El Salvador leads world in adopting bitcoin as legal currency

A poster inside a barber shop shows customers can enjoy discounts if they pay with bitcoin, in Santa Tecla, El Salvador, Sept 4, 2021. (SALVADOR MELENDEZ / AP)

SAN SALVADOR – El Salvador on Tuesday became the first country in the world to adopt bitcoin as legal tender, a real-world experiment proponents say will lower commission costs for billions of dollars sent home from abroad but which critics warned may fuel money laundering.

The change means businesses should accept payment in bitcoin alongside the US dollar, which has been El Salvador's official currency since 2001 and will remain legal tender.

President Nayib Bukele, who has pushed for adopting the cryptocurrency, says it will help Salvadorans save about US$400 million the government calculates is spent annually on commissions for remittances

President Nayib Bukele, who has pushed for adopting the cryptocurrency, says it will help Salvadorans save about US$400 million the government calculates is spent annually on commissions for remittances.

Last year alone remittances to El Salvador amounted to almost US$6 billion, or 23 percent of its gross domestic product, one of the highest ratios in the world.

Doubters say bitcoin could increase regulatory and financial risks for the Central American nation, and polls show Salvadorans are wary of the volatility of the cryptocurrency, which can shed hundreds of dollars in value in a day.

To warm up a skeptical public, Bukele has promised every citizen US$30 in bitcoin if they sign up for a government digital wallet. 

Ahead of the launch, El Salvador bought 400 bitcoins, Bukele said, helping drive the currency price above US$52,000 for the first time since May.

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Some citizens are optimistic.

"It's going to be beneficial … we have family in the United States and they can send money at no cost, whereas banks charge," said Reina Isabel Aguilar, a store owner in El Zonte Beach, some 49 km southwest of capital San Salvador.

Known as Bitcoin Beach, the town of El Zonte aims to become one of the world's first bitcoin economies.

In the run-up to the launch, the government has installed ATMs that will allow bitcoin to be converted into dollars and withdrawn without commission from the digital wallet, called Chivo.

Bukele on Monday looked to temper expectations for quick results and asked for patience.

"Like all innovations, El Salvador's bitcoin process has a learning curve. Every road to the future is like this and not everything will be achieved in a day, or in a month," he said on Twitter.

The cryptocurrency has been notoriously volatile, rising to more than US$64,000 in April and falling almost as low as US$30,000 in May this year.

The move to make bitcoin legal tender alongside the US dollar has muddied the outlook for El Salvador's quest for more than US$1 billion in financing from the International Monetary Fund (IMF).

Analysts fear adopting the cryptocurrency could fuel money laundering in a country with serious problems of government corruption and organized crime.

READ MORE: Tesla's Musk halts use of bitcoin for car purchases

After Bukele's bitcoin law was approved, rating agency Moody's downgraded El Salvador's creditworthiness, while the country's dollar-denominated bonds have also come under pressure.

But Bukele, who does not shy away from controversy, on Monday retweeted a video that showed face superimposed on actor Jaime Foxx in a scene from Django Unchained, Quentin Tarantino's film about American slavery. The video portrayed Bukele whipping a slave trader who had the IMF emblem emblazoned on his face.

Bukele later deleted the retweet.

His own tweet reads: "we must break the paradigms of the past. El Salvador has the right to advance towards the first world."