Bitcoin aimed to transform El Salvador’s economy and turn a poor Central American country into an unlikely precursor to a financial revolution.
But almost a year after the country’s president, Nayib Bukele, shocked the financial world by making the most popular digital coin the country’s currency, his bets backfired and supported cryptocurrencies. It seems to emphasize the gap between one’s Utopia promise and economic reality.
Government Bitcoin holdings have lost about 60 percent of their estimates during the recent market plunge. The country is running out of cash as the use of Bitcoin among the El Salvadorans has collapsed and Mr. Bukele has been unable to raise new funds from crypto investors.
Still, financial setbacks could not reduce Mr. Bukele’s popularity. Poll shows More than eight out of ten El Salvadorans continue to support the president, in part with his widespread crackdown on criminal gangs and fuel subsidies that ease the pain of global inflation. Thanks to.
However, the failure of Bitcoin’s objectives (investing in the country and providing financial services to the poor) described by Bukele reveals the shortcomings of his authoritarian, image-focused governance style. Critics say they did. It also raised questions about the financial sustainability of his ambitious plan to modernize El Salvador at the expense of democratic governance.
Last year, his government allocated 15 percent of the annual investment budget to infiltrate Bitcoin into the national economy.
We provided $ 30 to all citizens who downloaded a government-sponsored cryptocurrency payment app called Chivo Wallet. This is almost 1 percent of the amount the average El Salvadoran earns in a year. chivo means “cool” in local slang.
Bukele claims that nearly 3 million El Salvadorans, or 60 percent of adults, listened to his call.
However, after the first capture, the use of cryptocurrencies plummeted.
In February, a study conducted by three US-based economists found that only 10% of Chivo users continued to trade Bitcoin on their apps after spending $ 30 on benefits. Published by National Bureau of Economic Research. Researchers found that few new customers downloaded the app this year.
Fernando Alvarez, an economist at the University of Chicago and author of the study, said:
According to another study by the El Salvador Chamber of Commerce in March, only 14% of domestic companies have traded Bitcoin since it was introduced in September, recognizing its business value. Only 3% answered.
El Salvadorans in the United States have also ignored Mr. Bukele’s call to use Bitcoin to send money to his relatives in his hometown. According to the central bank of El Salvador, digital currency payment apps such as Chivo accounted for less than 2% of remittances in the first five months of the year.
Mr. Bukere’s Bitcoin push was further hit by the sale of a global cryptocurrency that has wiped hundreds of billions of dollars from the value of digital assets since March.
“People are afraid to lose money,” said Edgard Villalovos, who coordinates vendors at the vast street market in downtown San Salvador, the capital of El Salvador. After the recent price collapse, he said the $ 30 benefit from downloading the Chivo app is worth $ 10.
Still, despite the recession, Bitcoin enthusiasts and entrepreneurs have changed the image of El Salvador into the image of a technological pioneer with the introduction of Bitcoin, creating economic opportunities for citizens outside the mainstream banking system. Claims to have been.
Eric Grabengard, CEO of Athena Bitcoin, a US-based cryptocurrency company that operates a network of cryptocurrency ATMs in El Salvador and processes Bitcoin transactions, said: The largest retail chain in the country.
Critics say Bitcoin also failed to bring the promised wave of crypto entrepreneurs into the country.
According to the country’s central bank, only 48 new Bitcoin-focused companies have registered with El Salvador since the introduction of cryptocurrencies. Leanor Selva, Managing Director of the National Association of Private Enterprises in El Salvador, said this is less than 2% of all companies that opened in 2019.
“Every day, the impact was zero,” she said, adding that instead of attracting new investors, Bitcoin scared traditional lenders concerned about the impact of cryptocurrencies on economic stability.
Gravengaard argued, pointing out that all but two of his company’s 30 employees in El Salvador are locals. Broadly speaking, the country’s growing technology sector gives young people the opportunity to build a career in one of the country’s largest sources of immigration to the United States.
“This is just a dream,” said El Salvador’s Bitcoin entrepreneur, Kherson Martinez. “As the son of an immigrant who had to leave El Salvador, this gives me great hope.”
The price collapse also did not hinder Mr. Bukele’s enthusiasm for Bitcoin, which he gave. Praise of the global crypto community..
In a series of Twitter posts over the past year, Bukele announced that he has purchased nearly 2,400 Bitcoin tokens in total since September for an estimated $ 100 million worth of transactions.When critics accused him of being financially irresponsible, he replied saying he was trading on his phone. Barely..
“”Bitcoin is the future! “He said Twitter post June 30 after announcing his latest purchase in an ongoing cryptocurrency sale. “Thank you for selling cheaply.”
It is unclear where Bitcoin assets are held, what they are worth, how they were paid, or even who holds the code that proves ownership.
Mr. Bukele’s press office, his finance minister, Jose Alejandro Zelaya, and his Bitcoin adviser, Samson Mou, did not respond to requests for comment.
So far, Mr. Bukele’s transaction has cost the country an estimated $ 63 million, according to estimates from a magazine called Disruptive, published by researchers at the University of Francisco Gavidia in San Salvador.
Losses are increasing as the government helps raise food and fuel import costs and struggles to meet the next debt repayment.
Last year, Mr. Buquere emphasized funding challenges, reduced spending on local governments and forced some mayors to reduce public services such as scholarships and water infrastructure.
“The problem with Bitcoin is that no one is getting anything,” said Carlos Asebed, an economist and former central bank director in El Salvador. “It’s an investment that doesn’t bring social benefits.”
The collapse of cryptocurrency prices has already upset the main plans of Mr. Buquere’s financial experiment: the world’s first Bitcoin-backed government bond issue.
The bond would have allowed Mr. Buquere to bypass traditional financial institutions such as the International Monetary Fund, which has provided new funding to the country subject to financial discipline.
After announcing a $ 1 billion Bitcoin-denominated bond, the government postponed the project indefinitely at the last minute, claiming that the war in Ukraine had worsened the world’s financial position.
Economists say this has given them few good options for paying $ 800 million for debt to be paid in January or for subsequent years.
Ultimately, Bukele will face the difficult choice of taking the risk of offending voters and significantly reducing public spending or pushing the country to default. Defaults can disrupt basic imports, slow growth, and even cause run on the bank.
Frank Muchi, a public policy expert at the London School of Economics who studied Bitcoin Bonds in El Salvador, said: “But in the end, the chickens will return to the roost at a very high cost for the country.”
