16 Sep 2021

El Salvador’s Bitcoin Bet

Global Insights
Contributor(s): Citi Global Insights
On September 7, 2021, El Salvador became the first country to adopt Bitcoin as its official currency amid much controversy. In a Citi Research report published a few days before that, Donato Guarino laid out some of implications of that move, asking the question: Is it worth the trouble?

In early June, President Bukele successfully led an effort in El Salvador’s legislative assembly to officially recognize Bitcoin as legal tender. The news buoyed crypto markets, with Bitcoin rallying from a local low of $32,000 to trade around $37,000 by the end of the week as the President spoke at a Miami cryptocurrency conference about the virtues of the decision. He said that the law would help the pace of adoption as many previously unbanked Salvadorans sign up to send remittances without the typical transaction fees taken by third parties.

At the end of June, President Bukele appeared in a national address to further clarify how the rollout would take place after the law took effect: The government will develop its own, state-sponsored crypto wallet called Chivo (Spanish for billy goat), and each citizen who signs up will receive $30.

El Salvador credit underperforming EM index, single Bs

Bonds widened around 150bps, led by the front end and belly

Source: Citi Research

Source: Citi Research, Bloomberg


The description of Chivo explains that the app “will allow Salvadorians to send and receive Bitcoin, as well as convert the cryptocurrency to US dollars.” It has been reported that Chivo can be used on mobile devices without a data plan. The ATM operator Athena Bitcoin announced a plan recently to install 1,500 ATMs in the country as well. For now, it seems that the country is trying everything it can to incentivize its citizens to familiarize themselves with the cryptocurrency.

President Bukele suggested the use of volcanic energy to mine cryptocurrency, but this could strain the power-generating capacity of the nation as a whole. The state-owned geothermal electric company has earmarked a 95-megawatt facility supposedly for green bitcoin mining.

If the residents of El Salvador do not see the value in using Bitcoin in their everyday lives, however, the project will not get off the ground. The risk is that high volatility and fear of the unknown will hold back adoption. Furthermore, in order for Bitcoin to form a monetary base in El Salvador, continued inflows from not only remittances but also exports would be required.

A role for bitcoin as an inflation hedge may be plausible, especially in countries that are prone to high and long-lasting bursts of inflation. While those are unlikely in most developed markets, they regularly happen in emerging markets. This could also help bitcoin adoption in El Salvador, though the easy access to USD may be a headwind.   

For many emerging market countries, the incentives for individuals to use crypto are in direct contrast with the goals of their governments, and this tension could limit further development. China, Russia, and others have already taken action to curb the development of crypto in their countries, despite having some of the greatest usage of these currencies. In 2020, Chainanalysis put out a report analyzing in which countries crypto is most heavily used, adjusting for the wealth of a country, and the ten highest-ranking countries were Ukraine, Russia, Venezuela, China, Kenya, the United States, South Africa, Nigeria, Colombia, and Vietnam. Yet, at the same time, China recently banned banks and payment firms from transacting in crypto, Russia has banned the use of digital assets for payments, Nigeria has warned its banks of stiff penalties if transacting in crypto, Colombia has warned its banks not to facilitate crypto transactions, and crypto is illegal as a payment tool in Vietnam.

While citizens in El Salvador can own bitcoin without any of the coming legal changes, having the government promote it could lead to larger adoption than without this state sponsorship. In particular, to the extent that bitcoin will be used as a savings tool, a strongly appreciating bitcoin could create wealth in an underbanked community such as El Salvador. For more information on this subject, please see this report, published on August 26, 2021: LatAm Credit Strategy - Bitcoin as Legal Tender in El Salvador: Worth the Trouble?.

Citi Global Insights (CGI) is Citi’s premier non-independent thought leadership curation. It is not investment research; however, it may contain thematic content previously expressed in an Independent Research report. For the full CGI disclosure, click here.

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