Cryptocurrency and El Salvador
Bitcoin is the most well-known form of cryptocurrency, which means it is not a physical form of money. Bitcoin itself is a form of stocks in a way, as most people purchase it on the premise it will hold a greater value in physical currency (e.g., $) in the future than it does today. Bitcoin is also decentralised, which means that money can be transferred between individuals without going through a traditional bank, meaning it is audited by independent ‘miners’ who assess the validity of the transaction to make sure it is legitimate.
There was much media attention surrounding the country’s adoption of Bitcoin and the most common justification for adopting Bitcoin was the increase in remittance inflows. El Salvador is known to have high net inflows from the US, as many workers are sending money back to their families. Using Bitcoin would better this process because it means that less is lost in administration costs, and the money can be transferred quicker as it does not need to go through a central bank. This in turn would increase the value of remittances, which would increase GDP and income inequality between those working in El Salvador and those relying on personal remittances from countries such as the US. Additionally, President Nayib Bukele highlighted that it would increase US investment into Salvadorian businesses as the funds could be directly transferred to the businesses without the intervention of central banks. Although the issue of money laundering immediately comes to mind, it seems to ignore the fact that the main currency of El Salvador is the US dollar already, so why would this increase US investment? Yes, it is true that the decentralised element of Bitcoin is what appeals more, but surely this would impact foreign investment from other countries more than US? It is clear, even without having a depth of knowledge on El Salvador, that it aims to have close ties and quasi-reliance on the US, by adopting its currency, for example. This leads to the risk of politics coming into play, as the US may withdraw some of its aid (e.g., imposing restrictions in CAFTA-DR, the free trade agreement between the US and Central America) if conflict countries are seen to invest heavily into Salvadorian business.
Coming back to the impact upon money laundering, it is already a prominent issue within El Salvador. Being in Central America, the exposure of the country to drug and trafficking routes is unavoidable, and the levels of poverty within the country mean that many of its citizens turn to these illegal activities in hope of a better lifestyle, hence the high levels of gang crime that instigate the persistent economic crisis. The introduction of Bitcoin is unlikely to make this issue any better, as people are able to transfer money anonymous to their allocated ‘miner’, which means that a lot of the currently cash transactions that take place in El Salvador will become those of Bitcoin. Needless to say, the leaders and frontrunners in the drug and trafficking industries in El Salvador are most likely going to be hesitant switching their methods of transaction, as it is unclear as to how regulated the Bitcoin currency is going to be. Although Bitcoin can be bought almost everywhere in the world, the Salvadorian government have created Chivo wallet, which is an official app that can be used the same as online banking to store and pay with Bitcoin. Unsurprisingly, the fact that this app has been marketed by the government means it is likely to be regulated and ingrained with codes that can help track and crack down on illegal and hidden transactions. Therefore, from the surface it looks like the Salvadorian government is almost ignoring the issue of their hidden economy and almost encouraging it by adopting a quasi-traceable currency, but in reality, it means identities are more easily attached compared to cash, as in order to set up a Bitcoin account and transfer money into it, a valid ID is needed. One of the only ways to acquire Bitcoin without investing traditional currency is through mining: but due to the popularity of this process globally, one would need an industry grade advanced computer which uses enormous amounts of electricity, which would be easy to notice in a country that has a GDP per capita of around $6000.
The motives and mindsets as alluded to in the crime example above play an important role as to whether Bitcoin can lift the economy of El Salvador. President Nayib Bukele is popular with the people of El Salvador, as he seems to bring a fresh and young take to helping the country; in particular his social media engagement plays on the trust of the citizens. This can help the anchoring of the Salvadorian people to the idea that Bitcoin will lift their economy: they are anchored to the idea that the president is going to improve their country, as well as theoretically being anchored to the same values as the rest of the world in that cryptocurrency is the way forward, whether it is imminent or gradual. This could help ease them into using Bitcoin, in particular the provision of the Chivo wallet can enable trust in the cryptocurrency, hence leading to its use and success in terms of spending power and remittances. This is also linked to their bounded rationality and the commitment mechanisms in place, in that all shops are required to accept it, so it ‘must be trustworthy and used’: this would lead to increased investments and savings in Bitcoin, which increases the value of Bitcoin globally, which increases the value of citizens’ assets. However, it is important to consider how much hold these methods and concepts have over Salvadorians, as many have been wrong done by foreign finances before, for example the idea that the country is severely indebted to the US for imports. Some Salvadorians have already expressed their concern surrounding Bitcoin to Western news outlets, claiming that Bitcoin echoes the financial traditionalism of the past, and it further ties them to the world banking system, when in fact, to people in countries such as the US and UK cryptocurrency is acknowledged to be the opposite. The diminishing marginal sensitivity explains this idea too: articles surrounding the adoption have been widespread, because the use of it impacts Bitcoin investors globally (it is close to both status quos), this means the success of its adoption could go either way: if the use of Bitcoin in El Salvador was to take a turn for the worst e.g., the guerilla groups gain a hold of the government, the financial implications of this would double down, as it would lead to a reactionary fall in Bitcoin investment globally, which would decrease the value of the asset for the Salvadorian people, alongside their purchasing power.
In conclusion, the current collective mindset of Salvadorians seems to be that Bitcoin is another apparatus for social control. Simply, the people of more established nations e.g., US and UK see Bitcoin as an investment to gain on, an addition to our assets. We make up the majority of Bitcoin holders worldwide, so effectively influence the state of it, whereas the Salvadorian people are relying on it to pay their taxes, their food bills, their healthcare. No wonder they feel it echoes financial traditionalism.