In pre-Hispanic times, the indigenous peoples who lived on the land we now call El Salvador used cocoa beans as their dominant medium of exchange. In 2021, the people living on this same land use Bitcoin.
This radical evolution of humanity’s relationship with money fascinates me, and it was one of the main reasons driving my travels to El Salvador. I wanted to truly understand the technology, whether it had the power to live up to its promise, and whether locals were really on board with this transformational shift. But before I get into my experience, we first need to dig into a little background to better understand the context of this historic moment.
Between cocoa beans and Bitcoin, El Salvador’s currency has changed many times. When the Spanish came, they were forced to adopt the Spanish colonial currency. Then silver coins called reales, then something called Bambas, then Salvadoran Colones, and finally, in 2001, the adoption of the US dollar.
The ‘Dollarization’ of El Salvador (2001)
As I have previously discussed, the civil war from 1979–1992 forced many Salvadorans to move abroad to the United States. Naturally, these immigrants stayed connected with their family and friends back in El Salvador and sent them money or ‘remittances’ to support them through the difficult times in El Salvador. These remittances meant large amounts of US dollars were being transferred from the United States to El Salvador and then exchanged for the Salvadoran Colon once it arrived in El Salvador. This artificially inflated the price of the Colon beyond what it was actually worth, making El Salvador’s exports much less competitive and hurting economic growth.
The government decided at the turn of the century that adopting the US dollar would solve this problem, as well as bring greater stability to the country, lower interest rates, and attract foreign investment. In 2001, it became official, and El Salvador became the third Latin American country — after Ecuador and Panama — to adopt the American currency.
The government promised its people that it wouldn’t be a complete switch. Dollars and Colones would continue to circulate simultaneously. But according to many people I met here, within months, all the Colones were swept out of the country. Prices increased because all businesses suddenly had to switch their pricing to adjust for dollars — leading to a phenomenon referred to as “rounding up.” When prices for small items, like bus fares and food, were converted from Colones to Dollars, they were rounded up to the nearest nickel, dime, or quarter. However, wages stayed the same, leading to high inflation and the decaying of purchasing power, hurting already poor Salvadorans the most.
The majority of people were — and still are — reliant on stable and low bus prices for transportation
This inflation has been made worse as of recently due to the United States’ monetary policy. By adopting the US dollar in 2001, El Salvador handed over authority over its money supply and interest rates to the United States Federal Reserve, which is very unlikely to take the interests of El Salvador into consideration when making decisions. The decisions of the Fed to inject the US economy with trillions of dollars affects El Salvador by decreasing the value of their currency — but unlike Americans who have enjoyed the benefits of stimulus checks, unemployment support, and investments into the economy, Salvadorans have essentially been seeing zero benefits from this spending. They get all of the downsides of inflation, and none of the upside of a social safety net. For this reason, the government of El Salvador has been forced to raise deficits to stimulate the economy. Simply decreasing interest rates to spur consumption (like the US does) is not an option.
How did we arrive at Bitcoin?
On August 15th, 1971, exactly 50 years and 23 days prior to when Ley Bitcoin went into effect in El Salvador, Richard Nixon suspended the convertibility of the US dollar into gold. This means that US dollars were no longer physical representations of small units of gold being traded between people and businesses. While gold has value as a scarce resource that takes significant effort and capital expenditure to mine, little green pieces of paper have no inherent value. Instead, the value of this type of currency is derived from the power of the country backing it. We call this “fiat currency,” as the Latin word fiat means “it shall be” or “let it be done.” In a strange sense, this means the US dollar is quite valuable because the US is a large, powerful, trusted country with a strong military. It is unlikely that the US could be crippled by a war, breaking the back of the US economy and devaluing the currency…and therefore, people have faith that their US dollars will continue to be valuable.
