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El Salvador: Bitcoin Illustrates the Value of Cash

Categories : Cash does not require a technology infrastructure, Cash is available to all users, Cash is trust, Costs of cash versus costs of electronic payment instruments
June 6, 2022
Tags : Bitcoin, Cash usage, Cryptocurrency, El Salvador, Financial inclusion
Bitcoin's use in payments remains limited in El Salvador, despite the government's massive marketing campaign - something no country has ever done for cash.
Manuel A. Bautista-González

Ph.D. in U.S. History, Columbia University in the City of New York

Post-Doctoral Researcher in Global Correspondent Banking, 1870-2000 – Mexico and South America, University of Oxford

This post is also available in: Spanish

Guillaume Lepecq

Chair, CashEssentials

This post is also available in: Spanish

In a recent paper, Fernando Álvarez (University of Chicago), David Argente (Pennsylvania State University), and Diana van Patten examined the adoption of bitcoin in retail payments in El Salvador. Drawing data from a nationally representative, face-to-face survey of 1,800 households conducted with CID-Gallup, the economists’ conclusion is straightforward: “bitcoin is not being widely used as a medium of exchange” (Álvarez et al. 2022: 19).

Cash is Inclusive

Among the reasons to make bitcoin legal tender in El Salvador, President Nayib Bukele argued that the crypto-asset would promote financial inclusion in the country. Adult Salvadoreans can claim a Chivo e-wallet preloaded with $30 worth of free bitcoin. Chivo users can hold bitcoin and dollars in their wallets and trade bitcoin without fees.

However, the typical Chivo users are “individuals who own a cell phone with internet, and those who are banked, more educated, younger, and male” (Álvarez et al. 2022: 12, quote in 13). Most Salvadoreans downloaded Chivo to claim the $30 bonus in bitcoin and convert it to physical dollars, per the CID-Gallup survey and sources interviewed by the Financial Times and the Wall Street Journal (Álvarez et al. 2022: 15-16). Chivo downloads peaked during its September 2021 launch (at 40%) and have flattened since.

Although most respondents to the CID-Gallup survey (64.6%) have access to a mobile phone this has not been enough to promote Chivo’s adoption among the country’s population (Álvarez et al. 2022: 10).

“A lot of people don’t have smartphones, and if they do, they don’t have data plans,” said Santiago Pérez, WSJ Deputy Editor, Latin America.

Cash is Trusted

 Shopkeepers and customers rarely, if ever, employ bitcoin in retail payments. A Central American University poll indicates that 70% of Salvadoreans have little or no trust in bitcoin as legal tender, and 58% think bitcoin benefits “foreign investors, the wealthy, and businesspeople” (IUOP 2021: 10-11, 20-21).

The surf town of El Zonte, also known as “Bitcoin Beach,” appears to be the only exception. Foreign travellers pay for surf lessons and pupusas in bitcoin. “Most of the merchants accept Bitcoin,” said Carol Souza, a Brazilian influencer and crypto evangelist visiting the town. Adrian Torres, a resident in El Zonte, checks the value of bitcoin on the Chivo wallet whenever he gets paid in the crypto asset.

Table 1. El Salvador: Use of Cash and Payment Cards among Chivo Users

Note: The sample comprises users who downloaded the Chivo app. Source: Álvarez et al. (2022: 22).

Among those who downloaded the app, most kept using cash (70%), debit and credit cards (83%) at the same rates as before (see Table 1). Most Salvadoreans (60.7%) stopped using Chivo after spending the $30 bonus (Álvarez et al. 2022: 15).

“We believe that this is a relatively strong sign of adoption,” said Felipe Vallejo, chief corporate and regulatory affairs officer at Bitso, a Mexican crypto exchange and technology provider to the Salvadorean government.

Cash is Secure

 “We’re a people who like to touch our money,” said Danilo Martínez, a cab line operator in San Salvador.

Some Chivo users have reported unauthorized charges, phishing schemes and identity theft. Cristosal, a consumer rights advocacy group, has collected the signatures of more than 1,000 Salvadorans who claim their identities and funds were stolen through Chivo, according to lawyer Ruth López. Even worse, gang members have extorted 2.3% of Salvadorans to transfer their $30 Chivo bonus (IUOP 2021: 8, 27).

According to the CID-Gallup survey, nearly all firms accept cash in payments, slightly over 25% accept debit and credit cards, and just 20% of them take bitcoin. Among the firms accepting bitcoin in payments, 71% convert the crypto funds to dollars and then withdraw them in physical cash; 17% convert bitcoin into dollars and keep the funds in the Chivo wallet; only 12% held bitcoin within the app (Álvarez et al. 2022: 24-25). Most firms accepting bitcoin are large enterprises, such as Starbucks, McDonald’s, and Pizza Hut.

This post is also available in: Spanish