Bitcoin was intended to transform El Salvador’s economy and catapult the poor 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 turning its most popular digital currency into a national currency, his bet seems to be backing up, bridging the gap between the utopian promises of cryptocurrency proponents and emphasizes the economic reality.
The government’s bitcoin holdings have lost about 60 percent of their supposed value during the recent market decline. Bitcoin use among Salvadorans has collapsed and the country is running out of money after Mr. Bukele failed to raise new funds from cryptocurrency investors.
Nevertheless, the financial setbacks have not affected Mr Bukele’s popularity. Polls show that more than eight in ten Salvadorans continue to support the president, thanks in part to his broad-based crackdown on criminal gangs and fuel subsidies that have lessened 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 flaws of his authoritarian, image-centric style of governance, critics say. It has also raised questions about the financial sustainability of its 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 try to integrate bitcoin into the national economy.
It offered $30 dollars, nearly 1 percent of what the average Salvadoran earns in a year, to every citizen who downloaded a government-backed cryptocurrency payment app called Chivo Wallet; chivo means “cool” in the local slang.
Mr. Bukele claims that nearly 3 million Salvadorans, or 60 percent of adults, have answered his call.
But after its initial introduction, cryptocurrency usage has plummeted.
According to a survey conducted by three US economists in February and published by the National Bureau of Economic Research, only 10 percent of Chivo users continued to transact bitcoin on the app after spending their $30 allowance. Almost no new customers have downloaded the app this year, the researchers note.
“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 by the Chamber of Commerce of El Salvador in March found that only 14 percent of businesses in the country have transacted bitcoin since its introduction in September, and only 3 percent said they saw any business value in it.
Salvadorans in the United States have also ignored Mr Bukele’s call to use bitcoin to send money to relatives back home. According to El Salvador’s central bank, digital currency payment apps such as Chivo accounted for less than 2 percent of remittances in the first five months of this year.
Mr. Bukele’s bitcoin push took another blow with a global cryptocurrency sell-off that wiped out hundreds of billions of dollars in value from digital assets 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 collapse, he said his $30 stipend for downloading the Chivo app is worth $10.
Despite the downturn, bitcoin enthusiasts and entrepreneurs claim that the introduction of bitcoin has transformed El Salvador’s image into that of a technology pioneer and created financial opportunities for its citizens outside the mainstream banking systems.
“As far as we’re pursuing financial freedom, we’re still on track for that,” said Eric Gravengaard, the CEO of Athena Bitcoin, a United States-based cryptocurrency company that operates El Salvador’s network of cryptocurrency ATMs 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 into the country.
According to the country’s central bank, only 48 new bitcoin-focused firms have registered in El Salvador since the cryptocurrency’s introduction; that represents less than 2 percent of all businesses opened in 2019. Almost all of them are start-ups that hire few local people and involve little investment, said Leonor Selva, the executive director of El Salvador’s National Association for Private Enterprise.
“Day to day, the impact has been zero,” she said, adding that rather than attracting new investors, bitcoin has deterred traditional financiers concerned about the impact of cryptocurrency on economic stability.
Mr. Gravengaard replied 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 technology sector has given its youth the opportunity to build careers in a country that has long been one of the largest sources of migrants to the United States.
“This is just a dream,” said Gerson Martínez, a Salvadoran bitcoin entrepreneur. “As the son of migrants who had to leave El Salvador, this gives me great hope.”
The price collapse has also not deterred Mr. Bukele’s enthusiasm for bitcoin, which has earned him the admiration of the global cryptocurrency community.
In a series of Twitter posts over the past year, Mr. Bukele announced that he had purchased a total of nearly 2,400 bitcoin tokens since September, in deals worth an estimated $100 million. When critics accused him of financial irresponsibility, he responded by saying he transacts on his phone while naked†
†Bitcoin is the future!,” he said in a twitter posts on June 30 after announcing its latest purchase amid an ongoing cryptocurrency sell-off. “Thanks for selling cheaply.”
It is unclear where the bitcoin assets are kept, what they are worth, how they were paid or even who owns the codes proving their ownership.
Bukele’s news agency, his finance minister, José Alejandro Zelaya, and his bitcoin adviser, Samson Mow, did not respond to requests for comment.
So far, Mr. Bukele’s dealings have cost the country an estimated $63 million in loss of value, according to estimates last week by Disruptive magazine, published by Francisco Gavidia University in San Salvador.
The losses mount as the government struggles to subsidize the rising costs of food and fuel imports and meet an impending debt payment.
Underlining funding issues, Mr Bukele cut payouts to local governments last year, forcing some mayors to cut public services such as scholarships and water infrastructure.
“The problem with bitcoin is that nobody wins,” said Carlos Acevedo, a Salvadoran economist and former central bank director. “It’s an investment that has no social benefits.”
The collapse in cryptocurrency prices has already become an important part of Mr. Derailing Bukele: Issuing 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 has granted new funds to the country on the condition of financial discipline.
After announcing a $1 billion bond denominated in bitcoin, the government indefinitely postponed the project at the last minute, in March, alleging that the war in Ukraine had worsened global financial conditions.
Economists say this has left the country few good options for making an $800 million payment on its debt due in January, or subsequent payments in later years.
Ultimately, Mr. Bukele will face a difficult choice: drastically cut government spending, at the risk of angering voters, or defaulting the country. A default can disrupt basic imports, reduce growth and even cause a bank run.
“Bukele has shown that he cares more about public image than sound 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 roast, at a very high cost to the country.”