According to Nayib Bukele, El Salvador’s 40-year-old President, the introduction of bitcoin as legal tender presents a host of new opportunities for his country’s deeply flawed economy. Cryptocurrency, he contends, will bypass fees on annual remittance inflows worth around 20% of GDP. Meanwhile, much-needed foreign investment may flow from crypto-enthusiasts lured in by tax incentives on bitcoin-denominated profits for foreigners.  

The cryptocurrency’s ignominious official launch on 7 September, which featured protests, technological glitches, and a 17% drop in bitcoin’s value, suggests otherwise. Salvadoreans are spooked by its inherent volatility, which may see savings and incomes tank overnight. A Central American University poll found that approximately 65% of respondents opposed bitcoins’ formalisation. Logistical issues in a country with just 45% internet connectivity are likely to further limit its use among ordinary citizens, while criminal networks may exploit its anonymity to facilitate illicit financial flows. Its macroeconomic impacts may also be stark. Investors and creditors have expressed concerns over the exposure of El Salvador’s growing cryptocurrency reserves to market fluctuations, imperilling a USD 1bn IMF arrangement requested by the government.

For Mr Bukele, these worries are peripheral. The bitcoin experiment has not dented his approval ratings, which remain around 90%. Instead, it reinforces his image as a decisive and thoroughly modern leader, able to cut through pervasive socioeconomic issues. More importantly, it draws attention away from his autocratic tendencies. The Economist Intelligence Unit has downgraded the country from a “flawed democracy” to a “hybrid regime” in its 2020 Democracy Index after the president leveraged his supermajority to pass illiberal reforms, dismissing and reappointing judges ahead of changing the constitution and electoral code.

After El Salvador’s experience, other countries appear reluctant to formalise bitcoin as a legal tender. Initial enthusiasm in Paraguay and Panama for following suit has since muted, unsurprisingly. Potential autocrats may feel differently if bitcoin tightens Mr Bukele’s grip on his country’s institutions.

 Photo Credit: Pierre Borthiry