El Salvador’s Bitcoin Experiment Proves Crypto Payments Still Need Work

You’d think that such news would be cause for celebration for the cryptocurrency industry. However, while some within the community did commemorate September 7 with a number of celebratory tweets, the actual rollout of bitcoin as legal tender in El Salvador didn’t go particularly smoothly within the country. Not only were there protests in opposition to the move, but the wallet app underpinning the rollout — named Chivo — went offline for part of the opening day, as servers were expanded.

These teething issues illustrate how difficult it will be for other countries to follow El Salvador’s example and institute bitcoin as legal tender, while also illustrating that many people throughout the world still have serious reservations about cryptocurrencies, if only for their notorious volatility and association with less-than savory activity. At the same time, doubts remain about El Salvador’s experiment itself, with critics suggesting that the law is a scheme to fabricate money ‘out of thin air.’

El Salvador Experiences Protests and Problems

One of the most notable — and arguably telling — features about El Salvador making bitcoin legal tender is just how quickly everything has been railroaded to completion. President Nayib Bukele announced his governments plans on June 6, and it was only three days later that the El Salvadoran parliament voted through a law that would make these plans a reality. And now, only three months later, bitcoin is indeed legal tender in El Salvador, although it’s worth repeating that the country has expanded the definition of ‘legal tender’ to require that businesses — whether these be big corporations or independent/self-employed traders — accept BTC as payment.

And it seems that, for the most part, most people in El Salvador aren’t too happy about being required to accept bitcoin.

A survey published in early September by the (El Salvador-based) Central American University found that 68% of people disagreed or strongly disagreed with using bitcoin or other cryptocurrencies as a legal tender, while only 4.8% could profess to understand what Bitcoin is. Likewise, a July poll from Disruptiva (in partnership with El Salvador’s Francisco Gavidia University) found that less than 20% of El Salvadorans agreed with the government’s plans, with 54% of people description them as  “not at all correct” and another 24% framing them as “only a little correct.”

Given these responses, it was unsurprising that just over a thousand protesters marched in capital city San Salvador on the day of the rollout, with many citing bitcoin’s much-storied volatility as one of the key reasons for their opposition.

“This is a currency that’s not going to work for pupusa [traditional corn-based food] vendors, bus drivers or shopkeepers,” said one San Salvador resident quoted by Reuters. “This is a currency that’s ideal for big investors who want to speculate with their economic resources.”

Similarly, one street vendor quoted by the Economist was asked in the days before September 7 if anyone had yet tried to pay her in bitcoin. Her response: “Thank God, no.”

It’s therefore hard to shake the conclusion that the government’s introduction of bitcoin as legal tender in El Salvador isn’t universally popular among El Salvadorans. If nothing else, this undermines any claim that the populations of other nations (or at least nations with a similar socioeconomic profile as El Salvador’s) will be rushing to emulate the Central American state anytime soon.

This is also made a little more unlikely by the technical difficulties experienced by Chivo (Salvadoran slang for ‘cool’) during bitcoin’s first day as legal tender. In fact, three days after the launch, people were still facing issues, with users reporting that they experienced problems accessing the wallet, withdrawing money from ATMs, and verifying their data. Many also complained that the government hadn’t yet deposited the $30 bonus in BTC that Bukele promised to users of the app.

On top of this, the system was also taken offline on more than one occasion, as the El Salvadoran government reportedly sought to increase its capacity. Such hiccups have likely reduced the population’s appetite for bitcoin, and may have damaged Bitcoin’s reputation more globally.

Attempting to Understand the Government’s Motives

It was also noted that, for those users who did receive their promised $30 in BTC, many of them had difficulty moving this sum from Chivo to another wallet.

Source: Twitter

It later emerged that, while most users couldn’t withdraw their $30 in BTC immediately to begin with, many could after first making a few internal transfers solely within the Chivo system.

The Chivo wallet has now been downloaded over 50,000 times on the Google Play Store and received over 1,400 reviews on the Apple App Store, while the government is aiming for 39% of the population — about 2.5 million people — to download it. Given that many people within El Salvador admitted to not understanding Bitcoin, according to one of the survey’s cited above, it’s very likely that many users will be caught out by the need to move their bitcoin around a few times before being able to withdraw it from the Chivo app.

In other words, there’s a worry that users could end up being short-changed by Chivo in one way or another. Critics have noted the app’s centralization, which gives the government undue power over the holdings of its users.

Source: Twitter

They’ve also suggested that Chivo gives the El Salvadoran government the ability to create money as if it were printing its own currency. That is, because ‘1 BTC’ in a Chivo user’s account is actually an IOU for one bitcoin, there’s a chance that the government may create ‘virtual bitcoins’ where none actually exist. In theory, people could deposit USD with the app to buy bitcoin, but the ‘bitcoin’ they receive isn’t really there. Some of them may therefore not be able to withdraw their bitcoin, or at least not withdraw it consistently and on every attempt.

Put differently, Chivo may represent the El Salvadoran government’s attempt at running a fractional reserve bank that operates largely in bitcoin. Given that the government needs to raise around $4.4 billion in 2021 (according to Fitch Ratings), and has so far failed to acquire an IMF loan to help it do so, it’s conceivable that the bitcoin rollout is part of a plan to raise extra US dollars from its own citizens.

If true, this could further damage how the international public views the introduction of bitcoin as legal tender. And by extension, it may kick the possible adoption of bitcoin elsewhere further down the road.