El Salvador has adopted Bitcoin as an official currency; Salvadorans mostly shrugged

Central banks in more than 100 countries around the world are considering adopting digital currencies to increase financial inclusion and the efficiency of payments for their populations; some countries—including the Bahamas, Jamaica, and Nigeria—have already introduced such currencies.

El Salvador has taken a different path to digital payments. In 2021, to promote financial inclusion and job creation and facilitate remittances, it became the first country to adopt Bitcoin as a legal tender. At the same time, the country launched Chivo Wallet, an application that offers many of the same benefits as a central bank digital currency (CBDC), including accessibility and the ability to pay peers and firms and make deposits and withdrawals, both in US dollars (the country’s official currency) and in Bitcoin. But Bitcoin is of course different from a CBDC in many ways – not the least of which is that its value is not backed by a central bank.

Due to the interest in digital payment systems around the world, El Salvador’s experience can be instructive. But the country is tight-lipped about its experience, much to the chagrin of the International Monetary Fund. Yale SOM’s David Argente and Diana Van Patten and their co-author Fernando Alvarez of the University of Chicago developed a survey to get more information directly from people in El Salvador and wrote a new paper, published in the journal Science , which analyzes Salvadorans’ use of Bitcoin and Chivo Wallet.

They find that neither Bitcoin nor the app is widely used, despite a battery of incentives put in place, an indication that governments may face an uphill battle to convince their citizens to adopt new payment technologies to be taken in a way that promotes financial efficiency and inclusion.

“This is as good as it gets for an experiment” about launching a new digital currency, explains Argente. “It was a wonderful chance to study theories that we’ve never had a chance to test.”

Much of the publicly available information about the use of Bitcoin and Chivo Wallet in El Salvador came in tweets by the country’s president, Nayib Bukele. Argente, Van Patten and Alvarez did not receive answers to their requests for information from the government, so they decided to take their questions to Salvadorans themselves. In February 2022, in collaboration with the research firm CID Gallup, they conducted a personal survey among 1,800 representative households in the country to ask about people’s knowledge and use of Chivo Wallet. They then hired a firm to analyze blockchain data from transactions involving the app to validate their findings.

The researchers were impressed by how many people were aware of and downloaded the app: nearly 68 percent of potential users knew about Chivo Wallet; 78 percent of that group at least tried to download it. But from there the numbers decreased drastically. Despite government incentives — including a $30 Bitcoin bonus, a discount on gas when purchased with the Chivo wallet, and the elimination of certain transaction fees — nearly 20% of people who downloaded the app didn’t used their bonus by the time of the survey and most people who spent their bonus did not continue to use the app after they did.

Furthermore, more than 20% of the people surveyed knew about the app but did not try to download it. The authors anticipated that people might be skeptical about Bitcoin because of the volatility (and therefore risk) of cryptocurrencies in general. But instead, people shared that they don’t trust the app or Bitcoin because they aren’t anonymous like cash is. The latter explains why Chivo Wallet was not even used to transact in dollars. These are important findings for policymakers looking to adopt digital currencies in their own countries: like Chivo Wallet, any digital currency will require governments to keep track of users and their transactions; if people don’t trust the government or the technology, they won’t use it.

“The issues of trust and privacy are going to be key,” says Argente. If a lack of trust leads to a lack of adoption, it undermines the network effects that make digital technology more useful. “This is something that any government should keep in mind.”

The authors’ analysis of data on the blockchain—the digital public ledger where Bitcoin transactions are typically recorded—confirms their survey findings. Many wallets, including Chivo Wallet, are custodial, meaning they do not verify their transactions on the blockchain. But the authors were able to see certain transactions, including Bitcoin transfers between Chivo Wallet and other crypto wallets. The blockchain data was consistent with the authors’ survey results: transactions peaked around the time of the country’s adoption of Bitcoin and then declined significantly.

The paper is already having an impact: the IMF and the United Nations have asked for more information about the authors’ findings, as well as entrepreneurs who want to develop fintech products and people who follow developments in cryptocurrencies.

Argente, Van Patten and Alvarez, who are also collaborating on research on the adoption of a digital payment system in Costa Rica, where Van Patten grew up, plan to continue their work in this area.

Argente says he is fascinated by the study of payment systems. “The promise of financial inclusion can be fulfilled if we find a way to provide technology to people in a way that they can actually adopt it,” he says.