By: Phil Kernen
In September 2021, El Salvador became the first country to make bitcoin legal tender via the “Bitcoin Law.” Under the law, government agencies and businesses must accept bitcoin as a medium of exchange for all transactions, including tax payments. Eight months later, researchers from the University of Chicago conducted a national in-person survey to obtain information on bitcoin’s usage and effects. The results aren’t encouraging for those who believe bitcoin will come to replace central bank-issued currencies soon.
El Salvador also addressed transaction costs, launching an app (“Chivo Wallet”) designed to allow users to trade bitcoin and dollars digitally without paying any transaction fees. Further, they incentivized citizens to download the app by giving a $30 bitcoin bonus from the government as well as discounts for gas. Finally, the pandemic provided an additional incentive to adopt touchless payment methods.
Before Chivo’s launch, more than half of the respondents used only cash to pay for expenditures, 70% of respondents were unbanked, and nearly 90% did not use mobile banking despite two-thirds of Salvadoreans having mobile phones with internet access. Just over half of the respondents downloaded the Chivo app, driven primarily by the $30 bonus. The probability of being aware of the app (not everyone was) was higher for individuals who own a cell phone with internet, are banked, educated, young and male.
Most downloads took place as it launched in late 2021; nearly no downloads occurred in 2022. Those choosing not to download the app claimed a preference to use cash and a lack of trust in the system and bitcoin itself.
Most respondents spent their $30 bonus, but only 20% of those who downloaded the app continued to use it after they spent the bonus. And that 20% doesn’t use the app intensively. Promoters expected those living outside El Salvador and sending remittance payments to use Chivo most heavily. They aren’t. The Reserve Bank of El Salvador found that only 1.6% of remittances went through Chivo in February 2022.
The behavior of Salvadorean businesses is similar. Despite bitcoin’s legal tender status, only 20% report accepting bitcoin as payment, and businesses that do are typically large. On average, customers transact only 4.9% of sales in bitcoin, and 88% of companies that accept bitcoin transform money from sales in bitcoin into dollars and do not keep it as bitcoin in Chivo. Bloomberg published an article in early April documenting the challenges of paying only in bitcoin while traveling in El Salvador. Some of the author’s purchases went through, but most did not.
El Salvador has been the site of several monetary experiments, formally adopting the U.S. dollar as legal tender and the only official currency of the country in 2001. That one worked. The experiment of El Salvador and bitcoin allows us to record that
- requiring businesses to accept bitcoin;
- providing significant incentives to increase bitcoin adoption;
- accepting bitcoin as a means for paying taxes
Is not enough to create scale to use bitcoin as a medium of exchange.
If you are buying bitcoin or other cryptocurrencies on the belief they will one day push aside established options, these results don’t present an optimistic picture in the near term. So far, bitcoin isn’t much of a currency, digital or otherwise.
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