One year after the start of the Bitcoin experiment in El Salvador
Salvadoran President Nayib Bukele took the stage last year for fireworks and AC/DC’s “You Shook Me All night Long,” announcing to a cheering crowd of crypto enthusiasts at a conference on the range that Bitcoin was going to revolutionize his country. It was November, the digital token had just reached new all-time highs, and El Salvador was at the very beginning of its experiment as the first nation in the world to use cryptocurrency as legal tender.
Now, a year after the trip began, there are far fewer fireworks. Adoption has moved slowly, and the steep declines in the price of Bitcoin from those high levels of last fall have dampened the early euphoria that swept the country. Bitcoin didn’t replace El Salvador’s hard currency, the US dollar — it’s not even close — but it didn’t bring the financial ruin that some had warned about either. Or not yet anyway.
“No one really talks about bitcoin here anymore. It’s kind of forgotten,” said the former head of El Salvador’s central bank, Carlos Acevedo. “I don’t know if you would call it a failure, but it certainly wasn’t a success.”
Bukele captivated the world last year when he made Bitcoin an official currency alongside the dollar, sparking excitement in the cryptocurrency community while drawing criticism from skeptics including bond traders and the Fund. international currency. Bitcoin’s September 7 debut was plagued with technical issues, resulting in an inauspicious start. Unfazed, Bukele – sporting “laser eyes” in his Twitter profile photo – barked at critics while welcoming Bitcoin backers and crypto executives to his presidential office, where he continues to house them to this day. day.
As part of the rollout, Salvadorans were offered government-issued digital wallets preloaded with $30 worth of Bitcoin to help get started. By law, taxes can be paid in Bitcoin and businesses must accept it as a form of payment unless they are technologically unable to do so. But the coin’s volatility spooked users, and the cryptocurrency gained wider acceptance in countries with poor payment networks or tight currency controls, such as Argentina, Venezuela and Cuba, Acevedo said. “In El Salvador we have a good payment network, so why transfer money with cryptocurrency?” he said.
Most Salvadorans haven’t poured large sums into Bitcoin, which saved many from the recent bear market, Acevedo said. The same cannot be said for the government itself, which started buying the token last year as it approached its launch as legal tender and continued to add to its stock, visibly “buying the dip”. “during times when Bitcoin was declining. The result? He is sitting on losses.
A series of recent surveys revealed that only a relatively small minority of respondents continue to use digital wallets, and few businesses have recorded Bitcoin transactions. And the central bank says only 2% of remittances were sent through cryptocurrency wallets.
However, the government still claims victory. According to Finance Minister Alejandro Zelaya, bitcoin has attracted foreign investment and tourism and increased financial access to a largely unbanked population. The government says its digital wallet, Chivo, has more than 4 million users. Tourism is poised to surpass pre-pandemic levels this year and the central bank says 59 cryptocurrency and blockchain companies have headquarters in El Salvador.
Zelaya says the administration still plans to issue a Bitcoin-backed bond, dubbed the “volcano token,” using blockchain technology, although she admits recent price declines have hurt sentiment. Proponents say El Salvador has the potential to court companies in a promising sector and become a financial services hub in the future, creating high-tech jobs.
“To assume that the cars were a failure because after the very first year Ford started production in 1896, no more than 2% of the population had a car would have been pretty myopic,” said Paolo Ardoino, director of the technology at Bitfinex. “The government has a long-term vision. The crypto industry is highly technological and it is the type of industry that everyone should want in their country.
Bitfinex will serve as the trading platform for the volcanic bond and will apply for a license to operate in El Salvador once the government passes a digital securities law to underpin the issuance. According to co-founder Mauricio Di Bartolomeo, Canadian crypto lending and savings company Ledn has seen a 678% increase in users in El Salvador over the past year. New York-based AlphaPoint has been hired to fix bugs in the Chivo Wallet and a range of other companies have also been working on the country rollout.
“I don’t see the adoption that low. I see a country where everyone has a bitcoin wallet and everyone knows what bitcoin is,” said Simon Dixon, founder of crypto finance startup Bank to the Future, during an August visit to El Salvador in during which he met Bukele. Bank to the Future is currently hiring people in El Salvador and plans to open an office there, he said. “It’s the first time I’ve come across a government that has a president who has assembled a team that really works with the urgency and impact of a fast-growing business.”
But Bukele’s desire to win Bitcoiners came with a downside. The IMF delayed approval of a $1.3 billion program for the country citing Bitcoin risks. The 2,381 bitcoins purchased by the government with public funds are worth $47.2 million at current prices, less than half of what the administration paid for them. Moody’s estimates that the government spent a total of $375 million on the rollout, including a $150 million fund to support Bitcoin-to-dollar conversions and money for the $30 sign-up bonus given to users of Shivo.
“The Bitcoin experiment promoted by the Bukele administration has significantly increased the market’s perception of the country’s risk,” said Fabiano Borsato, COO of Torino Capital LLC. “It is implemented in a context of fragile public finances, high and persistent budget deficits and doubts about the rule of law in the country. This, in our opinion, will prevent El Salvador from accessing financing on international markets under favorable conditions in the short and medium term.
Overall, Bukele remains hugely popular among Salvadorans, largely due to its crackdown on gangs, infrastructure investments, and efforts to boost tourism, though many are wary of bitcoin.
A May poll by Universidad Centroamericana Jose Simieon Canas of El Salvador found that 71.1% of respondents said the Bitcoin law had done nothing to improve their family’s finances. Respondents ranked Bitcoin as Bukele’s second biggest policy failure in the past year behind accelerating inflation.
“If you go to any market in El Salvador, you’re more likely to get an insult than you can buy something in bitcoin,” said Laura Andrade, director of the university’s public opinion institute, who conducted the survey. “It’s not part of people’s daily routine.”
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