Compass Money: Salvadorans Speculate on Bitcoin Trading After Legalization
El Salvador has witnessed a series of speculation since the adoption of bitcoin as a legal tender. (Wikimedia Commons)
A month has passed since El Salvador adopted bitcoin as legal tender. Instead of the “financial inclusion, investment, tourism, innovation, and economic development” that Salvadoran President Nayib Bukele promised the cryptocurrency would bring, a speculative frenzy is sweeping the country.
Bukele, a millennial politician known for his liberal tactics and tech-savvy marketing strategies, suggested the use of bitcoin at the Bitcoin 2021 Conference to stimulate the growth of the country’s fragile economy and encourage financial freedom. The adoption of bitcoin would enable digital payments for 70 percent of the population without access to traditional financial services, thus incorporating them into the formal economy. The official digital wallet that reduces remittance fees and facilitates dollar conversions would optimize the foreign remittance procedures, according to Bukele. The Salvadoran Legislative Assembly approved the president’s proposal in June with 62 out of 84 votes, making El Salvador the first country to embrace bitcoin as legal tender.
Ever since the Bitcoin Law went into effect on September 7, a number of multilateral organizations have voiced their concerns over the limitations of crypto-based financial services. The exchange rate volatility of the cryptocurrency undermines the government’s dollar conversion abilities, augmenting the burden on taxpayers. The World Bank and the International Monetary Fund warned about the increased risk of tax evasions, money laundering, and other illegal activities. The problems of technical failures, lack of access, and mistrust of the government remain. More importantly, the ease of bitcoin-to-U.S. dollar conversion on Chivo, the government-issued digital wallet that serves as a platform for bitcoin transactions, has left El Salvador vulnerable to waves of speculation.
On October 3, Bukele announced that more than 3 million Salvadorans are using Chivo. Designed to promote the cryptocurrency, the app grants each user $30 worth of pre-loaded bitcoin, which can only be withdrawn after use in a transaction. It also enables users to speculate on falling bitcoin prices and withdraw funds in dollars when the prices go back up. Users have engaged in arbitrage practices of converting the currency back and forth before cashing out the bitcoin. Amid the speculative frenzy, some are investing personal savings to gain a bigger profit.
For non-users, privacy concerns remain a barrier to installing Chivo. With the Bukele administration collecting all information through the app, some Salvadorans fear that their data might be misused for other purposes.
Government obscurity is another deterrent to bitcoin usage. The Salvadoran government set aside $150 million to facilitate dollar conversions but failed to provide a backup plan in case of a transfer fund exhaustion. Furthermore, the purpose of more than $30 million worth of the government's bitcoin purchase was not explained, evoking anti-government sentiments among the taxpayers whose money funds the operation of Chivo. The undisclosed individuals who are in charge of the app add another layer of ambiguity.
Bukele’s consolidation of power yields from a lack of transparency on bitcoin policy and the suppression of dissidents. Mario Gomez, an IT specialist who critiqued Bukele as managing a “state-run central banking system,” was detained for repeatedly voicing dissent on bitcoin adoption. With rising public disapproval surrounding the adoption of bitcoin, over-speculation might not be the biggest problem for El Salvador.