research in developing countries, and one relating to non-Chivo Bitcoin wallets and adoption.
Self-Reporting on Surveys
The study's methodology, combining survey data and blockchain analysis, provides robust insights into the adoption patterns of the Chivo Wallet. However, the reliance on self-reported data may introduce bias, as respondents' perceptions and behaviors could be influenced by external factors. The limited geographical context of El Salvador raises questions about the generalizability of the findings to other countries with different economic conditions and regulatory environments.
Stage of Adoption
The focus on short-term adoption trends may overlook longer-term behavioral changes and the potential for increased adoption as Bitcoin systems and support evolve. Further research is needed to explore these dynamics and provide a comprehensive understanding of the factors influencing Bitcoin adoption. With regards to CBDCs and other digital payment systems, this appears to be something that the research team is actively working on (https://egc.yale.edu/research/spotlight/argente).
Narrow Focus on Chivo
Our main concern regarding this article relates to the potential conflation of Chivo wallet adoption and overall Bitcoin adoption in El Salvador.
It is reasonable to expect that some users in El Salvador might prefer to use other Bitcoin wallets to maintain privacy and keep transactions away from government oversight. The variety of available wallets, including hardware, software, and mobile wallets, offers users numerous alternatives to the Chivo Wallet. These include the Bitcoin Beach Wallet, which launched in El Salvador in 2020, and is now known as Blink. The diversity of globally-available wallets provides individuals with options that might better suit their privacy needs or personal preferences.
Given the face-to-face nature of the interviews, it is likely that some respondents would have discussed their use of other wallets. If such discussions occurred, the omission of this data from the study raises questions about the comprehensiveness and potential bias of the analysis. The exclusion of information on alternative wallet usage could significantly impact the study's findings, leading to an incomplete understanding of the adoption landscape.
The authors' conclusion of generally poor adoption might not fully capture the broader picture if other wallets were indeed in use but not considered in the study. A more balanced approach would include a comparative analysis with data on other wallets to validate the claim of poor adoption comprehensively. Including this additional data would provide a more accurate representation of Bitcoin usage in El Salvador, ensuring that the conclusions drawn are reflective of the actual situation.
About the Authors
Fernando Alvarez is a highly regarded economist with a distinguished academic and advisory background. He is an endowed full professor in economics at the University of Chicago; his primary research areas include macroeconomics, monetary economics, asset pricing, and labor economics. Among his advisory and consulting assignments, he has served as an advisor to the Board of Directors of the Central Bank of Argentina.
He does not maintain a Google Scholar profile but you can search for his papers using this search link.
David Argente is an Assistant Professor of Economics at Yale School of Management and holds secondary appointments at the Yale Department of Economics. He received his PhD from the University of Chicago in 2018. His research interests include applied macroeconomics, macro development, innovation, and monetary economics, with a focus on payment methods in developing countries. His webpage link is here:
Argente has a Google Scholar profile page showing his publication record:
Diana Van Patten is an Assistant Professor of Economics at Yale School of Management and an affiliate at the Yale Economic Growth Center. Her research focuses on development economics, international economics, and the economic impacts of digital technologies. Her information and cv is available at:
She also maintains a Google Scholar profile:
Are the Authors Biased?
For non-academic Bitcoin advocates reading this post, some of the authors' advisory positions and research interests in CBDCs and 'government-sponsored social protection programs' might set off warning bells.
However, these authors all have strong research interests in macroeconomics, economic policy, and adoption of new digital finance technologies in Latin America.
We are concerned about the lack of focus on alternative Bitcoin wallets in their paper. However, we see no reason to think that this research is being sponsored by Central Banks that aim to discredit Bitcoin. In the disclosure for the article in Science, the authors stated that funding for the study was supplied internally from their universities and that none of them had any conflicts of interest (i.e., consulting work, paid advisory services, etc.).
This study simply looks to be one part of their larger research program:
“With dozens of central banks considering digital payment platforms around the world, their research deepens our understanding of the adoption curves for such technologies. Beyond digital payments, such models can be applied to better understand user uptake for a range of welfare-enhancing efforts – including digital tools, web-based activities, or even government-sponsored social protection programs.”
Researchers interested specifically in Bitcoin adoption may find this paper lays the groundwork for further, and better, adoption studies in the future.
It would be very interesting to follow up with a similar survey that considers the full range of Bitcoin adoption options. Additionally, comparing the determinants of Bitcoin adoption in El Salvador with those in other countries would provide valuable insights.
The Alvarez et al. paper, published in Science, presents a golden opportunity for future researchers. Having such a prestigious publication as a foundation allows researchers to develop proposals that improve upon this study, justifying the need for a comprehensive analysis that includes a broader selection of wallets and regions. That reduces the odds that a grant funding review panel will say there is no need for a broader Bitcoin adoption study.
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