El Salvador's brave new bitcoin world fell flat.
The country's move to make bitcoin legal tender alongside the U.S. dollar took effect Tuesday, but was met with a crash in bitcoin prices and headaches with its new digital wallet as businesses and consumers grappled with difficulty in actually using the country's new currency.
Steep drops in bitcoin's price Tuesday and Wednesday highlighted the cryptocurrency's volatility. Protests also erupted from citizens who opposed the move to bitcoin.
El Salvador's digital wallet, Chivo, designed to be the central financial app for the entire country, was not available on Apple, Google or Huawei's app stores at launch Tuesday. It eventually showed up for download, but struggled with capacity problems, with the Chivo team taking it offline to move to higher-capacity servers at one point, according to crypto news site the Block.
President Nayib Bukele tried to put a good face on the launch, saying he bought the dip by purchasing bitcoin for the government's treasury at lower prices. He retweeted videos of people paying with bitcoin at businesses such as Starbucks, Pizza Hut and McDonald's. It's unclear how many small businesses that lacked the technological resources of a multinational corporation were accepting bitcoin.
There are some potential upsides of the country's move to bitcoin, such as lower costs for remittances, which are estimated to be one-quarter of the country's GDP. But there's a wide field of technical and financial landmines El Salvador still has to navigate.
The plan was passed through the country's legislature in a matter of hours and implemented in about 90 days. And since El Salvador is the first country to make bitcoin legal tender, there's no playbook for how to do this. It showed in the rollout.
- The country has outsourced its bitcoin plan to at least five private companies, with others like OpenNode, which McDonald's is reportedly using for bitcoin payments, getting in on the action.
- With so many players involved, there doesn't seem to be a central organization offering technical support or education. What about individuals who don't have a mobile phone, or can't access a bitcoin ATM, which seems to be the main plan to access physical cash? What if businesses need something more sophisticated than a consumer-oriented wallet app to receive payments? There were some Chivo kiosks set up at plazas across the country, but they weren't very active, the Wall Street Journal reported. At times, Bukele himself offered technical support on Twitter.
Volatility and financial stability
The crypto world has a solution for bitcoin's volatile price: stablecoins, or crypto tokens whose value is designed to stay linked to fiat currency to make them more attractive as a means of payment. El Salvador has vague plans to introduce its own stablecoin, a digital version of the colon, its pre-dollarization currency. But that's just an idea at this point, and bitcoin, with its gyrating price, is what the country has for now.
- If the price of bitcoin falls, businesses will have to hike their prices. If it rises, then consumers lose buying power.
- El Salvador's government seems to recognize the problem: It's still paying public workers' salaries in dollars.
- The IMF, with which El Salvador is negotiating a debt package, believes the bitcoin plan will cause "macroeconomic instability." It could hurt financial trust in the system, given crypto's connections with illegal activity, the multinational agency said.
- There's also the potential use of the system for money laundering or other criminal activity, given how quickly the system was set up. Protesters pointed this out, saying bitcoin would attract money laundering.
- The views of international lenders matter a lot, because the country is in debt and relies on international loans. Moody's downgraded the country's debt because of the bitcoin moves. The World Bank said it would not help with the bitcoin plan. If the country moves full steam ahead, there is no guarantee that the IMF or others will bail out the country's financial system if it doesn't work.
El Salvador's internal politics
Bukele, who's been called an "authoritarian hipster," is staking his reputation on the bitcoin plan. If he goes, will the bitcoin law stick around?
- Critics have argued that Bukele's bitcoin moves are just part of his consolidation of power. A ruling last week by the Supreme Court — whose makeup was changed by the country's legislature this spring to make it more friendly to the president — recently allowed Bukele's reelection.
- But the move to a crypto economy could end up making the country less stable — and Bukele's position less secure.
There's an argument that these are all just technological teething pains, a beta test conducted in public. And the dip in bitcoin could just be a "typical" sell-on-the-news reaction, according to Ulrik K. Lykke, executive director at crypto hedge fund ARK36. But it's clear that remaking an economy in real time around cryptocurrency is easier said than done.