El Salvador's world-first adoption of bitcoin hits snag

A man takes a selfie at one of the kiosks enabled to exchange bitcoins for dollars, in San Salvador, on Sept 7, 2021.
A man takes a selfie at one of the kiosks enabled to exchange bitcoins for dollars, in San Salvador, on Sept 7, 2021.PHOTO: EPA-EFE

SAN SALVADOR (REUTERS) - El Salvador on Tuesday (Sept 7) became the first country to adopt bitcoin as legal tender, although it suffered teething problems when the government had to unplug a digital wallet to cope with demand.

President Nayib Bukele, who pushed for adoption of the cryptocurrency, called for help from users who had already downloaded the government-backed app, to test if it was now working properly.

"Could you please try to register and post in the comments if there are any errors or if the whole process works fine?" the president wrote on Twitter.

Bukele said using bitcoin will help Salvadorans save US$400 million (S$540 million) a year on commissions for remittances, while giving access to financial services to those with no bank account.

Carlos Garcia, who went to a booth giving out advice on the new currency at a shopping mall on Tuesday to learn about how transactions would work, was excited about the opportunities bitcoin could provide.

"El Salvador is taking a great step forward today," he said.

However, the poorest may struggle to access the technology needed to make bitcoin work in El Salvador, where nearly half the population has no internet and many more only have sporadic access.

"I'm going to continue suffering with or without bitcoin," said sweet-seller Jose Herrera, who said he had trouble accessing a mobile phone.

Others say the move may fuel money laundering and financial instability. It has already muddied the outlook for more than US$1 billion in financing that El Salvador is seeking from the International Monetary Fund (IMF).

Bukele, 40, is Latin America's most popular leader but has been accused of eroding democracy, not least by the administration of US President Joe Biden.

Last week, top judges appointed by his lawmakers ruled that he could serve a second term.

Earlier on Tuesday, Salvadorans trying to download the Chivo digital wallet, which the government has promoted, promising US$30 of bitcoin for each user, found it was unavailable on popular app stores.

Then Bukele tweeted that the government had temporarily unplugged it, in order to connect more servers to deal with demand.

Bukele blamed Apple, Google and Huawei's app download platforms for the delay.

"Release him! @Apple @Google and @Huawei," Bukele wrote in one of his tweets, which was accompanied by a red-faced "angry"emoji.

The wallet was later available from Huawei.

Google and Apple did not immediately respond to requests for comment.

Bitcoin beach

Polls indicate Salvadorans are wary of the volatility of the cryptocurrency, which can shed hundreds of dollars in value in a day.

Ahead of the launch, El Salvador bought 400 bitcoins worth around US$20 million, Bukele said, helping drive the price of the currency above US$52,000 for the first time since May.

Hours later, however, bitcoin had weakened and last traded down 8.84 per cent at US$47,327.32.

Ethereum, another crypto currency, fell 10.52 per cent to US$3,537.62, while crypto exchange Coinbase Global slid 3.96 per cent after reporting delays in some transactions on its platform.

The change means businesses should accept payment in bitcoin alongside the US dollar, which has been El Salvador's official currency since 2001 and will remain legal tender.

It remains unclear whether businesses will be penalised if they do not accept bitcoin.

In the run-up to the launch, the government installed ATMs that allow bitcoin to be converted into dollars and withdrawn without commission from the digital wallet, called Chivo.

"Like all innovations, El Salvador's bitcoin process has a learning curve," Bukele tweeted. "Not everything will be achieved in a day, or in a month."

Levers of power

In barely two years in office, Bukele has taken control of almost all levers of power. But although he has promised to clean up graft, the Biden administration recently put some of his close allies on a corruption blacklist.

Analysts fear that the adoption of bitcoin, whose transaction records are distributed across the internet, beyond the reach of national jurisdictions, could fuel money laundering.

After the bitcoin law was approved, the rating agency Moody's downgraded El Salvador's creditworthiness, while its dollar-denominated bonds have also come under pressure.

Bukele, who does not shy away from controversy, on Monday retweeted a video that showed his face superimposed on actor Jaime Foxx's body in a scene from Django Unchained, a Quentin Tarantino film about American slavery. The video portrayed Bukele whipping a slave trader who had the IMF emblem emblazoned on his face.

Bukele later deleted the retweet.

In his own tweet, Bukele said: "We must break the paradigms of the past. El Salvador has the right to advance towards the first world."