September 7, 2021 was bitcoin day in El Salvador.
Now, they might not want to celebrate.
El Salvador said they had adopted bitcoin as legal tender to complement the dollar. As their basic currency, the dollar was a source of stability. However, it offered them no monetary control or flexibility. In a country where the majority have no credit or debit cards, no bank accounts, and no mobile banking, a digital currency was supposed to transform all transactions. They also hoped to boost financial inclusivity and perk up economic activity.
It began with an initial surge when 50 percent of all households downloaded the Chivo Wallet (digital) app and many spent the bonus it included. Then though, it all fell apart. Some people were worried about bitcoin’s fluctuations.
They were right:
The numbers aren’t good. Only 64.6 percent of the country has access to a mobile phone with an internet connection. Furthermore, one survey (probably not so recent) indicated only 20 percent of the people that downloaded the app continued to use it.
But perhaps this CNBC headline said it all:
It is fortuitous that shoppers aren’t paying with bitcoin because 76 out of 100 stores would have refused it.
Our Bottom Line: Characteristics of Money
I suspect though that it all comes down to the characteristics of money. We tend not to believe a commodity is money unless it is a medium of exchange, a unit of value, and a store of value. In El Salvador, mandating its acceptance implied that people really did not believe it was a medium of exchange. Then, seeing its value rise and fall, it was easy to question its current and future spending power. In addition, we should mention the friction created by app technical problems and convertability glitches.
Indeed, as much as El Salvador has tried to give bitcoin its crucial characteristics, only a young male population (that did not need to be persuaded) was convinced. Now, if the country was hit directly or indirectly by the FTX bankruptcy, it could have received the final blow.
Maybe though, as one scholar at the London School of Economics said, It’s “a nothing burger.”
My sources and more: With cryptocurrencies in the news because of the FTX bankruptcy, I decided it was time to check up on El Salvador. We first reviewed our econlife posts, here and here. Then we found the most recent update at CNBC.. Then, for still more, I recommend this detailed Forbes monetary history of El Salvador. (Please note that I have used the same definition of money in previous econlife posts.)