A Central American state, El Salvador was the first country to adopt Bitcoin as its official currency in September 2021. This reform was intended, in particular, to improve the conditions of access to the banking and financial system and to facilitate the transfer of funds from the stranger. Taking stock of such an experience, a university study shows that, in practice, Bitcoin is hardly used today by the Salvadoran population.
Why El Salvador was the first country to adopt Bitcoin as its official currency
By a law of September 7, 2021, known as the “Bitcoin Law”, El Salvador became the first country in the world to adopt a crypto-asset as its official currency. Since that date, Bitcoin is indeed legal tender in El Salvador, which means that all payments can be made directly in Bitcoin and therefore all merchants are required to accept payment with this crypto-asset. It is, for example, possible for a Salvadoran resident to pay his taxes in Bitcoin.
El Salvador is a Central American country with a population of 6.3 million. It is ranked 124e rank according to the human development index (HDI), just behind Morocco, Guyana and Iraq.
The expected benefits of such a reform, promoted in particular by the President of El Salvador, Nayib Bekule, were numerous:
- First of all, it had to allow reduce dependence on the US dollarthe official currency of the country since the abandonment of the Salvadoran colon in 2001, and therefore of the monetary policy led by the Federal Reserve (EDF).
- Then, this monetary reform had to improve the conditions of access to the banking and financial system of the Salvadorian populationhitherto unbanked.
- Finally, the adoption of bitcoin as the official currency should make it easier to transfer funds, especially from Salvadorans living abroad.
Early Lessons from the Bitcoin Experience in El Salvador
A recent study written by F. Alvarez, D. Argente and D. Van Pattan, three researchers from American universities, makes it possible to draw up a first assessment of bitcoin adoption in El Salvador. This study is based on a broad survey conducted directly with Salvadoran households and entrepreneurs. The observation is clear: despite its adoption as the official currency and the incentives implemented by the government of El Salvador, Bitcoin remains little used as a means of payment.
In order to encourage the Salvadorian population to adopt Bitcoin as a means of payment, the government has developed an application – Chino wallet – allowing Bitcoins and dollars to be exchanged free of charge and offered 30 dollars in Bitcoin – the equivalent of 0.7% of GDP per capita – to any new user of it.
It appears, first of all, that two thirds of the people questioned said they were familiar with the application Chino wallet. Despite the incentive put in place by the government, 21% of them, however, chose not to download it. They said they preferred cash payments and/or did not have enough confidence in the application or in Bitcoin in general. Thus, almost half of the Salvadoran population has, according to this estimate, not been able or wanted to download the application to exchange Bitcoins for dollars. (and vice versa). In addition, among Salvadorans who have downloaded the application, only 40% continue to use it after spending the $30 in Bitcoins offered by the government. However, this use is far from intensive. : the median user of the application has thus made or received no payment in bitcoin during a given month.
Moreover, despite the law of September 2021, only 20% of businesses surveyed said they accept bitcoin payments and only 11% said they had ever received payment in Bitcoin. In total, the authors of this study estimate that around 5% of sales are settled in El Salvador through Bitcoins. Another sign of distrust of the crypto-asset: 88% of companies that received Bitcoins said they converted them immediately into dollars.
Finally, contrary to expectations raised by the monetary reform of September 2021, bitcoin is hardly used today by Salvadorans for money transfers. According to the Central Bank of El Salvador, only 1.6% of Salvadorans’ remittances from abroad were, in fact, made in Bitcoin during February 2022.
Personal remittances from abroad are a major source of income for most Salvadorans. At the aggregate level, the World Bank estimates that these transfers represented, in 2020, nearly 24% of GDP.
The adoption of Bitcoin as the official currency in El Salvador is therefore far, for the moment, from having had the expected effects.