A poor country made bitcoin a national currency, the effort does not pay off

Bitcoin was meant to transform El Salvador’s economy, and catapulted the poor Central American nation into an unlikely herald of a financial revolution.

But almost a year after the country’s president, Nayib Bukele, shocked the financial world by turning the most popular digital currency into a national currency, his efforts seem to be hitting back, highlighting the gap between the utopian promises of cryptocurrency advocates and economic realities. .

The government’s bitcoin holdings have lost about 60% of their estimated value during the last market dive. The use of bitcoin among Salvadorans has collapsed, and the country is running out of cash after Bukele failed to raise fresh funds from cryptocurrency investors.

Nevertheless, the economic setbacks have not failed Bukele’s popularity. Opinion polls show that more than 8 out of 10 Salvadorans continue to support the president, thanks in part to his widely backed attacks on criminal gangs and fuel subsidies that have curbed global inflation.

But the failure of Bukele’s stated goal for bitcoin – to bring investment to the country and financial services to the poor – has revealed the shortcomings of his authoritarian, image-focused governance style, critics say. It has also raised questions about the economic sustainability of his ambitious plan to modernize El Salvador at the expense of democratic governance.

Last year, his government allocated the equivalent of 15% of its annual investment budget to try to incorporate bitcoin into the national economy.

It offered $ 30 dollars, almost 1% of what an average Salvadoran earns in a year, to all residents who downloaded a state-sponsored cryptocurrency payment app called Chivo Wallet; chivo means “cool” in local slang.

Bukele claims that almost 3 million Salvadorans, or 60% of adults, followed his call.

Nevertheless, after the first recording, the use of cryptocurrency has plummeted.

Only 10% of Chivo users continued to make bitcoin transactions on the app after using the $ 30 scholarship, according to a survey conducted by three US-based economists in February and published by the National Bureau of Economic Research. Almost no new customers downloaded the app this year, the researchers found.

“The government gave this project as much push as you could hope for, and it still failed,” said Fernando Alvarez, an economist at the University of Chicago and author of the study.

A separate survey by El Salvador’s Chamber of Commerce in March found that only 14% of the country’s businesses made bitcoin transactions since it was introduced in September, and only 3% said they perceived some business value in it.

Salvadorans in the United States have also ignored Bukele’s call to use bitcoin to send money to relatives back home. Digital currency payment apps, such as Chivo, accounted for less than 2% of transfers in the first five months of this year, according to El Salvador’s central bank.

Bukele’s bitcoin push was given a further blow by a global sale of cryptocurrencies that wiped out hundreds of billions of dollars from the value of digital assets since March.

“People are afraid of losing their money,” said Edgardo Villalobos, who coordinates vendors at a sprawling street market in downtown San Salvador, the capital of El Salvador. After the recent price collapse, he said that the $ 30 scholarship from downloading the Chivo app is worth $ 10.

Yet, despite the downturn, bitcoin enthusiasts and entrepreneurs claim that the introduction of bitcoin has transformed El Salvador’s image into a technological pioneer and created economic opportunities for residents outside the regular banking system.

“To the extent that we strive for financial freedom, we are still on track,” said Eric Gravengaard, CEO of Athena Bitcoin, a U.S.-based cryptocurrency company that operates El Salvador’s network of cryptocurrency ATMs and processes bitcoin transactions for the country. largest retail chains.

Critics say that bitcoin has also failed to bring the promised wave of cryptocurrency entrepreneurs into the country.

Only 48 new companies focused on bitcoin have registered in El Salvador since the introduction of cryptocurrency, according to the country’s central bank; which represents less than 2% of all businesses that opened in 2019. Almost all are startups that employ few locals and provide little investment, said Leanor Selva, CEO of El Salvador’s National Association for Private Enterprise.

“Today, the impact has been zero,” she said, adding that instead of attracting new investors, bitcoin has been intimidated by traditional financiers worried about the impact of cryptocurrencies on economic stability.

Gravengaard responded by pointing out that all but two of the company’s 30 employees in El Salvador are local citizens. More generally, the country’s growing technology sector has given young people an opportunity to build a career in a country that has long been one of the largest sources of migrants to the United States.

“This is simply a dream,” said Gerson Martinez, a Salvadoran bitcoin entrepreneur. “As a son of migrants who had to leave El Salvador, this gives me a lot of hope.”

Nor has the price collapse deterred Bukele’s enthusiasm for bitcoin, which has given him admiration for the global cryptocurrency community.

In a series of Twitter posts over the past year, Bukele announced that he had bought a total of almost 2,400 bitcoin tokens since September, in deals valued at an estimated $ 100 million. When critics accused him of financial irresponsibility, he responded by saying that he performs transactions on the phone while naked.

“Bitcoin is the future!” he said in a Twitter post on June 30 after announcing his latest purchase in the midst of an ongoing sale of cryptocurrencies. “Thank you for selling cheap.”

It is unclear where the bitcoin assets are kept, what they are worth, how they were paid for or even who has the codes proving their ownership.

Bukele Press Office; his Minister of Finance, José Alejandro Zelaya; and his bitcoin advisor, Samson Mow, did not respond to requests for comment.

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

The losses increase as the government struggles to subsidize the rising costs of importing food and fuel and meet an upcoming debt payment.

To highlight the funding challenges, Bukele last year cut payments to local authorities, forcing some mayors to reduce public services such as scholarships and water infrastructure.

“The problem with bitcoin is that no one earns anything,” said Carlos Acevedo, a Salvadoran economist and former central bank governor. “It’s an investment that does not provide social benefits.”

The collapse of cryptocurrency prices has already derailed a mainstay in Bukele’s financial experiment: the issuance of the world’s first bitcoin-backed government bond.

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

After announcing a $ 1 billion bond denominated in bitcoin, the government postponed the project indefinitely at the last minute, in March, claiming that the war in Ukraine had worsened global economic conditions.

Economists say this has given the country few good options to pay $ 800 million in debt due in January, or later payments in later years.

In the end, Bukele will face a difficult choice to drastically cut public spending at the risk of irritating voters or forcing the country into default. A default can disrupt basic imports, reduce growth and even lead to bank failures.

“Bukele has shown that he cares more about public image than sound financial management,” said Frank Muci, a public policy expert at the London School of Economics who has studied El Salvador’s bitcoin bond. “But in the end, the chickens will come home to rave, at a very high cost to the country.”