The adoption of Chivo Wallet and Bitcoin in El Salvador is being held back by several socioeconomic factors that the government of Bukele, the president of that country, is not addressing, as we have already commented on in other articles. A few days ago, a study carried out by several North American universities that analyzed the degree of implementation of bitcoin in the economy of El Salvador came to light. This study, which carries out an exhaustive analysis of the impact and use of bitcoin in Salvadoran society, draws several conclusions about the potential of cryptocurrencies in this country.
When President Nayib Bukele first announced the Bitcoin law in June of last year, he made a big promise to his citizens. The adoption of bitcoin, he said, would digitize the economy, reduce dependence on the US dollar, reduce remittance rates – which represent around 20% of the country’s GDP – and boost investments.. According to him, El Salvador could become the first country to demonstrate the transformative power of a cryptocurrency on a national scale.
As a consequence of this, the government of El Salvador broke a trump card in favor of cryptocurrencies providing a great impetus to encourage the use of bitcoin. Bitcoin is not only endowed with legal lender status, allowing the currency to be used to pay taxes and debts, but also must be accepted by any economic agent as a means of payment by law. In addition, the government offered great incentives for the adoption of Chivo Wallet, a platform that facilitates bitcoin transactions without commissions, including a large “welcome bonus” of USD 30 and discounts on gasoline.
Currently, once users adopt Chivo Wallet and use it as a form of payment, the use of this electronic wallet can replace other means of payment such as cash, credit cards and debit cards. A positive fact of the study is that, in fact, there is evidence that confirms this substitution. In net terms, users who have downloaded Chivo Wallet have reduced their use of cash by 10%, while their net use of debit cards has been reduced by 11%.
The study carried out a natural experiment in El Salvador in order to measure the elasticity of substitution between Chivo Wallet and other payment methods. As we have already mentioned, the government introduced a policy where users can get a discount of around 8% per gallon (30 cents) if gasoline was purchased using Chivo Wallet. The study identified respondents who have a car, who have gas expenses and who have downloaded Chivo Wallet. Next, using only this subsample of users, two groups were constructed: a treatment group made up of those who know about the gasoline discount (64% of the subsample), and a control group that includes those who do not know about the discount. discount on gasoline (36% of the subsample).
After this, it was concluded that the magnitude of the elasticity between Chivo Wallet and other payment methods is greater than the elasticity of substitution between cash and cards estimated by a study by Álvarez and Argente (2022), who found low values of this parameter using Uber trips in Mexico as a reference. This implies, for example, that the welfare costs of policies that discourage payment methods (such as cash) are lower if digital payment methods exist. However, the authors emphasize that this should be interpreted with caution, as they chose a small and very specific subsample of users who are likely to give more elastic results than the average person in El Salvador.
Regarding the download and use of the app, the study concluded that, Although most citizens of El Salvador have a mobile phone with Internet, less than 60% have downloaded Chivo Wallet and 20% have continued to use the app after spending the $30 sign-up bonus. In addition, 5% of citizens have paid taxes with bitcoin, and despite its status as a legal offeror, only 20% of companies -mostly large- accept bitcoin and only 11.4% report having positive sales in bitcoin.
In the first quarter of 2022, we find that there are almost no new adopters and the proportion of remittances in bitcoin is at its lowest point since the launch of Chivo Wallet. This underscores the challenges facing cryptocurrencies in becoming widely accepted, even after enjoying a huge government push and under favorable circumstances. Also despite continuing to be relevant for countries studying their viability as currencies. What is happening in El Salvador can serve as a lesson to other countries interested in cryptocurrencies and help analyze policies that encourage the adoption of digital payments.
Another conclusion that can be drawn from the study is that the fixed cost of adopting this new payment technology is large; on average, 0.7% of annual per capita income. However, conditional on adoption, the elasticity of substitution between Chivo Wallet and other payment methods is large. We also find that this electronic payment method presents strong strategic complementarities, which increases the importance of coordination to encourage adoption.
Although this study appears to be more accurate than its predecessors, it is difficult to get an idea of the extent of Bitcoin adoption in the country. In January, the The government backed a report according to which at least 4 million citizens – almost the entire population of the country – had been verified as users of the electronic wallet of the government in those last weeks. However, in March, a survey published by the Salvadoran Chamber of Commerce and Industry reported that 86% of the companies contacted denied having carried out transactions with Bitcoin.
Some interviews with dozens of Salvadoran citizens, economists and technology developers revealed cracks in the project. Since its development, the initiative has been plagued by technical failures, while tensions have arisen due to the mismatch between what some call “decentralized ethos” of Bitcoin and a government with authoritarian overtones. Only time will tell if bitcoin continues to expand and successfully integrate into the Salvadoran economy and if projects such as bitcoin bonds are viable.despite the controversies.
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