A year into El Salvador’s Bitcoin experiment

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

Now, after a year of travel, there are far fewer fireworks. Adoption moved slowly, and the sharp drop in Bitcoin’s price from those high levels last fall dampened the initial euphoria that hit the nation. Bitcoin hasn’t replaced El Salvador’s hard currency, the US dollar, it’s not even close, but it hasn’t brought the financial ruin that some had warned about either. Or at least not yet.

“Nobody really talks about Bitcoin here anymore. It’s been a bit forgotten, “said former El Salvador central bank chief Carlos Acevedo.” I don’t know if you’d 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 a cryptocurrency community craze and also attracting criticism from skeptics, including bond traders and the International Monetary Fund. Bitcoin’s debut on September 7 was plagued by technical glitches, which led to a bad start. Undaunted, Bukele – sporting “laser eyes” on his Twitter profile picture – barked at detractors as he welcomed Bitcoin supporters and cryptocurrency executives to his presidential office, where he continues to host them to this day.

As part of the launch, Salvadorans were offered government-issued digital wallets preloaded with $ 30 worth of Bitcoin to help kickstart things. Under the law, taxes can be paid in Bitcoin, and businesses should accept it as a form of payment, unless they are technologically capable of doing so. But the currency’s volatility has scared users, and the cryptocurrency has seen wider acceptance in countries with poor payment networks or strict currency controls, such as Argentina, Venezuela and Cuba, Acevedo said. “We have a good payment network in El Salvador, 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 continued to increase its stocks, conspicuously “buying the drop” during periods in which Bitcoin has declined. The result? He is sitting on the losses.

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

The government is still claiming victory, however. According to Finance Minister Alejandro Zelaya, bitcoin has attracted foreign investment and tourism and increased financial access to a largely bankless population. The government says its digital wallet, Chivo, has more than 4 million users. Tourism is on the verge of surpassing pre-pandemic levels this year, and the central bank says 59 cryptocurrency and blockchain companies are based in El Salvador.

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

“Assuming the cars were a failure because after the first year Ford started production in 1896 no more than 2% of the population had a car would have been quite shortsighted,” said Paolo Ardoino, Bitfinex’s chief technology officer. “The government has a long-term vision. The cryptocurrency industry is highly technological and this is the kind of industry everyone should want in their country. ”

Bitfinex will serve as a trading platform for the volcano bond and will require a license to operate in El Salvador once the government passes a digital securities law to support the issue. Canadian cryptocurrency lending and savings company Ledn has seen a 678% increase in users in El Salvador over the past year, according to co-founder Mauricio Di Bartolomeo. AlphaPoint, based in New York, was hired to fix bugs in the Chivo portfolio, and a number of other companies also worked on the country’s launch.

“I don’t see 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 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 planning to open an office there, he said. impact of a rapidly growing company “.

But Bukele’s desire to conquer the Bitcoiners had a downside. The IMF withheld approval of a $ 1.3 billion program for the country citing the risks of Bitcoin. 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 them. Moody’s estimates that the government spent $ 375 million in total on the launch, including a $ 150 million fund to support Bitcoin-to-dollar conversions and the $ 30 sign-up bonus money given to Chivo users.

“The Bitcoin experiment promoted by the Bukele administration has significantly raised the perception of the country’s market risk,” said Fabiano Borsato, Chief Operating Officer of Torino Capital LLC. “It takes place in a context of fragile public finances, high and persistent fiscal 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 at favorable conditions in the short and medium term ”.

Overall, Bukele remains hugely popular with Salvadorans, largely due to its crackdown on gangs, infrastructure investments, and efforts to increase 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. Respondents ranked Bitcoin as Bukele’s second biggest political failure in the past year after accelerating inflation.

“If you go to a market in El Salvador, you are 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, who conducted the survey. “It’s not part of people’s daily routine.”

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