El Salvador's experiment with Bitcoin as legal tender is effectively over.
In a deal negotiated with the IMF to secure a $1.4 billion loan, the government of El Salvador has capitulated on the centerpieces of its grand Bitcoin-as-legal-tender experiment, namely:
-Businesses are no longer required to accept Bitcoin
-The Chivo Wallet (the government-run Bitcoin app) is set to shut down or be sold
This comes after reports of year-on-year declines in the numbers of people using Bitcoin in the country, and long after the legal tender hype had died down. The dream of a mass-adopted cryptocurrency enforced by government is essentially dead now, sacrificed at the feet of fiat credit.
The government does continue to buy Bitcoin, however, so it hasn't entirely walked back everything it sought to accomplish with its grand adventure.
Let's break down the El Salvador Bitcoin experiment, the good and the bad, and see what we can learn moving forward.
What Didn't Work
It's time to go down a quick postmortem on the Bitcoin law to see what didn't exactly work out.
Mandating Bitcoin adoption
Government mandates don't tend to work out as intended, and simply requiring all merchants to accept Bitcoin doesn't mean that they will. And largely, according to numerous reports, they didn't.
Of course, a big part of this was the loophole that gave an exception for merchants who didn't have the technical capacity to accept it (so as to not shut down or punish every tiny street vendor). This proved to be a catch-all excuse to not accept it at all, apart from the major foreign chain businesses.
The Chivo Wallet
The other major issue was creating a nationalized payment app for the entire country to use. Worse than just thrusting new and experimental payments infrastructure on a whole populace all at once, doing it through a purpose-built, government-run app is another level worse of an idea.
For years, comments and reviews of Chivo were anything but rosy: constant bugs, missing funds, delayed payments, and more. And now, after this one app was used as a universal onboarding tool, it's going away due to the government's deal with the IMF. Users who relied on it are left high and dry.
Promoting a broken payment system
And finally, simply choosing to build a world-first adoption of a cryptocurrency to a whole country, and choosing Bitcoin and the Lightning Network to do it with, is simply a case of monumentally bad judgment (or acting in bad faith).
In addition to the complexities inherent to any cryptocurrency at this stage, Bitcoin had two major ways of using it, and two radically-different ways at that. On-chain works straightforward enough, but has high and unreliable fees and wait times. Lightning requires pre-loading and sometimes works, but its ability to send, at best, is extremely limited by the recipient, amount, and other conditions, resulting in frequent failed payments.
The decision to us this as the first major instance of crypto adoption was based purely on hype, and not on reality. No wonder things turned out the way they did.
What Did Work
But no, I'm not just a Bitcoin perma-bear. I'm not too unreasonable to recognize that the El Salvador experiment did, in fact, produce some real, significant, tangible benefits. Here's some of the highlights.
Marketing gimmick
What's undeniable is that, all of a sudden, the whole world paid attention to El Salvador. This bold move, along with the promotion from those who sought benefit from it, undeniably acted as a giant billboard saying: "Come do business in El Salvador."
Combined with favorable laws (especially around capital gains), this served as a magnet for foreign investment and tourism. This also amplified the positive perceptive effects of law enforcement crackdowns (which to be fair I did criticize from a due process perspective), which may have gone less noticed without the big Bitcoin megaphone.
Capital gains reform
The biggest amplification signal that El Salvador is a good place to live and do business in is undoubtedly the capital gains tax break for crypto. Growth-focused companies and individuals can stomach the challenge of moving jurisdictions away from a thriving tech sector because of the potential savings.
Saving in Bitcoin instead of dollars
The number one use case for Bitcoin, its "killer app", continues to be its ability to reliably go up in value year after year. Because of its regular purchases of Bitcoin, the government of El Salvador now has bigger reserves than it otherwise would have.
This will probably remain the very top benefit for Bitcoin for the next few years. Will it last forever? Probably not. But while the world is currently underexposed to decentralized digital assets, Bitcoin has room to grow, and its holders will probably benefit from price appreciation. Including El Salvador, of course.
Lessons on Adoption
Here's what we can learn about future cryptocurrency adoption ventures.
Don't expect government to save you
Yes, pushing for legal reform and getting the government out of the way is always a good thing. But an adoption law will never be the path to building tech that people will actually use, and getting them to use it.
Strategic reserves, volcano bonds, and all the rest are just sideshows. The main event is what it's always been: people building the best tech and getting it used, with the free market's feedback mechanism telling them when they've failed and need to improve.
Make a product that actually works
I can't stress this enough: modern-day Bitcoin, and in particular the Lightning Network, is a nightmare tech to thrust upon the general populace of the developing world!
Bitcoin became legal tender in El Salvador not because it was the most-suited for that purpose, but because people convinced the leader of the country it was a good idea. There are dozens of other much better-suited cryptocurrencies to use for payments. Building something that works is the first step to making sure people want to use it.
Pivot and take the wins you're given
It's easy to get stuck in the delusions that your original plans were the only ones that mattered. But it's much more useful to see what worked, double down on that, and discard what didn't.
El Salvador's grand Bitcoin experiment may have proven to be a giant waste of resources and hype in terms of onboarding people to use it as everyday money. But it did show that a little legal reform, a good PR campaign, and saving in scarce money can work out pretty well. Let's learn from El Salvador. All its lessons, bad and good.
Posted Using InLeo Alpha
I am pretty sad after reading this, mostly because I met the creator of the Chivo wallet, and he was genuinely trying to mass-adopt an entire country by creating a wallet they can use easily, but it is what it is.
Ppl can be forced to use anything unless they see the advantages of it first. They educate or at least try to educate ppl about Bitcoin, but that came after imposing its use.
I would love to hear what @missbitcoin-sv (my best wishes in the current beauty pageant u at) thinks of this.
Cool, was it Lorenzo? He's a good person and a good friend of mine.
No, Vakano is who i met. If my memory doesn't fail, his name is Arley or something similar.
Interesting.
Well that's the sad part about all this: so many people working so hard at things that won't really work out in the end.
That happens to most people; the good thing is that we can start over and do it right.
I don't think the effort needed to get everybody onto Bitcoin. They only had to get enough people to use it to start a network of customers, vendors, and suppliers. There may be enough Bitcoin tourists to maintain some level of use.
Having said that, I think the greater benefit is introducing crypto in general. HBD, USDC, and Tether are probably better suited for everyday commerce and remittances. If the Bitcoin experiment was a gateway to exploring other cryptos, I think it will have succeeded to some degree.
Yeah I have heard Tether has been used more in El Salvador. I would have to go investigate for myself.
Oh, really good information I did not know. Thanks.
Cheers!
This project got the crypto community excited, but I wondered how it would do. As I understand it Bitcoin is not that great for general spending. You really want something with fast and cheap/free transactions. I expect some people did well from it anyway. The traditional finance world does not like competition.
Yes, true. Mass adopting BTC for payments just won't work, not without some major technological breakthrough.