El Salvador has become the first country in the world to make bitcoin legal tender. The so-called ‘Bitcoin Law’, passed by the nation’s Legislative Assembly last week, will allow the use of the cryptocurrency alongside the US dollar, which since 2001 has been the only official currency in the Central American nation. But this week the World Bank declined to help the Salvadorian government implement the new system, citing environmental and transparency concerns and raising questions about whether the bitcoin will ever be suitable for making everyday payments.
The law was originally proposed by President Nayib Bukele, a former businessman and leader of the right-wing populist party Nuevas Ideas. With this move, the government plans to boost El Salvador’s economy, which for years has experienced low levels of economic growth. Most of the country’s population does not have a bank account and 23% of the gross domestic product comes from remittances sent from the large ex-pat community working abroad, benefitting around 360,000 households.
Bitcoin is well established as a store of value and a tradable commodity, but is it feasible to use it for small transactions relating to goods and services? Tech Monitor spoke to four experts to find out.
How practical will it be to pay in bitcoin in El Salvador?
Until now, bitcoin has been used mainly as an investment and not as an alternative to fiat currencies for everyday transactions. But with the new law, all businesses in El Salvador will have to accept bitcoin as legal tender for goods and services, unless they lack the necessary technology to process the payment.
“Bitcoin has historically been used primarily as a money commodity, like gold,” says Stephen McKeon, associate professor of finance and Inman research scholar at the University of Oregon, who thinks that bitcoin adoption in El Salvador can have meaningful societal benefit in an environment where a large segment of the population is unbanked and lacks access to basic financial services. “However, with the advent of the lightning network it has become more feasible to use bitcoin as a method of payment.”
The Lighting network allows users to make small bitcoin payments and reduced transaction fees. A video shared on Twitter shows a swift bitcoin payment of a coffee through the scanning of a QR code in the coastal area of El Tunco in El Salvador.
Peter McCormack, CEO of Hijack Media and host of the What Bitcoin Did podcast, says that bitcoin is already a mainstream payment tool and that people in El Zonte, a village dubbed “Bitcoin Beach”, have been using it to make payments for good and services since 2019, when an anonymous US donor introduced the cryptocurrency as a way to boost the local economy and create a sustainable cryptocurrency ecosystem.
“Bitcoin is a free and open network and the use of it is personal to the individual, for some it is a store of value, some a medium of exchange and for some it is both,” McCormack adds.
But not everyone is as convinced as McCormack about the practicalities of using bitcoin as a payment for the commodities of everyday life. Gavin Brown, associate professor of fintech at the University of Liverpool raises questions about bitcoin’s capacity and scalability, arguing that the technology underpinning it is not necessarily fit for purpose as it stands today to replace fiat currencies for payments.
Whereas Visa, one of the largest payment processing merchants in the world, processes an average of 1,700 transactions per second (the company claims it can handle more than 24,000 transactions per second), in the case of bitcoin this is 4.6 transactions per second.
Dr Jack Rogers, senior lecturer in economics at the University of Exeter, adds that the transaction fees attached to bitcoin payments are just not worth it for everyday payments. As of 17 June, the average bitcoin transaction fee was $5.090, but in the past it has peaked to almost $60 as a result of the 2017 ‘crypto boom’.
“Maybe for a transaction that involves buying a supercar or something it sounds sort of okay,” Rogers says. “The question is why would you be using a payment system that is so inefficient?” He adds that another version of bitcoin, bitcoin SV, has negligible transaction fees and the number of transactions per block is effectively unlimited in the long term.
Still, Brown is optimistic about the future of bitcoin for everyday payments given the success during its 12 years of existence, which has enabled people to use it as a banking and monetary system without being hacked.
“If I took you back 100 years and we watched the Wright brothers with their first flight and I say that’s going to change the future of humanity, the way we travel, do business and communicate, you might say “well, they don’t travel very far, and it looks dangerous and it’s not fuel-efficient”, says Brown. “You could come up with lots of negatives but it’s the symbolism of what that currently does.”
