Year One of the Bitcoin Experiment in El SalvadorSeptember 27, 2022
More than 12 months ago, the state of El Salvador in Central America became the first nation in the world to formally adopt bitcoin as its legal tender. Thanks to that legal decision, bitcoin took a position where it holds the same regulatory title as the USD, which became the country’s official currency in 2001. The USD replaced the old national fiat currency and now the BTC token is functioning in the same manner as the official US currency. The entire initiative is the brainchild of Nayib Bukele, the country’s president and a huge cryptocurrency enthusiast.
His drive to make the same idea a reality began several years earlier, slowly transforming it into the key platform of his tenure. According to the president’s pitch, the initiative should have slowly delivered a range of economic benefits to the otherwise poor nation in an underdeveloped region of the Americas. In the mind of the president, the adoption of bitcoin as a legal tender should have brought about foreign investment, generated local jobs, and pushed the entire humanity at least somewhat in the right direction. The last element was related to the potential of this global decentralized system to help underdeveloped nations to find opportunities outside of the beaten path of the traditional international financial systems. One year on, it is hard to say what are the ultimate benefits and failures of the same approach, but the result remains a complex and ongoing process.
Dreams of Cities
The ambition of Bukele goes a lot farther than the issue of using digital currencies like bitcoin to draw in investors. The president wanted to build a whole new settlement called Bitcoin city and turn it into a tax-free haven that would be built through the issuance of the one billion USD in government bonds. The plans saw the country spend half of the same revenue from the bonds on the city. The other half, 500 million USD, would be used to buy additional BTC tokens. Here, the same assumed crypto profit would be used to repay all of the bondholders, making the systems sustainable.
An additional factor would be the use of geothermal energy that El Salvador possessed to run cryptocurrency mining operations, gaining a big ecological footprint while also helping the country generate its financial reserve. All of this just shows the scope of the development and how would the same procedure work if everything goes according to plan. However, the first year showed that many things are definitely not going according to even the most limited plans, not to mention the grand desires of Bitcoin city.
Legal Tender Implications
Turning bitcoin into legal tender has a much wider set of implications than simply using it for financial transactions. The same was already possible in El Salvador as it is in a range of countries. However, the president wanted a lot more than that. Bukele wanted anyone selling goods or services to accept bitcoin, like it or not, just as they had to accept the USD. To encourage that process, the government built an app that is basically a national digital wallet called Chivo.
Here, they could store bitcoins and use them for transactions without paying any fees. The wallet also came loaded with a free 30 USD, which is not a small sum where the median weekly income comes to about 350 USD. So, the incentives to use the digital currency were in place and a lot less than that spurred on people in the esports community, for example, to embrace bitcoin. But, the incentives did not materialize into an actual state-wide drive of ordinary citizens to begin using BTC as their legal tender of choice.
Statistical Breakdown of BTC Use
A recent survey of over 1,800 residents of El Salvador brought about some hard facts about the use of digital currency in the country. The survey showed that only 20 percent of the population of the country began using Chivo Wallets. About 40 percent downloaded the app at some point, but they did it to claim the 30 USD reward. So, half of those who got the money never bothered to use the same digital currency wallet ever again.
The survey also showed that business owners are hesitant about bitcoin as well. According to it, only 20 percent of those who identify as owners of a business accept BTC, even though this is technically their legal requirement. Also, these were usually big companies and not small businesses. None of these are impressive numbers, especially having in mind the massive amount of exposure that Bukele and the whole initiative got in the press. The same goes not just for the local news outlets but even global mass media, all of which covered everything, including Chivo wallets in great detail.
On the surface, one of the more problematic elements of the bitcoin launch in El Salvador for its supporters is the fact that three in five residents will not claim 30 USD for free. The reasons for that are likely complex, but all of them do not point to trust or support for Bukele and his project. But, more problematic in the whole narrative is the expenses that the government made in BTC investment. The government spent over 100 million USD to buy bitcoin tokens. These are now worth 50 million. Bukele also ignored warnings from the IMF related to making bitcoin legal tender.
That is why international credit rating agencies like Fitch downgraded their credit rating in 2022. The main reason for that is a lot of concern related to bitcoin. At the same time, El Salvador is seeking a one billion USD loan from the IMF. Here lies the biggest cause for concern for the coming year – the country needs the traditional financial system. It needs a successful bitcoin project as well. Presently, they seem to be in a conflict with neither actually generating the wealth nor development that the resident needs. Bukele needs both to work and the path to that scenario is not clear.