El Salvador, Bitcoin, and Chivo: A Commentary on Financial Inclusion

El Salvador adopted bitcoin (BTC) on September 7, 2021, and the country has been a hotbed of discussion, speculation, and worry since then. Chivo, their official government bitcoin wallet, had a number of issues on the launch day that saw improvements during the morning after. This wallet, the adoption of bitcoin, and the hope to remove remittance from their economy, can be both a source of worry as well as a step towards widespread financial inclusion.

First, the good. Chivo, as a digital wallet, gives people the opportunity to make quick and easy cross-border payments, and make payments without transactions. By sending that money to someone in El Salvador, using Chivo, that person can take it out in cash within minutes. No risk, no going to firms, it’s simple.

With various multinational companies (such as McDonalds, Starbucks, and Pizza Hut) and a surge of people adopting bitcoin in the country, it could go on to push for other countries and other multinational companies to adopt the same policy. Making bitcoin legal tender in other countries allows for a more decentralized economy, owing to the fact that bitcoin is nigh-impossible to hack and it cannot be influenced by a single entity or organization, which removes potential for bias or manipulation of the system.

( I wrote an article discussing the various pros and cons of bitcoin as legal tender; to avoid repeating similar details, you can catch that article here. )

Not only that but, as 70% of the country’s people do not have access to basic, traditional financial services, Chivo offers a gateway for those people. It deals not only in bitcoin, but in U.S dollars, which can help people test the waters. And it’s proving to be successful. A statement on Twitter from El Salvador’s president, Nayib Bukele, revealed that Chivo became the App Store’s #1 Finance app in just 8 hours.

It should, however, be noted that the aforementioned decentralization benefits have a more optimistic outlook compared to the reality that experts are currently talking about, and that there is a caveat to be aware of when it comes to El Salvador. Chivo, unlike other digital wallets, is tied to the government; they can freeze it any time, making it nearly as centralized as a bank, which tells of a softer, slower approach to decentralization. This downplays one of the greatest benefits that bitcoin can offer.

One of the biggest consequences of attempting to change the face of their economy is that remittance firms are losing money. Specifically, companies such as Western Union and MoneyGram will be losing $400 million dollars a year – such money comes from the commission fees for remittances. That could be more. Mario Gomez Lozada, an expert and once a banker for Merrill Lynch (as well as Credit Suisse), believes that $400 million figure will actually be closer to $1 billion. It could run these firms out of business.

Technical issues, however, still plague Chivo. There are reports from various sources and personal accounts that accessing the account, handling the money, and cashing in on a sum of free money (which was promised by President Bukele) are still prevalent problems days after the app’s launch. While it broke records on day one, and was initially received well, the app has now begun to mellow out with mixed reviews despite the potential benefits it has.

“It started fine, I deposited $50 to try it but now it has been 2 days and are unable to login. I keep getting the “ups un error ocurrio!”. I was really looking forward to using this app and it has now been a big flop, really disappointed.”

Complaints such as these are becoming more and more frequent on Apple’s App Store as well as the Google Play Store. These mixed reviews swing between either 5 stars or 1 star.

There are benefits, as well as consequences, to the release of Chivo and the message that it brings with it. Businesses being run out of the country, El Salvador’s economy changing for better and for worse, the public opinion of Chivo as well as bitcoin; in order to truly tap into the benefits of cryptocurrency as legal tender, there needs to be a firm understanding of the knock-on effect that this new law has on more traditional companies, as well as the technical strain that introducing an app – one designed for mass adoption – is inevitably going to have.