Why has the World Bank rejected El Salvador’s call for support to implement bitcoin?
To carry out the bitcoin implementation in the 90-day period stipulated, the Salvadorian government asked the World Bank for its support – support which this week was denied by the international finance body.
“We are committed to helping El Salvador in numerous ways including for currency transparency and regulatory processes,” Reuters reported the bank’s response on Thursday. “While the government did approach us for assistance on bitcoin, this is not something the World Bank can support given the environmental and transparency shortcomings.”
Similarly, the International Monetary Fund said that there are “macroeconomic, financial and legal issues” with the Central American adoption of the cryptocurrency, despite the Salvadorian finance minister saying that conversations with the IMF had been successful.
Bitcoin’s environmental impact has come under scrutiny due to the huge amounts of electricity required for ‘mining’, or bringing new bitcoin into circulation. In May, Elon Musk tweeted that Tesla would be suspending bitcoin transactions for its vehicles because of its environmental impact, causing the cryptocurrency to fall by more than 10%.
According to the Cambridge Bitcoin Electricity Consumption Index, a tool created by the University of Cambridge to measure bitcoin’s electricity consumption and environmental impact, the cryptocurrency consumes more TWh per year than Finland or Kazakhstan alone.
However, the index also claims that there is little evidence to suggest that bitcoin contributes directly to climate change, even if it was entirely powered by coal, and that its environmental footprint remains marginal. And still, bitcoin’s growing electricity consumption may jeopardise the achievement of the United Nations Sustainable Development Goals in the future.
In McCormick’s view, bitcoin miners are subject to greater scrutiny than anyone else despite getting their energy from the same sources as the rest of the population. This, he adds, is due to the threat that bitcoin miners pose to other sovereign currencies and players.
“The energy used by bitcoin miners secures the best open and free monetary protocol which can provide economic freedom to the world,” McCormick told Tech Monitor. He says that bitcoin miners seek to find the cheapest source of energy possible and that many target renewable energy but “many false narratives circulate bitcoin, fed by weak journalists who don’t do the most basic research.”
Shortly after passing the Bitcoin Law, president Bukele posted on Twitter that he had instructed El Salvador’s state-owned geothermal electricity company “to offer facilities for bitcoin mining with very cheap, 100% clean, 100% renewable, zero-emissions energy from our volcanos”. Nordic countries have been at the forefront of providing clean energy for bitcoin mining but supply is set to dwindle as other industries rush to take advantage of these renewable sources of power.
Rogers thinks that while there are greener cryptocurrencies available such as bitcoin SV, even if everybody in El Salvador started using bitcoin, the impact on the environment would be minimal. However, he says that behind the World Bank’s statement there may be other concerns.
“I personally think that the World Bank would have thought very carefully about how they combine those two ideas together in their statement,” says Rogers. “They are very concerned about those other issues, including the fact that not just people on the ground, but potentially even political leaders, could be there to hide something.”
Could the adoption of bitcoin harm transparency in El Salvador?
Rogers is particularly wary of president Bukele’s intention to set up a $150m “trust” using a private company, not just to manage bitcoin assets but also tether, a stablecoin based on the US dollar but which in the past has had issues demonstrating that every single unit of tether is a real dollar. He adds that questions remain about conversion between bitcoin back into tether and then calling this a dollar when it is actually a unit of tether.
“It sounds like a potential opportunity for the government to set up quite an elaborate system, which in the end may well attract some investment from people in the bitcoin community,” says Rogers. “But at the same time, there's a big danger that it allows the government to more easily extract public money without being traced.”
Ultimately, whether the adoption of bitcoin or any other cryptocurrency is a threat or an opportunity for El Salvador or any other nation depends on who is calling the shots and who are the incumbent powers, concludes Brown: “As soon as you start to introduce a new type of financial and monetary system which is beyond the control of any individual actor […] that's going to present problems or opportunities, depending on your viewpoint about how the world should be run and whether you stand to lose or gain from these kinds of freedoms if they come along," he says.
