When President Bukele announced that Bitcoin would become legal tender in El Salvador, financial pundits began arguing that a country with limited access to banking but a higher degree of internet penetration is a case study to observe.
However, it is not the first case of adoption in the Central American nation. Around two years ago a beach town called El Zonte, on El Salvador’s Pacific coast with a small community of 3,000 people, adopted Bitcoin as its currency. That community is known as Bitcoin Beach.
President Bukele has also mentioned this initiative as his inspiration for proposing Bitcoin as a legal tender.
In January 2019, Mike Peterson, a surfer from the US, surfed on the bitcoin wave and landed on El Zonte beach. When Peterson was doing charity and volunteer work for the young, he received an anonymous donation of $100,000 with a condition to not cash it out and distribute it in the form of Bitcoin itself.
Peterson proposed a circular economy where all the earnings would be distributed and spent in Bitcoin. He first visited El Zonte 17 years ago to explore its serene beaches. While doing the philanthropic work he was introduced to the anonymous donor through an intermediary.
For the Bitcoin Beach Father, it has been a transformative journey for both himself and the town. He holds a degree in economics, but he too struggles to adopt the new digital technologies. At the age of 47, he is assisted by his children to deal with upcoming technologies.
The prime focus of this endeavor has been community participation. That’s why he started community-building programs with the locals. He assembled a local team with a 32-year-old surfer and community activist named Jorge Valenzuela. This became the Bitcoin Beach initiative.
Spreading Bitcoin as a “currency”
Recently, on a podcast, he narrated how his journey started, and how people went into disbelief when he told them, “Hey, we’re gonna start using this magic internet money, and we’re gonna give stores to accept it, we’re gonna get people to start taking their salaries in it.”
A key method used is to give people a small amount of Bitcoin to use. Initially, they are just told the fundamentals of Bitcoin and how to run and transact through digital wallets.
When they start using it, their curiosity is piqued which makes them gather more information by reading articles or engaging in discussions.
Telling people about Bitcoin’s technology to make them adopt it without experiencing it has not been a successful strategy as per Peterson. He says that people get overwhelmed with the amount of information. They may not completely understand the terms like “keys” or “seed phrases”, but they know how to work around it and slowly learn about the technology. It is possible only by experiencing it.
A bigger issue in adoption has been volatility. To circumvent this, during the first 2 months the adopters are trained about how to deal with the volatility. Gradually they become proficient in handling the volatility.
The easiest group to work with were teenagers. Bitcoin Beach started paying youth in Bitcoin to work as lifeguards, and pick up trash. These children and youth started using this digital currency to make payments. Soon different businesses also started using it.
The first 100 users were circulating $5,000 in bitcoin.
Most of the shopkeepers demanded cash. So, Peterson appeased their skepticism by acting as a guaranteed buyer. As the merchants grew, the skepticism turned into acceptance.
To up the ante the town installed El Salvador’s first Bitcoin ATM. It was a watershed moment as it provided Bitcoin liquidity to people. It has enabled exchanging Bitcoins for fiat currency which are ultimately deposited into the digital wallets. The possibility of instant exchange has worked as a catalyst.
The experiences and ATM helped people exchanging Bitcoin. Many businesses today prefer accepting Bitcoin because of its deflationary nature. They keep part of their earnings in Bitcoin as an investment which will grow.
Today approximately 600 families are using Bitcoin, but only 10 percent of the locals actually hold bank accounts.
Overcoming technological challenges
Making Bitcoin transactions possible was also challenging as they are slow and have high transaction fees. The solution came in the form of Lightning Network, a second layer payment protocol enabling affordable and instant transactions.
Using Lightning Network emerged, Bitcoin Beach wallet and Strike wallet, two wallets enabling efficient Bitcoin transactions. The Strike app also allows remittances to be sent from the US and received in either Bitcoin or US dollars.
Turning locals into investors
It also exposed the locals to financial investment instruments for the first time in their lives. They were awestruck when they observed that their money would appreciate in value if they held or invested it which also created a culture of savings.
Earlier, they did not have much incentive for saving as most of them only held cash. Now, with the use of financial instruments, they can increase their holdings.
Apart from financial transformation, the Bitcoin Beach community aimed at a holistic transformation of the local community. They have done substantial work with youth especially in education, employment, and gang prevention.
El Zonte has a serious gang problem. Most of the teenagers are recruited into gangs. That’s why there is a special focus on youth under this initiative. These youth are unemployed and poor who live in tin shacks.
The initial jobs provided to youth to work as lifeguards or pick up trash diverted them from these gangs. The focus on education incentivized students to educate themselves as they were paid for getting good grades. Even the expenses of these children for commuting to school have been borne by the Bitcoin Beach.
As of now the project has taught 50-100 youths about Bitcoin which has proven quite fruitful especially during the pandemic.
When El Salvador was under lockdown, the whole community helped the 600 families of El Zonte by providing universal basic income. Bitcoin Beach provided around $40 of basic income to the local families every month.
Moreover, given the situation of how “unbanked” El Salvador is, people used Bitcoin to make contactless payments during the pandemic. Most of these people have never seen “plastic money”. They moved straight to digital wallets and currencies.
Today one can see people roaming around in bitcoin shirts, hats, and other accessories.
From tacos to medicines, one can buy anything through Bitcoin.
This community has moved away from the perspective of viewing Bitcoin as “digital gold” to using it as real money to be used to exchange.
The digital economy is contributing to crypto tourism and entrepreneurship which received further impetus through the recent legislation of accepting Bitcoin as legal tender.
Another country in South America, Argentina will soon debate a bill to pay workers’ salary in Bitcoin, while Paraguay is set to discuss the bill of recognizing Bitcoin as legal tender on July 14.
Back at home in India, the government is yet to make any concrete decisions on regulating cryptocurrencies and the likelyhood of one has been pushed back to the next fiscal year.