El Salvador adopted Bitcoin to revolutionize its economy. didn’t work

Bitcoin was set to transform El Salvador’s economy, setting the impoverished Central American country as an unlikely harbinger of a financial revolution.

But nearly a year after the head of state, Neb Bukele, shocked the financial world by turning the most popular cryptocurrency into fiat tender, his gamble appears to have failed, highlighting the gulf between the utopian promises of cryptocurrency defenders and the economy. reality.

During the recent market crash, government holdings of bitcoin lost about 60 percent of their assumed value. Bitcoin usage among Salvadorans has declined and the country has run out of money after Bukele failed to raise fresh funds from crypto investors.

However, financial setbacks failed to affect Bukele’s popularity. Opinion polls show that more than eight in 10 Salvadorans continue to support the president, in part because of his popular strategy against criminal gangs and fuel subsidies, which have eased the blow of global inflation.

Critics say the failure of Bukele’s stated goals of bitcoin adoption – bringing investment into the country and financial services for the poor – exposed the shortcomings of his authoritarian, image-focused style. 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 the equivalent of 15 percent of its annual investment budget to trying to root bitcoin in the national economy.

Offer $30, roughly one percent of what the average Salvadoran earns in a year, to every citizen who downloads a government-backed cryptocurrency payment app called Chivo Wallet; chivo means “awesome” or “great” in Salvadoran slang.

Bukele claims that nearly three million Salvadorans, or 60 percent of adults, have heeded his call.

However, after the initial acceptance, the use of the cryptocurrency declined.

Only 10 percent of Chivo users continued to transact with Bitcoin on the app after spending their $30 salary, according to a February survey of three US economists published by the National Bureau of Economic Research. The researchers found that almost no new customers downloaded the app this year.

“The government gave this project all the momentum you could hope for, and it still failed,” said Fernando Alvarez, an economist at the University of Chicago and one of the study’s authors.

An independent survey conducted by the Salvadoran Chamber of Commerce and Industry in March revealed that only 14 percent of companies in the country have dealt with bitcoin since its introduction in September, and only three percent said they see any commercial value in it.

Salvadorans in the US also ignored Bukele’s call to use bitcoin to send money to relatives back home. Digital currency payment apps like 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 has taken another blow with global cryptocurrency sell-offs that have wiped out hundreds of billions of dollars in digital assets since March.

“People are afraid to lose their money,” said Edgardo Villalobos, coordinator of vendors at a sprawling street market in downtown San Salvador, the capital of El Salvador. After the recent price crash, he said his $30 salary for downloading the Chivo app is worth $10.

However, despite the decline, Bitcoin enthusiasts and entrepreneurs assert that the introduction of Bitcoin has transformed the image of El Salvador into a technological pioneer and created financial opportunities for its citizens outside of traditional banking systems.

“As long as we pursue financial freedom, we remain on track to achieve it,” said Eric Gravengaard, CEO of Athena Bitcoin, a US-based cryptocurrency company that operates an ATM network in El Salvador and processes transactions. Bitcoin transactions for the largest trading chains in the country.

Critics say bitcoin has also failed to attract the promised wave of crypto entrepreneurs into the country.

Only 48 bitcoin-focused startups have been registered in El Salvador since the introduction of the cryptocurrency, according to the country’s central bank; This represents less than 2% of all companies that opened in 2019. Almost all of them are start-ups that employ a few local workers and bring in little investment, said Leonor Silva, executive director of the National Association of Private Enterprise in El Salvador. .

“On a daily basis, the impact has been nil,” he said, adding that rather than attracting new investors, bitcoin has scared away traditional financiers worried about the cryptocurrency’s impact on economic stability.

Gravengaard responded by noting that all but two of his company’s 30 employees are in El Salvador. More broadly, the country’s growing technology sector has given young people a chance to build a career in a country that has long been one of the largest sources of immigrants to the United States.

“This is just a dream,” said Gerson Martinez, Salvadorian Bitcoin entrepreneur. “As the son of Salvadorian immigrants who had to leave El Salvador, it gives me a lot of hope.”

The price crash also did not deter Bukele from his enthusiasm for bitcoin, which has earned him the admiration of the global cryptocurrency community.

In a series of Twitter posts over the past year, Bukele announced that he had bought nearly 2,400 Bitcoin Tokens since September, in trades worth nearly $100 million. When critics accused him of financial irresponsibility, he responded by saying that he trades on his phone. while naked.

He wrote in English: “Bitcoin is the future!” Share on Twitter On June 30, after announcing his last purchase amid an ongoing cryptocurrency sale. “Thanks for selling on the cheap.”

It is not clear where the bitcoin assets are, what they are worth, how they were paid for, or even who has the tokens proving their ownership.

Bukele’s press office, his finance minister, Jose Alejandro Zelaya, and his bitcoin adviser, Samson Mao, did not respond to requests for comment.

So far, Bukele’s operations have cost the country a loss of about $63 million, according to calculations made last week by Disruptiva magazine, published by Francisco Gavidia University in San Salvador.

Losses are mounting as the government struggles to support rising costs for food and fuel imports and to meet upcoming debt payments.

Emphasizing funding problems, Bukele cut spending for local governments last year, forcing some mayors to cut public services such as scholarships and water infrastructure.

“The problem is that no one is making anything with bitcoin,” said Carlos Acevedo, a Salvadoran economist and former director of the central bank. “It’s an investment that has no social return.”

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

The bounty would have allowed Bukele to bypass traditional financial institutions, such as the International Monetary Fund, which made the country’s new money contingent on fiscal discipline.

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

Economists say this has left the country with few good options for paying $800 million of its debt due in January, or subsequent payments in subsequent years.

Ultimately, Bukele will face the difficult decision to drastically cut public spending, risking angering voters, or sending the country into default. A default can disrupt essential imports, reduce growth, and even fire banks.

“Buckley has shown that he cares more about the public image than he does about good economic management,” said Frank Mossi, a public policy expert at the London School of Economics who has studied bitcoin bonds in El Salvador. “But in the end, the difficulties will remain, at a very heavy price for the country,” he added.

Anatoly Kurmanayev is a Mexico City-based reporter, covering Mexico, Central America, and the Caribbean. Before joining Mexico Correspondent in 2021, he spent eight years reporting from Caracas on Venezuela and the nearby region. Tweet embed

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