Bitcoin in El Salvador and wallets. Explained
Nine months ago, El Salvador made Bitcoin one of its national currencies or legal tender. “ A global first” was the heading in the New York Times. I traveled to San Salvador to learn how people and businesses are reacting to it firsthand.
What El Salvador did well
- Gave citizens US$30 in Bitcoins to encourage its use.
- Trained folks to explain how Bitcoin works, stationed downtown, right across from the cathedral (video below).
3. Installed Bitcoin ATM s, such as this one at the airport.
When I arrived, the ATM was out of cash, though. There is a 5% fee to withdraw cash from these Bitcoin ATMs. When I use my Chase or Schwab Visa debit cards, I get no service charges and a full refund for any ATM charges anywhere in the world. Not at a Bitcoin ATM, though.
Using Bitcoin to make payments
A 5% fee for withdrawing cash is expensive. How could we use Bitcoin to pay for products and services instead? The problem is that a Bitcoin transaction takes 20 minutes to an hour to settle. Bitcoin’s original ideal, to exclude financial intermediaries, is proving not to work. Paypal, Coinbase, and others have created “wallets” to make Bitcoin easier to use. Their customers can transfer Bitcoin to each other instantaneously, but only if they are both customers of the same firm. To make it easier to explain how a wallet works, let’s use an example.
How Bitcoin and wallets work
Imagine that El Salvador was the state of South Dakota. Visa & Master Card processing fees are ~3%, and the state government wants local businesses to save on processing fees. Thus, South Dakota creates its own virtual debit card, issued by the Bank of South Dakota. The marketing comes up with a fancy name for it, Crypto Chivo. To encourage users, there is a $30 bonus to sign up. Only residents of South Dakota can get that virtual debit card. Like for other crypto wallets, users have to upload their ID, which goes against the concept of anonymity, a pillar of cryptocurrency. The bank argues that they need the ID to comply with Know Your Customer regulations and that all wallets do that. This debit card cannot use Visa/MasterCard infrastructure, so the bank of South Dakota creates its own processing system or wallet, called Chivo. Stores that go through the hassle of getting the Chivo processing terminal pay no processing fees, but only for transactions with the Chivo virtual debit card. Very few stores have signed up for it.
Residents from other states or countries cannot get the Chivo virtual debit card. When they try to make a payment using their own debit or credit cards, the Chivo terminal rejects the charge. A few stores claim they can accept payments with other debit cards, but it didn’t work when tested. That hypothetical example in South Dakota is what El Salvador did for Bitcoin. Let’s go now through their implementation.
Bitcoin wallet implementation in El Salvador
El Salvador implemented Bitcoin to eliminate transfer fees for those sending money from abroad. It made Bitcoin legal tender in September 2021. It also created the Chivo wallet to enable users to make Bitcoin payments to each other without having to wait for an hour and incur the Bitcoin network fees. To entice nationals to use it, anyone who registers for the Chivo wallet gets $30 in Bitcoins. Some workers I met work 3 days to make $30.
Residents from other countries cannot get the Chivo wallet. When they try to make a payment with Bitcoin using their wallets, such as Coinbase, the Chivo terminal rejects the payment. A few stores, such as Pizza Hut, claim they can accept Bitcoin payments with other wallets, but it didn’t work when I tested it in 26 stores. Some foreigners claim they were able to make payments with other wallets. Very few stores have adopted the system.
Bitcoin network fees are expensive
When I tried to get a $1 cup of coffee at Pizza Hut, if it had worked, Coinbase would have charged me Bitcoin network fees of 34% to make the payment (photo above).
Bitcoin needs Visa & MasterCard
Coinbase has been promoting a Visa debit card to use Bitcoins. I wasn’t interested. My debit cards and credit cards have no fees of any kind and I get 2% cashback. However, since I was unable to make Bitcoin payments in El Salvador, I applied for it and was approved right away. Visa is researching whether banks are interested in issuing Bitcoin cards. In my opinion, is the only way Bitcoin can work as a method of payment.
People’s reaction to Bitcoin
During my visit, I met with bankers and officials. As I always do, I also met consumers. I took 3 local buses and chatted with passengers, store owners, Uber drivers, security guards, and peddlers 75% of people in El Salvador don’t support Bitcoin according to The Economist. I’ll go through the reasons why in a different article later this week.
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This article appears also in Chapter 1 of my book “How to Make Money” available on Amazon. Proceeds go to donate copies to foster financial education.
Follow me on Linkedin or Medium George Benaroya