Whatever you say about the controversial El Salvador Bitcoin experiment, it is certainly a real live natural experiment. Success, failure, or in between, we’re going to see what happens.
There are many interesting aspects of this experiment, including the attempt to assert sovereignty and restructure state financing. The geopolitical provocation has certainly generated predictable reactions, but it is too soon to know how the chips will fall as El Salvador enters a potential debt crunch.
But one of the most interesting parts of the experiment is the attempt to boot up Bitcoin as a real, functioning currency throughout El Salvador. With a wallet available and businesses required to accept Bitcoin, the stage is set for the people of El Salvador to use Bitcoin as currency.
So how’s that going?
This spring researchers at the US National Bureau of Economic Research report on a survey of Bitcoin use in El Salvador before and after the Bitcoin experiment . Overall, it seems clear that El Salvadorans have not adopted Bitcoin. And adoption is not growing, and may be shrinking.
There are many points of interest in the survey data. One thing that struck me is that a large number of Salvadorans do not have smart phones connected to the Internet—a prerequisite for actually using Bitcoin via the Chivo wallet. And, naturally, the poor and “unbanked” are more likely to not have access to the internet. Similarly, knowledge about and downloading the Chivo wallet is much higher among wealthier, better educated people, and also among younger and male individuals.
However, the most critical factor is that the Chivo wallet is competing with cash and other digital payment methods. The survey shows that many people have not downloaded the Chivo wallet yet, and many who did download it have not used it except to get the $30 incentive. Basically, the Chivo has not gained much popularity against cash and other options. We may note that, despite the law, most businesses do not accept Bitcoin—most business in El Salvador was, and remains, cash.
The most surprising finding to me is that Bitcoin is not being used for remittances from overseas, even though this is a natural use case, and Bitcoin should be economically competitive in this role because of the government subsidies that reduce transaction costs.
“Overall, we document that bitcoin is not being widely used as a medium of exchange. The later stands despite the big push exerted by the government, which involved endowing bitcoin with legal tender status through the Bitcoin Law, the $30 bonus, gas discounts, and no transaction or withdrawal fees; and despite the incentive to use touchless payment methods in the midst of the COVID-19 pandemic.”(, p. 19)
The survey hints at reasons for the relatively low uptake. Aside from the lack of access to the internet or other infrastructure, the Chivo app and Bitcoin have not successfully competed with the alternatives, cash and cards. This seems to be a combination of preference for the familiar and distrust of the new.
This isn’t exactly a shocking finding. Most people are pretty conservative about money. The El Salvador experiment took many steps to address these concerns, but it has not yet made much progress on this front in a few short months. And even with enviably high public support, the government has not yet established sufficient trust in their innovative currency project to overcome natural inertia.
My own view is that the main asset of Bitcoin is psychological, i.e., that it “disrupts” conventional money and finance. This is certainly the central thrust of the government’s push for financial sovereignty.
However, to the degree that Bitcoin “disrupts” conventional money, that is not necessarily a psychological plus for many ordinary people and ordinary commerce. So, the thing that makes Bitcoin attractive for state finance is probably a negative for uptake as a regular currency.
It also seems to me that, even if Bitcoin isn’t widely used, El Salvador can still potentially gain sovereignty and financial benefits. “Legal tender” is sort of a separate experiment from financial sovereignty. Something like the “Bitcoin bond” might work, and attracting Bitcoin mining and other crypto businesses could succeed, regardless of how many people buy milk with Bitcoin. For that matter, I would think that people might well start using Bitcoin for remittances, even if they just convert to cash and never use it a a local currency.
Do I think El Salvador will achieve greater financial sovereignty? I doubt it. The powers-that-be don’t want to be “disrupted”, and they probably can make sure they get their way. But adoption of Bitcoin as legal tender isn’t crucial to the success or failure of that effort.
- Fernando E. Alvarez, David Argente, and Diana Van Patten, Are Cryptocurrencies Currencies? Bitcoin as Legal Tender in El Salvador. National Bureau of Economic Research Working Paper Series, No. 29968 2022. http://www.nber.org/papers/w29968