Since El Salvador adopted Bitcoin as legal tender in September 2021, a series of swift decisions were made declaring the move a failure, with some critics going so far as to suggest that Bitcoin was somehow responsible for the economic problems that existed in El Salvador long before Bitcoin. even created. But traditional financial pundits, top speakers and even International Monetary Fund (IMF) officials who hold this view are completely missing the point.
After El Salvador’s President Naib Bukele announced in July his plan to offer to buy back government bonds maturing between 2023 and 2025, El Salvador’s total national debt was more than $20 billion. Admittedly, the huge sum for the Salvadoran economy had nothing to do with the decision to accept Bitcoin as legal tender.
Instead, El Salvador’s debt is affected by countless factors. In 1982, 39 years before Bitcoin was legalized, El Salvador borrowed $85 million from the International Monetary Fund, increasing its economic debt and giving its citizens marginal civil war benefits. When the country’s decision in 2001 to make the US dollar its official currency limited its ability to manage its economy. Because the US dollar is its base currency, El Salvador cannot follow monetary policy to pay for domestic expenditures such as social programs or infrastructure. Instead, he had to increase public sector borrowing to pay for these important programs.
El Salvador’s debt problems are not a result of the country’s investment in new financial technologies like Bitcoin. Instead, El Salvador’s use of bitcoin is a step toward restoring its monetary sovereignty, giving its citizens access to financial services and opportunities, and addressing systemic issues that Salvadorans have historically been left out of.
Since filing for legal tender for bitcoin last year, El Salvador has spent just over $100 million on bitcoin. The new law stipulates that all businesses in the country must accept bitcoin as a form of payment. Around the same time, the government also created a trust fund with $150 million in public funds to facilitate dollar transfers and launched its digital “Chivo Wallet,” which gave $30 worth of bitcoin to citizens who download it.
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By legalizing bitcoin as a legal currency, creating wallets for citizens and encouraging them to use these new tools with bitcoin rewards, the government has taken important steps to give citizens more financial freedom and opportunity than ever before. For example, at the time of the adoption of this law, it was estimated that up to 70% of the country’s citizens did not have bank accounts. The Bitcoin experience uplifts these citizens by giving them the opportunity to join the formal economy and create opportunities for them to grow their wealth.
While the timing of El Salvador’s adoption of bitcoin as a legal currency unfortunately coincided significantly with an industry-wide bear market, the rush to assess this failure is premature, to say the least. To judge the success of an experiment, it is important to consider its purpose and give the experiment time to run its course.
Essentially, El Salvador bitcoin promised to usher in a new era of monetary sovereignty in the country and provide citizens with economic opportunities that they did not have in the past and likely will not have in the future. As a result of these efforts, through the use of blockchain technology, millions of unbanked Salvadorans now have access to financial services and global financial markets.
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While others stand by and wait to see what will happen, El Salvador has become the leader of this movement, which is likely to spread to many other countries in the world. Countries including Venezuela and Guatemala, among many others, may soon follow the path that El Salvador has taken in seeking progressive financial solutions based on blockchain technology to empower citizens and promote new eras of economic growth and independence.
Contrary to claims by critics who attribute El Salvador’s economic problems to bitcoin adoption, the adoption is the answer to the intractable problems El Salvador and countries that it faces, not the cause. The Salvadoran government has taken a bold and commendable step to actually give its citizens the opportunity for financial freedom.
