Is El Salvador’s Crypto Plan Paying Off?

Is El Salvador’s Crypto Plan Paying Off?

Three weeks on from the US election and the world is continuing to speculate how his presidency will unfold. In the world of cryptocurrency, events appear to be moving in the right direction. Bitcoin (BTC) has reached record highs, topping $99K at the time of writing, and the news that Elon Musk will head the newly created Department of Government efficiency will only serve to embolden crypto advocates. Although America’s reach is felt around the world, one area where American crypto and foreign policy will be felt acutely is in Latin America (LATAM). The reason is simple, geographic proximity. In the bustling capital of El Salvador, San Salvador, all eyes will be on how the markets continue to react to Trump’s victory. El Salvador’s young president Nayib Bukele has presided over the introduction of BTC as legal tender. El Salvador was the first country in the world to make BTC legal tender, alongside USD, in 2021.

On the face of it, the news of BTC’s rise in value and prominence in the Salvadoran economy should vindicate Bukele’s decision. Gripped in the midst of escalating gang violence and economic instability, a combination of radical fiscal policies and a clamp down on violent gang members, often through illegal detention, has stabilised El Salvador. El Salvador was plagued by high crime rates, statistically some of the highest homicide rates in the world. Homicide rates stood at 82.1 per 100,000 people in 2016. Facing mounting challenges, Bukele pursued some radical policies. With the election of Trump in America, it provides a timely opportunity to examine how crypto adoption in El Salvador is working. This interest piece aims to outline some benefits and pitfalls of crypto adoption in this small LATAM country. With that in mind, how is El Salvador’s venture with crypto going? Has its pivot toward crypto been successful?

BTC Becomes Legal Tender

So how did we get here? Bukele’s ‘Nuevas Ideas’ party burst onto the scene in 2018. The party espouses anti-establishment policies and does not identify with either left or right policies. Bukele emphasises the ideology of decentralised government. His government has the ambition to transform El Salvador into a tech haven with cryptocurrency central to his plans. Bukele also planned to build a crypto city in the foothills of Conchagua Volcano. This has yet to materialise, however. San Salvador’s relationship with crypto currencies, specifically BTC, has grown exponentially since the introduction of BTC as legal tender in 2021. Bukele pledged to purchase 1 BTC per day upon its introduction. Since the circulation of BTC as legal tender, Salvadorans have been able to pay for everyday necessities with the cryptocurrency. This includes everything from settling taxes to paying for a coffee. Moreover, El Salvador has seen an uptick in tourism as crypto enthusiasts travel to the country to witness the rise of BTC as legal tender. 

Questions over the regulation and supervision of crypto uptake in El Salvador were raised by the International Monetary Fund (IMF). A round of meetings between IMF negotiators and Salvadoran officials held in August resulted in a memorandum suggesting that the IMF will support public finances to mitigate the effects of BTC. Juan Carlos Reyes, the president of the National Commission of Digital Assets (CNAD), who spoke to CoinDesk earlier this month, stressed that El Salvador has the highest standard of crypto regulation. Moreover, he claimed that the crypto scene is evolving quickly and that San Salvador was at the forefront of implementing new policies. It is not all plain sailing though, BTC only accounts for 1.5% of GDP and remittances paid in BTC are also declining in volume. Moreover, BTC has not been as widely accepted outside of San Salvador.

Since Trump’s victory, San Salvador has been emboldened in its BTC venture. Bukele plans to use El Salvador’s natural resources to boost its crypto mining capabilities. El Salvador is already tapping into its numerous volcanoes to provide geothermal energy to power the state. Siphoning some of this energy for BTC mining is being floated as a further idea to strengthen its position in the global crypto market. Whether these ambitions will materialise is yet to be determined. What is evident, however, is that crypto is shaping El Salvador’s economic future. 

Order Restored?

So how is this reflected in El Salvador?  Homicide rates have fallen dramatically since Bukele ushered in his new policies. It is of course not possible to ascertain the true effect of how crypto adoption has shaped El Salvador’s gang violence issue. Moreover, we should not conflate the introduction of BTC and the decrease in violence, this would only serve to downplay other factors. The mass detention of young adult males across El Salvador, for example, plays a much larger role in the decrease in violence and homicide rates. Anti-gang policies are central to Bukele’s policy of stabilising El Salvador. Although it is not the purpose of this article to examine El Salvador’s human rights record, it is worth noting that multiple NGOs and human rights advocacy groups have called Bukele’s record into question. 

Furthermore, Bukele won the February election despite being unable to stand under the Salvadoran constitution. The immediate reelection of a president became unlawful under changes to the 2014 constitution. However, the Supreme Court of Justice overturned that decision in 2021 amidst outcry that Bukele had swayed the decision. Elsewhere, every day Salvadorans are not feeling the benefits of BTC. According to recent reports, the average citizen is still feeling increasing pressure on everyday goods and services. This would suggest that the introduction of BTC has had limited effects on the daily lives of Salvadorans, especially those outside of San Salvador. 

Conclusion 

There is already a contested legacy of crypto adoption in El Salvador. Some analysts believe Bukele’s policies are too radical and that a worrying trend in illegal detention is also driving democratic backsliding. Whether San Salvador’s experiment with crypto will be deemed a success in the long run will remain to be seen. It is currently riding a high off the back of favourable US presidential election results. With crypto adoption becoming more mainstream, this trend is likely to continue into the future. That crypto adoption outside of San Salvador has been slow is worrying, however. BTC still has the potential to transform the everyday lives of citizens if implemented correctly. El Salvador may provide a model for small to medium sized economies to incorporate crypto currencies into their financial institutions further. This may also provide the potential to navigate economic turbulence. The introduction of stable coins will only support this view further. 

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