In El Salvador, the Eldorado of bitcoin is becoming a mirage

Posted September 7, 2022, 7:58 p.mUpdated September 28, 2022 at 10:53 p.m

On Twitter, Nayib Bukele still flaunts his perfectly trimmed beard and slicked-back hair, but he’s ditched his “laser eyes”; meme liked by “max bitcoiners”. Michael Saylor and even for a while Elon Musk like to distinguish themselves. A year after bitcoin was accepted as legal tender in El Salvador – the first – its president still can’t boast of a balance sheet.

Bitcoin had several missions: to raise Salvadorans’ bank interest rates (30%), to bypass expensive traditional channels of remittances (a quarter of GDP), to help residents potentially become rich with the advancement of bitcoin (which has halved during this period). ) and making El Salvador a global cryptocurrency hub for better and worse.

“Enjoy Life”

It is an understatement to say that water is flowing under the bridge after September 7, 2021 and the enactment of the bitcoin law. The war in Ukraine, inflation, and tightening rates ultimately caused the bitcoin domino to fall below $20,000. On June 18, Nayib Bukele advises from the top of his Twitter feed to “stop looking at the charts and enjoy life”, while also reminding, as learned, that “patience is key when investing in bitcoin”. A known attitude to the “owners” (who “hold” their position in the event of a fall in prices), but to the people of Salvador?

The initial problem is that, according to the Binance boss, buying cryptocurrencies is “too risky” and should only be done with “money you’re willing to lose.” So how can we imagine the inhabitants of El Salvador, a country with a poverty rate of 26.2% according to the World Bank (2020), replacing the strong American dollar with volatile Bitcoin?

Adoption stopped

They were not wrong. A year later, the result is low acceptance of BTC by Salvadorans. According to official data, the same 4 million people out of 6.6 million residents have downloaded Chivo’s ad hoc created electronic wallet. But according to the National Bureau of Economic Research (NBER), only 20% still use it. In fact, many wanted to collect the $30 offered when opening an account.

Lack of trust from the beginning – there were demonstrations in the country – the population would be largely reluctant to bitcoin. The last available survey on the matter dates back to early 2022, before the cryptocurrency crash. He says 70.1% of Salvadorans don’t believe in bitcoin. According to the NBER, 5% of them would have paid their taxes in bitcoin. Ultimately, less than 2% of foreign remittances would be received in cryptocurrency.

On the business side, 20% of them still accept bitcoin, while 4.9% of sales are made in cryptocurrency, according to NBER. In such a case, 88% of companies rush to convert their acquired bitcoins into the country’s other legal currency, the US dollar, whose confidence will not be shaken soon. Few people are betting on the growth of BTC.

A savings mistrust?

For Ricardo Castaneda Ancheta, an economist at the Central American Institute for Financial Research, ultimately, despite the collapse of cryptocurrencies this year, thanks to this great lack of confidence in bitcoin, “the consequences have not been so serious. For the Salvadoran economy. “Companies and individuals have been smart and not used bitcoin en masse,” he assures himself.

At the budget level, it’s more complicated. According to financial rating agency Moody’s, Bukele’s government spent about $375 million on bitcoin distribution, including about $106 million to buy the cryptocurrency from the Treasury. That would have resulted in an “unrealized loss of approximately $57 million,” according to the agency.

“It’s really a shame to not have official information on how public resources are managed after a year,” says Ricardo Castaneda Ancheta. “The only source is the president’s Twitter account, according to which the government obtained 2,381 bitcoins. His last tweet on the subject, in June, was about buying 80 bitcoins for $19,000 at a discount.

“Volcano bonds” were suspended from a law

Meanwhile, talks with the International Monetary Fund on a $1.3 billion loan remain frozen, and the country’s cryptocurrency policy isn’t helping. IMF urges El Salvador to ban bitcoin as ratings agencies Moody’s, Fitch and S&P all downgrade El Salvador’s rating to triple C. in dollars, due in 2023 and 2025.

And the Salvadoran president hasn’t given up on raising $1 billion worth of bitcoin debt with aptly named “volcano bonds.” This new type of bond issue, which was planned for spring, was stopped by the digital values ​​law vote. It is expected in September. If accepted, the partner operator (Bitfinex) will then be able to denominate the securities in bitcoin, its CTO assures Cointelegraph. This is for two to three months.

gang warfare

After a post-Covid contraction of 10.3% in 2021, Salvadoran GDP should grow by 2.3% without any bitcoin-related spike, according to IMF forecasts. In addition, in the first half of this year, El Salvador was the Central American country that attracted the least amount of foreign investment, notes the economist of the Central American Financial Research Institute.

Nayib Bukele wants to make his country a global hub for cryptocurrencies with Bitcoin City as its capital; an ambitious project that is still in its infancy. However, it is difficult to estimate the number of startups founded so far. Salvador, which has been in a “state of exception” against gangs for four months to attract foreign companies, is trying to solve its crime problems above all. On Twitter, as bitcoin plummets, the president now keeps track of the number of days there have been no murders.

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