Since leaving the ‘gold standard’ 50 years ago, the US has had the absolute freedom to create more dollars if it wants. It doesn’t even need to print; it can simply change the digits in accounts to make more. Recently, these dollars have been created at a very rapid pace, prompting concerns that this will lead to the devaluation of US dollars. While many people who do not understand this system still continue to save US dollars, the rich have been instead exchanging their US dollars for assets (like stocks, real estate, art, etc) which do not depreciate in value with time. This cycle has been going on for years, leading to massive inequality as the rich (who own assets) have enjoyed massive annualized returns, while the poor (who do not) have watched the purchasing power of their US dollars decrease.
Then in the midst of the financial crisis in 2009, an anonymous individual who goes by the pseudonym Satoshi Nakamoto created something called Bitcoin (BTC). Bitcoin is a currency like US dollars, but it is global and completely digital. Its key advantage over US dollars is that it is considered “sound money,” meaning it has a fixed supply and thus is not inflationary. There will only be 21 million BTC ever created, and the creation of BTC is on a fixed schedule so everyone can plan for it.
The blue curve represents the number of Bitcoins in circulation at any time.
The detailed mechanics of BTC are outside of the scope of this blog, but essentially — instead of a central authority like a bank checking your account to ensure you have sufficient funds when you use your debit card (and then charging a small fee), Bitcoin is a decentralized, distributed network of computers that checks you are good for your payment and then publicly publishes it on something called a blockchain. This means that there is no central government or company in charge of approving what you do, which a lot of people find attractive. It also means that you don’t need a bank account to participate in standard financial services — you only need an internet connection. Finally, it means that this financial system is completely borderless — sending money to someone in the Central African Republic is the exact same as sending it to your next-door neighbor. It is universal, programmable, deflationary money. And it has skyrocketed in popularity recently as political, environmental, and health crises have left many people less trustful of large centralized institutions.
Why would El Salvador adopt Bitcoin?
Well, as I discussed in my previous blog, perhaps just because it is the cool thing to do. The current president, Nayib Bukele, is riding a wave of populism and knows how to market his ideas. It is difficult to quantify the true value of the earned media resulting from this bold decision alone, but it has been the first very serious international attention El Salvador has received since the fateful civil war.
But outside of this cynical interpretation, if you combine the previous two sections on El Salvador’s history and Bitcoin’s history, it kind of makes sense. The extremely high number of Salvadoran citizens living abroad (and conducting economic activity with their families back in El Salvador) means that a borderless currency is a big advantage. With the traditional financial system, borders are an opportunity for a middleman to take a profit. Remittance charges range, but many people pay upwards of a 10% commission to send their money across borders. Bitcoin cuts out the middleman and means that a higher portion (in many cases, 100%) of the money being sent to El Salvador actually gets to El Salvador. Given that over 20% of El Salvador’s gross domestic product is remittances, we are not talking about a small figure here.
Additionally, the decentralized nature of BTC means that by adopting it, El Salvador is no longer completely under the thumb of the US Federal Reserve. US economic sanctions may mean less, and by owning Bitcoin, El Salvador can protect itself from printing. In fact, if BTC’s price increase continues, El Salvador could actually be at a global advantage — in the three months since Bukele announced the country would be adopting BTC, the price has increased over 30%. Further, being the first mover to adopt the currency may encourage investment from pro-crypto advocates and create technology jobs, making El Salvador a regional hub of innovation.
Finally, 70% of El Salvadorans do not have a bank account. For those who live in remote rural areas and still lack access to the internet, this is not really a solution; but for the many citizens who have an internet connection but lack a bank account, it could be. As I have previously argued, financial access is one of the central pillars of reducing inequality and ensuring every human has the opportunity to flourish.
My experience with Bitcoin in El Salvador
I am personally quite agnostic to Bitcoin as a technology, but quite a strong supporter of anything that can provide increased financial access. So when I saw that a developing country was the first one to adopt BTC, I got really excited, because I saw it had potential to be an equalizer. If the developing world went all in on BTC first, and the slower institutions of the developed world followed after, and the price of BTC continued to climb, it would be a huge win for global inequality. I came to El Salvador hoping to confirm this would come true.
The world-renowned beaches also helped my decision!
