Bitcoin was intended to transform El Salvador’s economy, sending the impoverished Central American country into an unexpected harbinger of a financial revolution.
But nearly a year after the head of state, Najib Bukele, shocked the financial world by making the most popular digital currency a national currency, his bet appears to backfire, highlighting the gap between the utopian promises of crypto-supporters and economic realities.
Government holdings of bitcoin lost about 60 percent of their assumed value during the recent market downturn. Bitcoin use collapsed among Salvadorans and the country ran out of cash after Mr. Bukele failed to raise fresh funds from crypto investors.
However, financial setbacks failed to weaken Mr. Bukele’s popularity. Polls show That more than eight in 10 Salvadorans continue to support the president, thanks in part to his widely backed campaign against criminal gangs and fuel subsidies that dampened global inflation.
Critics say the failure of Mr. Bukele’s stated goals for bitcoin – to bring investment into the country and financial services for the poor – has 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 cement bitcoin into the national economy.
Offer $30, roughly 1 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” in local slang.
Mr. Bukele claims that nearly 3 million Salvadorans, or 60 per cent of adults, have heeded his call.
However, after the initial uptake, the use of cryptocurrency declined.
Only 10 percent of Chivo users continued to make bitcoin transactions on the app after spending their $30 salary, according to a survey conducted by three US-based economists in February and Posted by National Bureau of Economic Research. The researchers found that almost no new customers downloaded the app this year.
“The government gave this project as much as it could possibly hope for, and it still failed,” said Fernando Alvarez, an economist at the University of Chicago and author of the study.
A separate poll conducted by the El Salvador Chamber of Commerce in March found that only 14 percent of companies in the country have conducted bitcoin transactions since it was introduced in September, and only 3 percent said they see any business value in it.
Salvadorans in the US 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 percent of transfers in the first five months of this year, according to El Salvador’s central bank.
Bitcoin’s payment to Mr. Bukele has dealt another blow with a global cryptocurrency sale that has wiped out hundreds of billions of dollars in digital assets since March.
“People are afraid of losing 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 paycheck from downloading the Chivo app is worth $10.
However, despite the economic downturn, bitcoin enthusiasts and entrepreneurs argue that the introduction of bitcoin has transformed El Salvador’s image into a technological pioneer and created financial opportunities for its citizens outside of mainstream banking systems.
Eric Gravingard, CEO of Athena Bitcoin, a US-based cryptocurrency company that operates a network of crypto ATMs in El Salvador, and processes bitcoin transactions for the country’s largest retail chains.
Critics say bitcoin has also failed to bring the promised wave of crypto entrepreneurs into the country.
Only 48 new bitcoin-focused companies have registered in El Salvador since the introduction of the cryptocurrency, according to the country’s central bank; Which account for less than 2 percent of all businesses that opened in 2019. Almost all of them are start-ups that employ a few locals and bring in little investment, said Lenore Silva, executive director of the National Association of Private Enterprise in El Salvador.
“One day, the effect was null,” she said, adding that rather than attracting new investors, bitcoin scared traditional financiers worried about the cryptocurrency’s impact on economic stability.
Mr Gravengaard responded by noting that all but two of his company’s 30 employees are locals 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 immigrants who had to leave El Salvador, this gives me a lot of hope.”
Nor did the price crash dissuade Mr. Bukele from getting excited about Bitcoin, which earned him Flatter the global cryptocurrency community.
In a series of Twitter posts over the past year, Mr. Bukele announced that he had bought nearly 2,400 bitcoins since September, in deals valued at nearly $100 million. When critics accused him of financial irresponsibility, he responded by saying that he was transacting on his phone while naked.
It is not clear where the bitcoin assets are held, what they are worth, how they were paid for or even who holds the tokens proving their ownership.
Mr 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, Mr. Bukele’s deals have cost the country an estimated $63 million in lost value, according to estimates by a journal called Disruptive published by researchers at 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 challenges, Mr Bukele last year cut payments to local governments, forcing some mayors to scale back public services such as scholarships and water infrastructure.
“The problem with bitcoin is that no one is winning anything,” said Carlos Acevedo, a Salvadoran economist and former director of the central bank. “It is an investment that does not bring social benefits.”
The collapse in cryptocurrency prices has already derailed the main slate 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 made the country’s new money contingent on fiscal discipline.
After announcing a $1 billion bond denominated in bitcoin, the government indefinitely postponed the project at the last minute, in March, claiming that the war in Ukraine had worsened global financial conditions.
Economists say this has left the country with few good options for paying off $800 million of its debt due in January, or subsequent payments in subsequent years.
Ultimately, Mr. Bukele will face the difficult choice of radically cutting public spending at the risk of angering voters, or driving the country into default. A default can disrupt essential imports, reduce growth, and even cause bank outflows.
“Buckley has shown that he cares more about the public image than he does about sound economic management,” said Frank Mossi, a public policy expert at the London School of Economics who has studied bitcoin bonds in El Salvador. “But eventually the chickens will come home to stay at a huge cost to the country.”