A year ago, El Salvador became the first country to make Bitcoin legal tender – alongside the US dollar, which the Central American country adopted in 2001 to replace its own currency, the colón.
President Nayib Bukele, a cryptocurrency enthusiast, promoted the initiative as one that would bring multiple economic benefits.
Making Bitcoin legal tender, he saidwould attract foreign investment, generate jobs and help “push humanity at least a little bit in the right direction”.
His ambitions extended to build an entire “Bitcoin City” – a tax-free paradise funded by spending US$1 billion in government bonds. The plan was to spend half of the bond revenues on the city and the other half on buying Bitcoin, with the supposed profits then being used to pay back the bondholders.
Now, a year later, there is more than enough evidence to conclude Bukele – who has also referred to himself.the world’s coolest dictatorin response to criticism of his creeping authoritarianism – had no idea what he was doing.
This daring financial experiment has turned out to be an almost complete failure.
Making Bitcoin legal tender
Making Bitcoin legal tender meant much more than letting Bitcoin be used for transactions. That was already possible, as in most (but far from everything) to land.
If a Salvadoran wanted to pay for something in bitcoins and the recipient was willing to accept them, they could.
But Bukele wanted more. Making Bitcoins legal tender meant a beneficiary had to accept them. as the 2021 legislation stated, “Every economic agent must accept Bitcoin as payment when offered to him by the one acquiring a good or service”.
To encourage Bitcoin adoption, the government has created an app called “Chivo Wallet” (“chivo” is slang for “cool”) to trade bitcoins for dollars with no transaction fees. It also came preloaded with US$30 as a bonus (the median weekly income is about US$360).
But despite the law and these incentives, Bitcoin has not been embraced.
Greeted with little enthusiasm
A nationally representative survey of 1,800 Salvadoran households in February reported that only 20% of the population used Chivo Wallet for Bitcoin transactions. More than double that number downloaded the app, but only to claim the $30.
Of the respondents who identified as business owners, only 20% said they accepted bitcoins as payment. These were usually large companies (belonging to the top 10% of companies by size).
Business Acceptance of Bitcoin in El Salvador
Found a survey for the El Salvador Chamber of Commerce in March only 14% of the companies transacted with Bitcoin.
Making big losses
Fortunately for Salvadorans, nothing has come of the $1 billion Bitcoin bond program. But the government of Bukele still spent over US$100 million buy bitcoins – which are now worth less than US$50 million.
When Bukele announced his plans in July 2021, Bitcoin’s value was about US$35,000. By the time the legislation went into effect, on September 7, 2021, it was about US$45,000. Two months later, it peaked at $64,400.
Now it trades at around US$20,000.
Bukele made self congratulating tweets about “buying the dip”, but almost all bitcoins bought by the government have been for over $30,000, at an average price of over $40,000.
A year ago, Bukele urged its citizens to keep their money in bitcoins. For anyone who did, the losses would be devastating.
Bukele’s misunderstanding about Bitcoin – and economics more generally – has been repeatedly demonstrated.
In June 2021 he has tweeted: “Bitcoin has a market capitalization of $680 billion. If 1% of that is invested in El Salvador, it would increase our GDP by 25%.”
This suggests that he seemed to think Bitcoin was some kind of investment fund. It turned out too he didn’t understand GDP. Foreign investment is not part of GDP. There has been no increase in foreign investment or GDP.
In January 2022 tweet he argued that a “huge price increase is only a matter of time” as there will only be 21 million bitcoins while there are 50 million millionaires in the world. “Imagine each of them deciding that they must own at least ONE #Bitcoin,” he proclaimed. Bitcoin’s value has since halved.
The rest of the world is not impressed
The Bitcoin plan has negatively impacted El Salvador’s creditworthiness and relations with the International Monetary Fund. With investors becoming more wary of lending to the country, local borrowers have had to offer higher interest rates.
In January, the IMF urged El Salvador to reverse Bitcoin’s legal lender status because the “major risks to financial and market integrity, financial stability and consumer protection”. Bitcoin is notorious for its use in scams and other illegal activities, as well as for its volatility.
Bukele tweeted a dismissive response with a Simpsons-themed meme.
This seems particularly rushed, since El Salvador has been looking for a loan of more than $1 billion from the IMF.
International credit rating agencies fitch has downgraded El Salvador’s credit rating this year, amid concerns over its Bitcoin policy.
No other country with its own currency, not even Zimbabwe and Venezuela’s discredited currencies, has followed suit and made Bitcoin legal tender.
Given El Salvador’s record, it’s unlikely anyone will ever do that.
- John Hawkinssenior lecturer, Canberra School of Politics, Economics and Society, University of Canberra