Bitcoin was meant to transform El Salvador’s economy, catapulting the impoverished Central American nation into an unlikely harbinger of a financial revolution.
But nearly a year after the country’s president, Nayib Bukele, shocked the financial world by making his most popular digital coin a national currency, his gamble appears to be backfiring, underscoring the chasm between the utopian promises of cryptocurrency proponents and economic realities.
Government bitcoin holdings lost around 60% of their presumed value in the recent market crash. Bitcoin usage among Salvadorans has plummeted and the country is running out of money after Mr. Bukele failed to raise new funds from cryptocurrency investors.
Yet financial setbacks have failed to shake Mr. Bukele’s popularity. Polls show that more than eight in 10 Salvadorans continue to support the president, thanks in part to his widely supported crackdown on criminal gangs and fuel subsidies that have dampened the sting of global inflation.
But the failure of Mr Bukele’s stated goals for bitcoin – to bring investment to the country and financial services to the poor – has exposed the shortcomings of his authoritarian and image-driven style of governance, critics say. He also raised questions about the financial viability 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 integrate bitcoin into the national economy.
It was offering $30, or nearly 1% of what an average Salvadoran earns in a year, to every citizen who downloaded a government-backed cryptocurrency payment app called Chivo Wallet; chivo means “cool” in local slang.
Mr. Bukele says nearly 3 million Salvadorans, or 60% of adults, have responded to his call.
Yet, after initial adoption, the use of cryptocurrency plunged.
Only 10% of Chivo users continued to transact bitcoin on the app after spending their $30 allowance, according to a survey by three US 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, a University of Chicago economist and author of the study.
A separate survey conducted by El Salvador’s Chamber of Commerce in March found that only 14% of businesses in the country have transacted with bitcoin since its introduction in September, and only 3% said they saw commercial value in it.
Salvadorans in the United States also ignored Mr. 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 remittances in the first five months of this year, according to El Salvador’s central bank.
Mr. Bukele’s bitcoin push was another blow from a global cryptocurrency selloff that has wiped hundreds of billions of dollars of digital asset value since March.
“People are afraid of losing their money,” said Edgardo Villalobos, who coordinates vendors at a sprawling street market in downtown San Salvador, El Salvador’s capital. After the recent price crash, he said his $30 allowance for downloading the Chivo app was worth $10.
Yet despite the downturn, bitcoin enthusiasts and entrepreneurs say the introduction of bitcoin has transformed El Salvador’s image into that of a technology pioneer and created financial opportunities for its citizens outside of the banking systems. traditional.
“As we seek financial freedom, we are still on the right path,” said Eric Gravengaard, CEO of Athena Bitcoin, a US-based cryptocurrency company that operates the ATM network of cryptocurrency from El Salvador and processes bitcoin transactions for the largest retail chains in the country.
Critics say bitcoin has also failed to bring the promised wave of cryptocurrency entrepreneurs to the country.
According to the country’s central bank, only 48 new bitcoin-focused businesses have registered in El Salvador since the cryptocurrency was introduced. this represents less than 2% of all businesses opened in 2019. Almost all of them are start-ups that hire few locals and bring little investment, said Leonor Selva, executive director of the National Association for Private Enterprise from El Salvador.
“Day-to-day impact has been nil,” she said, adding that instead of attracting new investors, bitcoin has scared off traditional financiers concerned about the impact of the cryptocurrency. on economic stability.
Mr. Gravengaard countered by pointing out that all but two of his company’s 30 employees in El Salvador are local citizens. More broadly, the country’s growing tech sector has given its young people the opportunity to pursue careers in a country that has long been one of the main sources of migrants to the United States.
“It’s just a dream,” said Gerson Martínez, a Salvadoran bitcoin entrepreneur. “As the son of migrants who had to leave El Salvador, this gives me a lot of hope.”
The price crash has also not dampened Mr. Bukele’s enthusiasm for bitcoin, earning him the adulation of the global cryptocurrency community.
In a series of Twitter posts over the past year, Bukele announced that he had purchased a total of nearly 2,400 bitcoin tokens since September, in deals valued at around $100 million. When critics accused him of financial irresponsibility, he responded by saying he transacted on his phone naked.
It is not known where the bitcoin assets are held, what they are worth, how they were paid for, or even who holds the codes proving their ownership.
Mr. Bukele’s press service, his finance minister, José Alejandro Zelaya, and his bitcoin adviser, Samson Mow, did not respond to requests for comment.
So far, Mr. Bukele’s trades have cost the country an estimated $63 million in lost value, according to estimates last week by Disruptive magazine, published by Francisco Gavidia University in San Salvador.
Losses mount as the government scrambles to subsidize the rising costs of food and fuel imports and meet an upcoming debt payment.
Pointing to funding problems, Bukele cut disbursements for local governments last year, forcing some mayors to cut public services such as scholarships and water infrastructure.
“The problem with bitcoin is that no one earns anything,” said Salvadoran economist and former central bank director Carlos Acevedo. “It is an investment that does not bring social benefits.”
The collapse in cryptocurrency prices has already derailed a main element of Mr. Bukele’s financial experiment: the issuance of the world’s first government bond backed by bitcoin.
The bond would have allowed Mr. Bukele to bypass traditional financial institutions, such as the International Monetary Fund, which provided new funds to the country subject to financial discipline.
After announcing a billion-dollar bond denominated in bitcoin, the government postponed the project indefinitely at the last minute in March, saying the war in Ukraine had worsened global financial conditions.
Economists say that has left the country with few good options for making an $800 million payment on its debt that is due in January, or subsequent payments in subsequent years.
Ultimately, Mr. Bukele will be faced with the difficult choice of drastically reducing public spending at the risk of irritating voters, or pushing the country into default. A default could disrupt basic imports, reduce growth and even cause a bank run.
“Bukele has shown that he cares more about public image than good economic management,” said Frank Muci, a public policy expert at the London School of Economics who has studied El Salvador’s bitcoin bond. . “But eventually the chickens will come home to roost, at a very high cost to the country.”