El Salvador Taps Billionaire-Backed Bitcoin Unicorn In Historic Legal Tender Debut

El Salvador Taps Billionaire-Backed Bitcoin Unicorn In Historic Legal Tender Debut

ElSalvador is making history Tuesday by becoming the first sovereign government to use bitcoin as legal tender—clearing the way for residents to pay taxes and other debt with the cryptocurrency, and allowing hundreds of thousands of businesses nationwide to accept it as payment. The Central American nation of 6.5 million residents has already marked the occasion with $20 million in bitcoin purchases and the rollout of hundreds of bitcoin ATMs across the country, but the bulk of transactions are slated to happen on El Salvador's official bitcoin wallet, dubbed Chivo—or “cool” in Spanish slang.

For months, El Salvador has kept many of Chivo's details under wraps with the nation's 40-year-old president, Nayib Bukele, teasing the wallet's launch on Twitter just last week. However, Forbes has learned El Salvador appears to have tapped cryptocurrency unicorn BitGo to provide Chivo's application programming interface and security platform, making the Palo Alto, Calif-based startup the nation's exclusive hot-wallet provider in a historic moment for cryptocurrency adoption.

The decision to use the U.S. company—and a publicly available blockchain—to power such a vital part of the nation’s infrastructure shows how far the cryptocurrency has come since the days when it was seen as a bastion for criminals. But the nation’s controversial president still has many questions to answer. El Salvador's presidential press secretary didn't immediately respond to a request for comment.

Though El Salvadorans can opt to use other cryptocurrency wallets, only those who download the BitGo-powered Chivo app will receive the $30 in bitcoin that the nation's government has promised to give to residents. El Salvador's not yet disclosing current signups, but the country's already allocated $150 million to help it establish as many as 5 million starter bitcoin wallets.

"Digital assets look so different from what we've seen with other types of money, and so people wonder about how [they] fit in, but this is an opportunity to build financial freedom for the people of El Salvador" says BitGo CEO Mike Belshe, speaking from his home in Silicon Valley on Saturday. "The ability to send money in a hurry on a Saturday night, when banks are closed, across the planet and at almost no fees, it's hard to put into words how empowering that is, and what we'll see in El Salvador is, people will start figuring it out."

At least for now, the Chivo wallet will only support bitcoin and USD, and users won't incur fees when transacting with others using the wallet—a point President Bukele has stressed on Twitter. Funds withdrawn from the wallet, however, will incur fees. BitGo has worked out a "small commercial relationship" with El Salvador's central bank, Belshe says, but financial terms weren't disclosed.

Though its deal with El Salvador puts BitGo at the forefront of global cryptocurrency adoption, the wallet provider isn't alone in helping government officials navigate the nascent crypto space. Digital wallet company Strike, founded by Forbes 30 Under 30 alum Jack Mallers, has been "providing insights" to El Salvador as part of a project in the small seaside town of El Zonte, where some 600 residents and 15 businesses use bitcoin for everything including wages, purchases and donations. In a statement, Strike said it’s “excited about the opportunities for [El Salvador] to build an ecosystem of interoperable services for people and businesses using bitcoin’s open network.”

Founded in 2013, BitGo has grown into one of the biggest cryptocurrency wallet companies in the world, raising more than $70 million in funding from investors including Goldman Sachs and Redpoint Ventures, and processing more than $50 billion in bitcoin volume each month. Though it faces competition from the likes of Coinbase and Blockchain.com, BitGo says its assets under custody have roughly doubled to $40 billion since the end of last year, with the firm now serving more than 400 institutional investors and 150 exchanges. In May, existing investor Galaxy Digital, the cryptocurrency investment firm founded by billionaire Mike Novogratz, announced it would acquire BitGo for $1.2 billion in cash and stock. When the deal closes in the fourth quarter, BitGo will continue operating independently from Galaxy.

Perhaps the biggest question remaining about El Salvador's unprecedented embrace of bitcoin is how lingering concerns over the cryptocurrency's volatility and shaky reputation will impact adoption. Streets of the nation's capital, San Salvador, have already been filled with protests in the past few weeks, with residents waving posters reading, "No to corrupt money laundering," alluding to bitcoin’s use in some transactions to hide the origin of illicit deals. Nearly 68% of El Salvadorans said they disagree with the use of bitcoin as a legal tender, according to a poll of 1,281 residents conducted by the nation's Central American University in August. About 9 out of 10 residents said they didn't have a clear understanding of the cryptocurrency, and another 8 in 10 said they had little or no confidence in its use.

Increasing the uncertainty, Bukele’s election has come into question, and ratings agency Moody's downgraded the nation’s foreign debt load in July after its government's decision to accept bitcoin as a national currency, saying the measures "reflect weakened governance" and "raise tensions with international partners." Later that month, the International Monetary Fund, which is reportedly in talks to provide El Salvador with a $1.3 billion loan, published a blog post saying bitcoin was "too volatile" to warrant its adoption as a national currency, even in light of benefits including fast payments, enhanced financial inclusion and facilitated cross-border transfers. (El Salvadoran migrants, many from the U.S., sent about $5.9 billion back to El Salvador last year, accounting for nearly 25% of the nation's gross domestic product.)

As for the future, bitcoin skepticism hasn't stopped several other countries, particularly in Latin America, from voicing their own cryptocurrency ambitions. Lawmakers in Panama, Brazil, Argentina and Brazil quickly lauded El Salvador's bitcoin proposal after the new law passed an assembly vote in early June with a supermajority of 62 votes to 22. "As I’ve been saying for a long time, our country must move forward hand in hand with the new generation. The moment has come—our moment," Paraguayan congressman Carlos Rejala tweeted at the time. And though support is also growing in countries like Cuba and Venezuela, Belshe says it's likely to be a while before any other country takes the same step as El Salvador.

"I tend to think most of these projects usually take a fair amount of time to roll out and materialize, so we'll see," says Belshe. "All eyes are on El Salvador right now to kind of see what happens, and that'll in some ways dictate what happens next."

Source