In 2008, the U.S. financial crash and subsequent bailout led to an even greater loss of trust in central banks and governments. More than 8 million Americans lost their jobs in the aftermath. The companies responsible for the financial crash received generous relief packages.
A month into the crash, the enigmatic Satoshi Nakamoto introduced the idea of decentralized, digital currency — Bitcoin.
Bitcoin touted fast peer-to-peer transactions, and an immutable and decentralized record of transactions to prevent fraud and manipulation. No central government, bank or individual can control the issuance of Bitcoin. Instead, algorithms (proof-of-work mining) rewards people verifying transactions with new Bitcoin.
Despite the high-energy usage of Bitcoin and many other cryptocurrencies, despite the volatility of its price, despite bans and staunch opposition from many governments, it appears to be like Marvel Studio’s villain Thanos — inevitable.
Countries are dealing with this reckoning in very different ways.
El Salvador made Bitcoin legal tender. Ukraine is certainly on track to increased adoption. Many other countries with economic strife, a highly unbanked population, and rising inflation are welcoming cryptocurrencies — including Cuba, Brazil, Panama, and Venezuela.
Initially there was staunch opposition in El Salvador from much of the population. This was ignited by the disapproval of their President Nayib Bukele (who calls himself a dictator in his Twitter bio) and who actually is one as far as almost anyone who’s paying attention to what’s been happening there will attest.
The people of Ukraine suddenly have a very different understanding of the benefits of crypto in the aftermath of the Russian invasion. Many people fleeing the destruction in major cities are also holding crypto assets. It’s not difficult to travel with a recovery phrase or a password compared to physical assets.
Like it or not cryptocurrency is a genie that’s out of the bottle, and for better or worse, we’ll have to reckon with it.
El Salvador’s Bitcoin Experiment
On June 9th, 2021, President Bukele passed a motion to make Bitcoin legal tender in El Salvador. The motion passed with a total of 62 out of a possible 84 votes and officially kicked in on September 7th, 2021. While this sounds impressive, he did invade the legislature with the army to approve a previous bill and replaced the attorney general and Supreme Court Justices for loyalists.
By buying Bitcoin during dips, El Salvador acquired 550 Bitcoin by September 20th, 2021, equivalent to more than $24 million USD — enough to sustain a rollout. The Court of Accounts is investigating complaints about government holdings and Bitcoin ATM construction, due to a lack of transparency.
The Case for Bitcoin Remittance
A quarter of El Salvador’s economy is dependent on USD remittances from overseas workers. Of course, this incurs a high cost as they often go through Western Union or other similar services. Bukele’s pitch is simple — reduce the cost of remittances through Bitcoin.
It is easy to install a Bitcoin wallet on a smartphone, benefiting the 70% of the population that is unbanked. Incentivizing users to download the state-sponsored Bitcoin wallet, Bukele’s government airdropped $30 in Bitcoin. Additionally, Bukele tapped the government-owned geothermal firm LaGeo with building Bitcoin mining facilities near El Salvador’s volcanoes, benefiting the industry.
Public Outcry Against the Bitcoin Law
The Bitcoin motion itself was highly unpopular amongst the people, with a university survey suggesting that approximately seven out of ten Salvadoreans wanted the law repealed. It didn’t help that, nine out of ten Salvadorans, according to the Central American University’s survey, had little to no knowledge of Bitcoin. Regardless, the new law forces all businesses to accept Bitcoin. This was quite difficult for the people working in the business didn’t understand it or didn’t want to accept it.
Many of the workers sending remittances similarly don’t have enough knowledge about Bitcoin and may not be aware of the cost on workers overseas in converting USD to Bitcoin (a fee as high as five to seven percent). Even if the transfer fee is subsidized by the government, it doesn’t guarantee a cheaper remittance and may take significantly longer.
A Disastrous Rollout
In anticipation of the Bitcoin rollout, a prominent critic named Mario Gómez was illegally detained by police. It isn’t clear exactly why, but Gómez has remained vocal about the weaknesses within the government’s rollout of Bitcoin.
Just as the law went into motion, the government-sanctioned Bitcoin wallet Chivo went down due to unexpected glitches. Chivo is funded by $60 million in public funding, but as a private corporation it isn’t subject to any freedom of information requests. Others are concerned that Chivo retains the private keys over Bitcoin, meaning that Chivo the company retains custody over the Bitcoin.
After these glitches, Salvadorans explained to reporters that they were angry about forced acceptance, the lack of transparency as well as Chivo dysfunction. While people are free to use other Bitcoin wallets, their transaction fees won’t be subsidized and there are also questions about cross-app operability.
