El Salvador made Bitcoin a national currency. The bet doesn’t work

Bitcoin was set to transform El Salvador’s economy, catapulting the poor Central American nation into an unlikely harbinger of a financial revolution.

But almost a year after the president of the country, Nayib Bukeleshocked the financial world by converting its most popular digital currency into a national currency, their bet seems to backfire, highlighting the gap between the utopian promises of cryptocurrency advocates and economic realities.

The government’s bitcoin holdings have been losing around 60% of its assumed value during the recent market crash.

Bitcoin usage among Salvadorans has plummeted and the country is lagging behind no cash after Bukele failed to raise new funds from cryptocurrency investors.

However, the financial setbacks failed to dent Bukele’s popularity.

Polls show that more than 8 out of 10 Salvadorans continue to support the president, also thanks to his widely supported crackdown. against criminal gangs and fuel subsidies that have eased the sting of global inflation.

But the failure of Bukele’s stated goals for bitcoin – to attract investment to the country and financial services for the poor – has highlighted the shortcomings of his authoritarian, image-centric style of governance, critics say.

He also raised questions about the financial sustainability of his ambitious plan to modernize El Salvador at the expense of the democratic government.

Last year, your government set aside the equivalent of 15% of its annual investment budget to try to do so. bitcoin root in the national economy.

It offered $ 30, nearly 1% of what an average Salvadoran earns in a year, to every citizen who downloaded a government-backed cryptocurrency payment app called Chivo wallet; chivo means “cool” in the local slang.

Bukele assures that nearly 3 million Salvadorans, or 60% of adults, have listened to his call.

However, after initial acceptance, the use of cryptocurrencies plummeted.

Only 10% of Chivo users continued to trade bitcoin on the app after spending the $ 30 salary, according to a survey conducted by three US economists in February and published by the National Bureau of Economic Research. .

Hardly any new customers downloaded the app this year, the researchers found.

“The government gave this project all the boost it could hope for, and it failed anyway,” said Fernando Alvarez, an economist at the University of Chicago and author of the study.

A separate survey conducted by the El Salvador Chamber of Commerce in March found that only 14% of businesses in the country have transacted in bitcoin since it was introduced in September, and only 3% said they perceive commercial value in it. .

Salvadorans in the United States also ignored Bukele’s request to use bitcoin to send money to relatives back home.

Digital currency payment apps like Chivo accounted for less than 2% of remittances in the first five months of this year, according to the central bank of El Salvador.

Bukele’s Bitcoin push was dealt a further blow by a global cryptocurrency sell-off that has wiped hundreds of billions of dollars off the value of digital assets since March.

“People are afraid of losing their money,” said Edgardo Villalobos, who coordinates vendors at a vast street market in downtown San Salvador, the capital of El Salvador.

After the recent price slump, he claimed that his $ 30 Chivo app download salary is worth $ 10.

However, despite the recession, bitcoin enthusiasts and entrepreneurs argue that the introduction of bitcoin transformed El Salvador’s image into that of a technology pioneer and created financial opportunities for its citizens outside conventional banking systems. .

“As far as financial freedom is concerned, we are still on the right track,” said Eric Gravengaard, CEO of Athena Bitcoin, a US-based cryptocurrency company that operates the El Cryptocurrency ATM network. Salvador and processes bitcoin transactions for the country. large retail chains.

Critics say even bitcoin has failed to bring the promised wave of cryptocurrency entrepreneurs to the country.

Only 48 new companies focused on bitcoin have been recorded in El Salvador since the introduction of the cryptocurrency, according to the country’s central bank; which represents less than 2% of all open activities in 2019.

Almost all of them are startups that hire few premises and attract few investmentssaid Leonor Selva, executive director of the National Association of Private Enterprises of El Salvador.

“On a daily basis, the impact was nil,” he said, adding that instead of attracting new investors, Bitcoin scared traditional financiers concerned about the impact of cryptocurrencies on economic stability.

Gravengaard retorted by pointing out that all but two of his company’s 30 employees in El Salvador are local citizens.

More broadly, the country’s growing tech sector has provided its young people with the opportunity to build careers in a country that has long been a major source of immigrants to the United States.

“This is just a dream,” said Gerson Martínez, a Salvadoran bitcoin entrepreneur.

“As the son of migrants who had to leave El Salvador, this gives me a lot of hope.”

The collapse in prices hasn’t deterred Bukele’s enthusiasm for bitcoin either, earning the adulation of the global cryptocurrency community.

In a series of Twitter posts over the past year, Bukele has announced that it has bought a total of nearly 2400 tokens of bitcoin since September, in operations worth around 100 million dollars.

When critics accused him of financial irresponsibility, he responded by saying he transacts from his phone while on the go. naked.

“Bitcoin is the future!” he said in a Twitter post on June 30 after announcing his latest purchase amid an ongoing cryptocurrency sale.

“Thanks for selling cheap.”

It is not clear where they are kept bitcoin assets, how much they are worth, how they were paid or even who has the codes that prove their ownership.

the Bukele press office; its Minister of Finance, José Alejandro Zelaya; and his bitcoin advisor, Samson Mow, did not respond to requests for comment.

So far, Bukele’s operations have cost the country an estimated loss in value of $ 63 million, according to estimates last week by Disruptive magazine published by Francisco Gavidia University in San Salvador.

Losses are mounting as the government struggles to subsidize rising costs of food imports and fuels and meet the next debt payment.

Pointing out financial challenges, Bukele last year cut spending on local governments, forcing some mayors to cut public services like scholarships and water infrastructure.

“The problem with bitcoin is that nobody earns anything,” said Carlos Acevedo, a Salvadoran economist and former central bank director.

“It is an investment that does not bring social benefits”.

The collapse in cryptocurrency prices has already derailed one of the pillars of Bukele’s financial experiment:

the issue of the first government bond in the world guaranteed by bitcoin.

The bonus would have allowed Bukele to bypass traditional financial institutions, such as the International Monetary Fund, which made new funds for the country subject to financial discipline.

After announcing a $ 1 billion bitcoin bond, the government postponed the project indefinitely to the last minute of March, arguing that the war in Ukraine it had worsened global financial conditions.

Economists say this has left the country with few good options to make a payment of $ 800 million on debt maturing in January or subsequent payments in subsequent years.

Eventually, Bukele will face the difficult decision to cut public spending at the risk of angering voters or driving the country to default.

A default could disrupt core imports, reduce growth and even trigger a bank run.

“Bukele has shown that he cares more about public image than good economic management,” said Frank Muci, a public policy expert at the London School of Economics who has studied El Salvador’s bitcoin bond.

“But eventually, the chickens will come home to the roost, at a very high cost to the country.”

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