However, I was very conscious of my bias and tried to ask as open of questions as possible and never reveal my personal beliefs too strongly. I also wasn’t out there grilling people with interview questions; I just talked to as many people as I could and a lot of times it came up naturally in conversation. But I clearly was hoping for a certain narrative. I wanted to hear that people were thinking about their personal finances for the first time because of BTC, that they were excited about investing in crypto and other assets, and that they preferred it to cash as a method of payment. I could lie to you, as many people do, to tell you that is absolutely what most people in El Salvador think, but it is not.
Contrary to what all the Bitcoin maximalists on Twitter want you to believe, the majority of people in El Salvador are not supporters of Bitcoin yet— even those who are supporters of Bukele. I spoke with many people who generally liked Bukele but thought his Bitcoin idea was a bit out there. There are many reasons for this, but I’ll attempt to summarize the main ones I heard. Anyone hoping that Bitcoin succeeds must understand that these concerns are real, legitimate, and for the most part logical — before trying to address them. Humans generally don’t respond well when you try to shove an idea down their throat. Human beings respond to patience and understanding, and sometimes need time to adopt big new ideas.
- Probably the biggest reason for opposition was the fear of volatility. BTC is a great store of value, but currently a pretty inefficient unit of exchange. If you don’t make enough to save, and you need to pay the bills tomorrow, the fear that your net worth could plunge 20% on an Elon Musk tweet is not settling. The government of course says that no one will be forced to hold BTC, but many people do not trust this.
- Building off that, the reason for this mistrust likely largely stems from the mismanagement of the switch to the US dollar in 2001. That was 20 years ago, and the majority of the population remembers the pain of trying to make ends meet in those years. It is logical that they would not want to play this currency switching game again.
- Some people wrote off BTC just because they are against Bukele. There is no doubt some of his actions can be off-putting and that his polarizing personality may not help the cause of widespread adoption.
- A good amount of people said they were simply uninformed and wanted the time to do more research. I appreciate it when someone admits this! Not enough people withhold their opinion until they are informed. And the great thing is, they have plenty of time. If the promise of BTC is real, we are still very early.
- And finally there was: “El Salvador has bigger problems than Bitcoin.” Many people are not happy that the government is diverting scarce resources to an experiment when there are so many critical day-to-day issues Salvadorans are facing. “I would rather a developed nation like the US tried it first so we could trust it,” they say, “we have more pressing problems here that need to be addressed now.” Undoubtedly this is a bold strategy that carries a lot of risk, and this risk looks even bigger if you don’t see the potential upside. Few people are making the leap that monetary policy is the foundation of society, nor that access to basic personal financial services could be a solution for so many other problems facing El Salvador.
All of this being said, I found a big divide between the coast and the rest of the country. On the coast, especially in El Zonte, many people have already been using BTC for years, and how could you not love it if your wealth had increased tenfold in the last couple years because of it? There was some great enthusiasm and promise in places that had actually tried it. And contrary to what the other side wants you to believe, these are not the rich and corporations that are taking big gains. I found some of the largest fans of Bitcoin to be the lady selling pupusas at a dimly lit diner and the kid working at a humble convenience store. I saw a tiny glimpse of what a world with a more inclusive financial system might look like. But I also saw how far we have to go to make that a reality.
Two gringos, two local Bitcoiners, and the first Bitcoin ATM in all of El Salvador.
Bitcoin, and El Salvador, is complicated. And the majority of its history is yet to be written. Over the next couple months and years, the eyes of the world will be on this tiny Central American nation to see whether they can really pull off the impossible by promoting a more inclusive financial system and redefining humanity’s relationship with money forever. We will see all sorts of news articles saying all sorts of things, trying to push an agenda supporting one side or the other.
Already, not even a month in, this experiment has been firmly labelled as both a success and a failure. It is neither. We must be patient for those on the ground who are currently doing the hard daily work of trying to make this vision a reality. We must understand that something this big will take decades, respect the variety of opinions that will continue to evolve, and allow our own opinions to evolve as well when facts change. Because ultimately, it will be the voices of the Salvadoran people who will provide the world with the verdict — and if we are truly interested in building a better tomorrow, we must listen carefully.