It is no surprise that this motion led to protests, fearing that Bitcoin adoption would lead to more instability and inflation. Its price can fluctuate wildly, as much as 25% within one month. Other protestors are concerned about Bitcoin’s carbon footprint as it would need to import energy to meet its domestic needs since the majority of geothermal energy would be dedicated to Bitcoin mining.
Is El Salvador a Failure?
While Bitcoin maximalists are celebrating on Twitter, the majority of El Salvador is critical and highly sceptical of the new law.
It turns out that passing a digital currency that most of the country doesn’t use or know much about, without much transparency, is unpopular.
Remittances will remain expensive as most overseas employees are paid in USD and would need to use services to convert it to Bitcoin, incurring higher fees than using Western Union. Finally, a country that’s been at the center of many environmental protests isn’t really cool with using geothermal energy to mine Bitcoin, necessitating the import of carbon energy sources.
Ukraine Begins its Bitcoin Journey
Shortly following El Salvador’s lead, Ukraine’s parliament passed a bill allowing the country to regulate virtual financial assets which include cryptocurrency. This may pave the way to future legalization of Bitcoin and other digital assets as legal tender.
“The development of a new industry will allow attracting transparent investments and will strengthen the image of our country as a high-tech state,” said Mykhailo Fedorov, Ukraine’s vice prime minister of digital transformation.
The Case for More Crypto Adoption
Ukraine’s parliament hopes their law will attract new technology companies and businesses. While economic powerhouses like the United States and China attempt to limit, regulate or altogether prevent the use of cryptocurrency, Ukraine could welcome them with more permissive legislation. Crypto is overseen by the National Bank of Ukraine. However, at this stage, this law is still largely symbolic, as Ukrainians could already buy and trade cryptocurrencies, albeit in a legal gray area.
It is unclear whether any of these ambitious goals for the country will become reality. It is also unclear what the average person in Ukraine thinks about this new legislation. Nonetheless, it isn’t controversial to say that at least so far, they’ve fumbled this process a lot less than El Salvador.
Conclusion:
The Perils of Crypto Legalization and the Barriers to Adoption
Bitcoin and other cryptocurrencies emerged out of distrust in centralized financial institutions. While legalizing the use of cryptocurrency (not unlike cannabis) is generally welcomed, pushing it as legal tender without much transparency is sure to spark outrage.
What Ukraine Can Learn From El Salvador
From the El Salvador situation, it seems that Bitcoin remittance may be more costly than the existing system. Most of the population disapproves of the recent law and even more know little to nothing about Bitcoin. The rollout has featured glitches in government-sanctioned Bitcoin wallets, unlawful arrests of critics, and large protests.
With businesses required to allow Bitcoin payments, the costs of these goods may differ wildly day-to-day; after all, Bitcoin is now recognized for its ability to store value like gold, rather than its utility as a currency.
Most troubling of all, the geothermal energy used to power the country may be diverted to Bitcoin mining. This may mean a higher reliance on carbon-energy imports, a steep financial and ecological price to pay for legally adopting a digital currency.
Ukraine and Everyone Else
While Ukraine isn’t planning to make Bitcoin legal tender, it has made cryptocurrency legal, clarifying its previous ambiguous status. Ukraine, like many other countries planning cryptocurrency legalization, aims to attract technology companies focused on digital currency. Ukraine, Cuba, Brazil and Panama are all hoping that they could be home to the crypto version of Silicon Valley. But it remains to be seen whether this symbolic legalization will even be popular, or benefit, the average citizen.
Over the pandemic, the billionaire class expanded their wealth and cryptocurrency may provide yet another convenient tax shelter. Some of them also happen to be cryptocurrency whales, who stand to benefit much more from legalization and adoption than the average citizen.
The following must be considered and transparently addressed before pushing for using Bitcoin as a legal tender:
- Surveying the population to identify gaps in Bitcoin knowledge
- Allow business owners and citizens to transparently voice concerns
- Provide programs that help businesses adopt and use Bitcoin
- Develop or promote the use of open-source wallets where individual citizens will retain the keys
- Determine whether the country will need to import more energy to support Bitcoin
- Consider whether using other cryptocurrencies would be more appropriate and less energy-intensive
As the socioeconomic gap widens into a chasm, and rising temperatures literally burn towns on the ground, legalizing cryptocurrency probably isn’t the solution. Especially when the majority of the public, who voted officials into office, is opposed. While a decentralized currency has its benefits, regulating it through a centralized government proves hazardous.
