The adoption of Bitcoin in El Salvador

Introduction

On September 7th, 2021, El Salvador became the first nation to recognize Bitcoin as legal tender with the "Bitcoin Law." This unique monetary experiment has received lots of attention and a range of opinions. A recent study (Alvarez et al, 2023) investigated the adoption of Bitcoin as legal tender in El Salvador by running a survey in the data and analysing blockchain transactions. This article provides a discussion of the El Salvador experiment along with a summary of the findings of the study. 

The path of adoption

The Colon had been long the official currency of El Salvador since its adoption in 1892. In 2001, the US dollar became the country's sole official currency and legal tender with the aim of achieving price stability. The lack of control over monetary policy and the implicit fixed exchange rate due to the dollarisation decreased the purchasing power of the population and slowed down exports. 

In 2019, the village of El Zonte adopted Bitcoin as a payment following a $100,000 worth of Bitcoin donation, and has since become known as "Bitcoin Beach," serving as an example of using cryptoassets as legal tender. Honduras and Guatemala have also attempted to attract tourists using Bitcoin in "Bitcoin hubs."

This experiment loomed large in the debate in the country and in June 2021, the President of El Salvador, Nayib Bukele, announced a bill to adopt Bitcoin as legal tender in the country, citing the benefits of easier remittance transfers and increased accessibility to digital transactions for underbanked people. 

The Legislative Assembly of El Salvador voted in favour of the Bitcoin Law, making the cryptoasset legal tender in the country. 

The law's main objective was to regulate Bitcoin as an unrestricted legal tender with unlimited power in any transaction, public or private, carried out by natural or legal persons. The article 1 of the law establishes Bitcoin as legal tender and reads:

The purpose of this law is to regulate Bitcoin as unrestricted legal tender with liberating power, unlimited in any transaction, and to any title that public or private natural or legal persons require carrying out.

Additionally, the law made Bitcoin a unit of account in the country and endowed it with value by accepting it as a means of payment for tax purposes, in line with a Chartalist conception of money.¹ In fact, article 7 imposes an obligation to accept Bitcoin:² 

Every economic agent must accept Bitcoin as payment when offered to them by whoever acquires a good or service.

Article 8 mandates that the government must provide means for conducting transactions via Bitcoin. To this aim the government set aside $150 million to back the country's adoption of Bitcoin. Chivo Wallets allow users to convert Bitcoin into dollars and vice versa without a fee, as well as send or receive either currency. Payments through the application are made by entering the recipient's identification number or phone number and the payment amount.

El Salvador's adoption has been strongly incentivised by the government that has offered a $30 Bitcoin bonus as well as discounts on fuel payments made using Chivo. 

The World Bank was sceptical of the move and rejected a request to assist with the implementation of the law due to transparency concerns and the environmental impact of Bitcoin mining. Furthermore, information regarding the Chivo platform and its policies are classified by the government.

An assessment of the adoption

Alvarez et al (2023) conducted a nationally representative survey of 1,800 households to generate data on the adoption of Chivo Wallet. They find that over two-thirds of Salvadoreans are aware of the app, but only just over half of all adults have downloaded it. 

Figure 1 – Awareness and acceptance of Chivo Wallet and Bitcoins 
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Left: Awareness and Individual Use of Chivo Wallet. Right: Acceptance and Use of Bitcoin Among Firms. The top two bars in the figure show percentages with respect to all surveyed owners and employees who knew about payment methods at the firm. The bottom two bars show percentages with respect to total sales.  Source: Alvarez et al (2023).

According to the survey, 68% of Salvadorans are aware of Chivo Wallet's existence (Figure 1, left). 

Merely 20% of businesses accept Bitcoin, and among those who do, they are typically large enterprises (Figure 1, right). Out of all businesses, only 11.4% reported positive sales in Bitcoin. On average, Bitcoin payments make up only 4.9% of total sales, and 88% of businesses convert the money received from Bitcoin sales into dollars. Additionally, 71% of those businesses withdraw the converted dollars in cash.

The authors also analyse all transactions involving Chivo using data from the blockchain, a distributed public ledger. They find that the total number of Bitcoin transactions in the app increased in the month following the launch but has since declined, and the majority of transactions involve small amounts of Bitcoin (see Figure 2). 

Figure 2 – Transaction, Deposits and Withdrawals

Left: Total transactions, both internal and external. Right: External deposits and withdrawals (in USD) 

Notes: Panel (right): The charts report the total number of transactions in Chivo Wallet, both internal transactions, and external withdrawals and deposits. The figures are converted and reported in USD not to reflect movements due to Bitcoin's price changes, which were significant in the sample of study. Panel (left): The chart shows the dynamics of external withdrawals and deposits. The vertical dashed lines date moments when El Salvador's government announced a Bitcoin purchase. Source: Alvarez et al (2023).

Analyses conducted in the study show that Chivo's Bitcoin withdrawals occur infrequently and in large amounts, coinciding with the pace of accumulated deposits. This suggests that Chivo manages its Bitcoin inventory by accumulating balances to reduce transaction costs when selling them. This behaviour aligns with the wallet's almost zero net accumulation of Bitcoin shown in Figure 2.

Lessons from the adoption

A few interesting lessons emerge from the case of El Salvador.

1. Privacy likely matters to users. Not all of those who know about the app have tried to download it. In fact, just over half of all respondents did so. The main reason reported for not downloading Chivo, after a preference for cash, is mistrust related to privacy concerns.

2. The unbanked may not benefit from digital currencies. Those who are aware are more likely to be young, male, educated, banked, and own a cell phone with internet access. These findings may contradict the common belief that cryptocurrencies and CBDCs will necessarily benefit the poor and unbanked.

3. Fees are not the only barriers to adoptions. The El Salvador experiments shows that the sole implementation of zero fees does not automatically guarantee widespread and sustained adoption. Privacy and transparency concerns, along with high fixed costs and network externalities, are key barriers to adoption. 

The findings have broader implications for the likelihood of the success of CBDCs and cryptoassets and suggest that adoption rates may vary in other countries depending on factors such as income per capita and access to banking services. 

Bibliography

Fernando E. Alvarez, David Argente, and Diana Van Patten, “Are Cryptocurrencies Currencies? Bitcoin as Legal Tender in El Salvador”, NBER Working Paper No. 29968, April 2022, Revised February 2023
https://www.nber.org/papers/w29968

Wikipedia, “Bitcoin in El Salvador”
https://en.wikipedia.org/wiki/Bitcoin_in_El_Salvador

Footnotes

¹ Chartalism is a monetary theory that asserts that money derives its value from the government's power to issue it as legal tender and demand it as payment for taxes. It holds that money's value is based on its acceptance as a means of payment for debts and taxes, rather than its intrinsic value or its backing by a commodity. Chartalists contend that governments can create value by issuing currency, and that money is not scarce because it is a product of political authority. In summary, Chartalism views money as a creation of the government that derives its value from its status as legal tender, with taxes being a key factor in determining its value in use.

² It is important to note that payments of public salaries and pensions in El Salvador remained in dollars.

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