Why Aren’t We Seeing More Bitcoin Usage in El Salvador? (#115 - 08 August 2022)

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The Future of Money with Henri Arslanian
Why Aren’t We Seeing More Bitcoin Usage in El Salvador? (#115 - 08 August 2022)
By Henri Arslanian • Issue #104 • View online
It’s been nearly a year since El Salvador instituted their groundbreaking Bitcoin Law, which formalized the crypto-asset as legal tender and mandated that all businesses in the country accept Bitcoin. 
To stimulate Bitcoin adoption in the country, El Salvador unveiled the Chivo digital wallet last September. But curiously, the app remains underused and a majority of businesses around the country are continuing to transact in cash. 
So why aren’t we seeing more Bitcoin usage in the first country in the world to embrace the asset?
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In a recent newsletter, we examined the Central African Republic’s push to stimulate Bitcoin and digital asset adoption throughout the impoverished country via their Sango initiative. 
Being the second country in the world to adopt Bitcoin as legal tender and a recognized form of payment, the Central African Republic’s recent moves have obviously drawn parallels with the first country to adopt Bitcoin as legal tender: El Salvador. 
As we covered in this space last year, El Salvador became the first country in the world to make Bitcoin legal tender via their Bitcoin Law.
Under the Bitcoin Law, the crypto-asset must be accepted as a means of payment for taxes and settling outstanding debts whilst mandating that businesses accept Bitcoin as a medium of exchange for all transactions. 
Source: BBC
Source: BBC
To stimulate adoption, the Salvadoran government launched a high-profile app known as the Chivo Wallet, which allows users to receive and send Bitcoin and dollars (El Salvador is a dollarized economy) without paying any transaction fees.
And to incentivize usage, any Salvadoran who downloaded Chivo received $30 in Bitcoin, no small amount considering that this is a country with a per capita GDP of roughly $4,400. 
But curiously, nearly a year into the Bitcoin Law, usage of Chivo Wallet remains low, Bitcoin transactions around the country have plummeted, and a majority of businesses and merchants continue to conduct transactions in cash rather than crypto. 
Source: BBC
Source: BBC
To study this phenomenon, the National Bureau of Economic Research surveyed 1,800 households around the country along with a number of firms to examine the average Salvadoran’s relationship with the Chivo app and their perception of Bitcoin as legal tender and as a medium of exchange. 
Launched last September as the Bitcoin Law went into effect, the Chivo Wallet initially showed a lot of promise, despite several widely reported technical glitches upon rollout.
The digital wallet allows users to convert Bitcoin into dollars and vice-versa without any fees. Payments are made by entering the recipient’s ID or phone number, the payment amount, and simply hitting send. 
Source: NBER
Source: NBER
Meanwhile, users can withdraw dollars from their wallet either by doing a transfer from their bank account or by withdrawing cash from one of the hundreds of physical Chivo ATMs around the country, with neither method incurring a fee.
Likewise, users can load money into their wallets via a credit or debit card, or with cash through Chivo ATMs. 
As for use cases, Chivo can be used to pay for goods and services at local establishments and is compatible with the broader Bitcoin network as well as the Bitcoin Lightning Network.
Chivo is also linked with El Salvador’s national banking system, allowing users to deposit or withdraw dollars from their bank accounts to the platform. 
Chivo can be used by all verified Salvadorans, even if they reside abroad, thus allowing the large Salvadoran community in the United States to send remittances back home via the Chivo app.  
As of January 2022, more than two-thirds of the population had downloaded the app.
The public’s interest in Bitcoin also significantly increased in tandem with the app’s launch, which is reflected in Google Search trends in El Salvador for terms like “bitcoin,” “chivo,” “ bitcoin to dollars,” and “bitcoin value.” 
Source: NBER
Source: NBER
The absence of any fees on Chivo or when making withdrawals at Chivo ATMs also clearly showed the Salvadoran government’s efforts to drive users to the app and begin making transactions in Bitcoin.
Around the world, Bitcoin transactions typically come with high fees.For example, Bitcoin ATM fees can range from 5% to over 20%, with an average of about 8.5%. 
In theory, then, El Salvador’s aggressive push into Bitcoin via the Chivo Wallet makes a lot of sense.
After all, in developing countries, the lack of access to banking services increases the potential of digital payment platforms that do not require a bank account to promote financial inclusion.
In addition, the lack of transportation and communication infrastructure in low-income countries could increase the benefits of digital payments over traditional cash transactions. 
As we’ve seen in the year since El Salvador unveiled their Bitcoin Law, a number of developing countries around the world (especially in Latin America) have begun proposing their own digital asset laws, from Brazil and Argentina to Panama and Paraguay.
And as a matter of fact, most of the top 20 countries in the 2021 Global Crypto Adoption Index happen to be emerging economies.
Source: Chainalysis
Source: Chainalysis
Getting to the survey results, the NBER found that only one-third of the adult population in El Salvador owned a bank account at a financial institution in the last five years.
Most transactions in the country are paid in cash, with over 50% of the surveyed population using only cash to pay for goods and services.
Similar to findings from the World Bank, over 70% of respondents are unbanked, and almost 90% of them do not use any form of mobile banking. 
