One year into El Salvador’s Bitcoin experiment

by Arthur · September 3, 2022

El Salvador’s President Nayib Bukele took the stage last year to fireworks and AC/DC’s “You Shook Me All Night Long,” announcing to a cheering crowd of crypto enthusiasts at a beach confab that Bitcoin would revolutionize his country. It was November, the digital token had just reached new records and El Salvador was at the very beginning of the experiment as the world’s first nation to use the cryptocurrency as legal tender.

Now, a year into the journey, there are far fewer fireworks. Adoption has been slow, and steep falls in Bitcoin’s price from its highs last fall have dampened the early euphoria that swept the nation. Bitcoin hasn’t replaced El Salvador’s hard currency, the US dollar—it’s not even close—but it hasn’t led to the economic ruin that some warned either. Or not yet anyway.

“No one really talks about Bitcoin here anymore. It’s kind of been forgotten,” said former El Salvador central bank governor Carlos Acevedo. “I don’t know if you’d call it a failure, but it certainly hasn’t been a success.”

Bukele captivated the world last year when he made Bitcoin an official currency alongside the dollar, sparking a frenzy in the cryptocurrency community while drawing criticism from skeptics, including bond traders and the International Monetary Fund. Bitcoin’s debut on September 7 was marred by technical glitches, leading to an inauspicious beginning. Unabashedly, Bukele – sporting “laser eyes” on his Twitter profile picture – barked back at critics as he welcomed Bitcoin supporters and crypto leaders to his presidential office, where he continues to host them to this 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 should accept it as a form of payment, unless they are technologically unable to do so. But the coin’s volatility has scared off users, and cryptocurrency has gained wider acceptance in countries with poor payment networks or strict 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 have not poured large amounts of money into Bitcoin, saving many from the recent bear market, Acevedo said. The same cannot be said of the government itself, which began buying the token last year ahead of its launch as legal tender and has continued to increase its inventory, conspicuously “buying the dip” during periods when Bitcoin fell. The result? It is at a loss.

A series of recent surveys found that only a relatively small minority of respondents continue to use digital wallets and few businesses have recorded transactions in Bitcoin. And the central bank says only 2% of transfers have been sent via cryptocurrency wallets.

However, the government still claims victory. Bitcoin has attracted foreign investment and tourism and increased financial access to a largely unbanked population, according to Finance Minister Alejandro Zelaya. The government says the digital wallet, Chivo, has more than 4 million users. Tourism is set to surpass pre-pandemic levels this year, and the central bank says 59 cryptocurrency and blockchain companies have registered offices in El Salvador.

Zelaya says the administration still plans to issue a Bitcoin-backed bond, dubbed the “volcano token,” using blockchain technology, although it admits recent price drops have hurt sentiment. Advocates say El Salvador is in a position to woo companies in a promising industry and become a financial services hub of the future, creating high-tech jobs.

“Assuming cars were a failure because after the very first year Ford started production in 1896, no more than 2% of the population would have been pretty nearsighted,” said Paolo Ardoino, chief technology officer at Bitfinex. – The government has a long-term vision. The crypto industry is high-tech, and it’s the kind of industry that everyone should want in their country.”

Bitfinex will serve as a trading platform for the Volcano bond and will apply for a license to operate in El Salvador once the government passes a digital securities law to underpin the issuance. Canada-based crypto lending and savings company Ledn saw a 678% increase in users in El Salvador in the past year, according to co-founder Mauricio Di Bartolomeo. New-York-based AlphaPoint was hired to fix bugs in the Chivo wallet, and a number of other companies have also worked on the country’s rollout.

“I don’t see adoption as low. I see a country where everyone has a Bitcoin wallet and everyone knows what Bitcoin is, said Simon Dixon, founder of crypto financial startup Bank to the Future, during an August visit to El Salvador where he met Bukele. Bank to the Future is currently hiring people in El Salvador and plans to open an office there, he said. “This is the first time I’ve ever encountered a government that has a president who has put together a team that really operates with the urgency and impact of a fast-growing company.”

But Bukele’s desire to win over Bitcoiners has come with a downside. The IMF has delayed approving a $1.3 billion program for the country citing risks from Bitcoin. The government’s 2,381 Bitcoins purchased with public funds are worth $47.2 million in current prices, less than half of what the administration paid for them. Moody’s estimates that the government has spent $375 million in total on the rollout, including a $150 million fund to support Bitcoin-dollar conversions and the money for the $30 sign-up bonus given to Chivo users.

“The Bitcoin experiment promoted by the Bukele administration has significantly raised the market’s risk perception of the country,” said Fabiano Borsato, Chief Operating Officer of Torino Capital LLC. “It is being implemented in a context of fragile public finances, high and persistent fiscal deficits and doubts about the rule of law in the country. In our opinion, this will prevent El Salvador from gaining access to financing in the international markets under favorable conditions in the short and medium term.

Overall, Bukele remains hugely popular among Salvadorans, largely due to his crackdown on gangs, investment in infrastructure and efforts to boost tourism, although many remain wary of Bitcoin.

A May poll by El Salvador’s Universidad Centroamericana Jose Simieon Canas found that 71.1% of respondents said the Bitcoin law did nothing to improve family finances. Those polled ranked Bitcoin as Bukele’s second biggest political failure of the past year behind accelerating inflation.

“If you go to any market in El Salvador, you’re more likely to get an insult than to be able to buy something in Bitcoin,” said Laura Andrade, director of the university’s public opinion institute, which conducted the survey. “It’s not part of people’s daily routine.”