In 2015, the small state of El Salvador took headlines as the most dangerous country outside a warzone. It was a “country ruled by gangs” - one so dangerous that even police were forced to flee.
Since then, tough security reforms and informal diplomacy have gone some way in changing narratives. Homicide rates have consistently fallen year on year, touching historic lows in 2020. At 19.6/100,000 they now hover below the regional average.
As such, this time round El Salvador has made headlines for an entirely different reason.
On June 9th 2021, El Salvador became the first country to adopt Bitcoin as legal tender.
In a message broadcast at Bitcoin 2021, President Nayib Bukele announced a partnership with Strike - a digital wallet company - to build out the country’s digital infrastructure. Given 70% of El Salvadorians have no access to a bank or credit card, it’s big news. "Making bitcoin legal tender is a leapfrog moment that can help countries like El Salvador shift from a largely cash economy to an innovative, inclusive, and transparent digital economy where your bank account is your phone" Strike founder Jack Mallers said.
The move has been heralded by Bitcoin commentators on Twitter, but is not without its critics. Analysts have urged caution given the volatility of cryptocurrency, with some noting the lack of control El Salvador will have over the network. “This just feels like a bad idea . . . in effect, El Salvador will have two currency regimes operating in the country with control over none of them,” said Bipan Rai, currency analyst at CIBC. It may well be that the legislation is little more than a PR stunt for Bukele, looking to harness Bitcoin-mania to grow his popularity both within and abroad.
So one has to ask whether Bitcoin will have any tangible impacts on El Salvador.
Of course, one is immediately apparent - El Salvador has been thrust into the limelight and interest in the country has piqued. On announcement of President Nayib Bukele’s plans, worldwide Google search enquiries for properties in El Salvador rose by 335%. Further, search enquiries for holidays in El Salvador jumped 9100%. Bukele - a former marketing man - harnessed such increased coverage, quickly promoting El Salvador as a destination through Twitter by retweeting surf clips and footage of the country’s natural environment. If search enquiries are anything to go by, short-term tourism will pick up, especially given the US state tourism department has ranked El Salvador as level 2 - lower than nearby Nicaragua and Costa Rica’s level 4, and Panama’s level 3.
Beyond this, the new legislation will bring financial impetus to El Salvador, where socioeconomic indicators are underwhelming. GDP growth has been persistently low, averaging just 2.3% in recent years whilst only 20% of those aged over 10 are literate. Should just 1% of Bitcoin’s market cap be invested into the newly crypto-friendly El Salvador, then GDP would grow by 25%. GDP’s moderate correlation with commercial and residential real estate suggests we would see prices rise in line.
Overall though, the largest impact regards remittances. Other than Haiti, no country in the Western Hemisphere relies more on remittances than El Salvador, with the £2.9bn sent from abroad every year making up 20% of El Salvador’s GDP. Currently cross-border transactions are expensive and take days to arrive - Bitcoin transactions would cut fees by some 10% and take seconds. Though this is nothing new, Bukele’s decision to make Bitcoin legal tender means turning Bitcoin to fiat currency will no longer be subject to capital gains tax.
Whatever happens, interested eyes will be focused on El Salvador over the next few months. The move has bolstered Bitcoin’s image as a viable currency and support for Bukele, now framed as an innovator, is high.