Source: NBER
Source: NBER
As for awareness of Chivo, 68% of potential users know about the existence of the app, with most residents learning about Chivo via social media, TV and radio, news, and friends and family.
Source: NBER
Source: NBER
When it comes to the demographics of who uses Chivo, a majority of users are those with a cell phone and internet, implying higher socioeconomic status, with banked, educated, and young males around the country more likely to know about the digital wallet than other demographic groups. 
Most downloads, meanwhile, happened in the days following Chivo’s launch, with 40% of all downloads to date occurring in September 2021.
Curiously, there have been very limited downloads in 2022. 
Source: NBER
Source: NBER
As for reasons to download Chivo, the most decisive factor for respondents was the $30 Bitcoin bonus.
But other frequently cited reasons for downloading the app include the contactless nature of Chivo in the midst of the COVID-19 pandemic as well as the potential to receive remittances.
Source: NBER
Source: NBER
A majority of respondents stated that they spent their $30 bonus to pay for various expenses in Bitcoin, but almost 20% of the people who downloaded Chivo have yet to use their bonus. 
Source: NBER
Source: NBER
Meanwhile, over half of Chivo’s active users have not made any cash withdrawals from a Chivo ATM, and the average amount of payments and transfers, either sent or received, is slightly larger in dollars than in Bitcoin.
So overall, active Chivo users have conducted more transactions in dollars than in Bitcoin.
Source: NBER
Source: NBER
As for the respondents who never downloaded the Chivo app, the most frequently cited reasons for not downloading or interacting with the app include preferences to use cash over Bitcoin, lack of trust in Chivo and Bitcoin (from lack of awareness to price volatility), not owning a mobile phone or having a reliable internet connection, and Chivo being difficult to use and/or containing several technical glitches. 
Finally, Bitcoin usage for taxes and remittances continues to remain low. 
Source: NBER
Source: NBER
These findings broadly align with recent reports from the Central Reserve Bank of El Salvador, which show that only 1.6% of remittances were received via digital wallets like Chivo from September 2021 - February 2022, a pretty shocking figure considering that remittance payments were believed by many to surge with the passage of the Bitcoin Law. 
The figure shows the share of monthly remittances received in bitcoin; Source: Central Bank of El Salvador
The figure shows the share of monthly remittances received in bitcoin; Source: Central Bank of El Salvador
But of the users who have continued to actively interact with Chivo, the NBER finds that Chivo has shown the ability to be a substitute for other payment methods like cash, credit cards, and debit cards, with users who have downloaded Chivo actually decreasing their use of cash by 10%, while their use of debit cards has declined by 11%.
But when measured on the whole, the introduction of Chivo has not had much of an effect in terms of changing Salvadorans’ payment methods.
Source: NBER
Source: NBER
Bitcoin and Chivo usage among firms is also low, despite the fact that the Bitcoin Law states that all merchants and businesses must accept Bitcoin as a method of payment.
For example, whilst nearly all firms throughout El Salvador accept cash as a means of payment, only 20% of them accept Bitcoin.
This is actually not a surprising development if you take into account low levels of access to banking services throughout the country, as the share of businesses that even accept credit and debit cards is only barely over 25%. 
Source: NBER
Source: NBER
Only 11.4% of firms have positive sales in Bitcoin to this point, findings that align with two other recent surveys that studied this issue.
The Salvadoran Foundation for Economic and Social Development, for instance, found that only 10% of businesses have made sales in Bitcoin, whilst the Chamber of Commerce and Industry of El Salvador found in February that 13.9% of firms have made sales denominated in Bitcoin.
Of the firms that have conducted sales in Bitcoin, 71% of those sales were immediately converted into dollars and withdrawn as cash. 17% of sales, meanwhile, were converted into dollars and kept in Chivo, with only 12% stored as Bitcoin within the app. 
Source: NBER
Source: NBER
In addition to these rather underwhelming numbers, El Salvador’s Bitcoin holdings have lost roughly 60% of their value, and President Nayib Bukele’s plans to raise funds from crypto investors by selling Bitcoin-denominated bonds have not panned out. 
I personally (maybe naively or due to my lack of in-depth understanding of El Salvador) expected the usage to be higher, especially with regards to remittances. From all the data above, I am most surprised about the lack of usage of Chivo when it comes to remittances. 
An interesting question would be what if this happened in a developed country and not El Salvador? Perhaps a country where people had more trust towards their government? Would the numbers be higher in such a scenario? 
Also, the macro environment turned against El Salvador with the volatility and fall in the price of Bitcoin. Would adoption be higher if we were not in a bear market? 
In any event, it will be interesting to see how this develops and time will give us answers to some of the questions above. El Salvador has had no shortage of other issues in recent months (from riots to inflation) but what happens with this historic monetary experiment will be interesting to watch. 
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*Please note that this newsletter reflects Henri’s personal views and not those of any organisation he is involved with. This newsletter is for educational purposes only and none of its content should be construed as investment or financial advice of any kind. 
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Future of Finance and Money - PwC Global Crypto Leader, Best Selling Author, Keynote Speaker, University Professor, Host of Crypto Capsule™ - Views are my own

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