What is happening in El Salvador 5 months after Bitcoin was made the national currency?

At a bitcoin conference on the beach last November, El Salvador President Nayib Bukele called Canadian game developer and bitcoin enthusiast Samson Mow onto the stage.

In front of the screen that reads “Feel the Bit”, Mr. Mow revealed the novel financial idea of ​​El Salvador – a small country in Central America. It was the world’s first Bitcoin bond to raise $1 billion. The crowd below — mostly crypto advocates, Bukele fans, and a few curious locals — exploded in loud cheers after the announcement.

“Bitcoin will change the world. This is humanity’s revolution and we will go there,” said Mr. Bukele at the event.

BITCOIN REAL LIFE “LAB”

According to The Wall Street Journal, in less than three years as President of El Salvador, Bukele has taken swift and decisive steps to “revitalize” the country. However, perhaps the 40-year-old president is best known for making El Salvador the real “laboratory” of Bitcoin.

Last September, El Salvador became the first country in the world to use bitcoin as its national currency, forcing businesses in the country to accept payments in bitcoin.

The Central American country aims to capitalize on the cryptocurrency craze by opening up new markets for debt and using Bitcoin gains to implement economic policies. Mr. Bukele said bitcoin assets could solve El Salvador’s poverty and violence and transform the country into the “Singapore of Latin America.”

The government of El Salvador’s Bitcoin bond issuance has received mixed reactions so far. The International Monetary Fund (IMF) has criticized the move, arguing that Bitcoin’s volatility is too risky for a small economy like El Salvador. The organization also believes Mr Bukele’s policies are putting El Salvador on an unsustainable debt path.

Ever since the country adopted bitcoin as its national currency, this virtual currency is rarely used in day-to-day transactions. A recent survey found that around 70% of respondents do not trust the government’s actions.

However, making bitcoin the national currency fits the image that Mr. Bukele has built – a young, radical leader fueled by technological and financial innovations. This move helped him gain prominence in the global community of Bitcoin advocates.

The El Salvador government spent about $180 million installing bitcoin ATMs and issued $30 worth of bitcoins to Chivo e-wallets for anyone to register and use. The government of this country said that the majority of people have registered to open this e-wallet. However, many business owners say that not many purchases are made with Bitcoin because the cryptocurrency’s price volatility makes it difficult to use in day-to-day transactions.

After more than 5 months, bitcoin is not used much in this country where two-thirds of workers work in the informal sector. For most people in this country, cash is still “king”.

“We’re people who like to touch our money,” said Danilo Martínez, a taxi operator in the capital, San Salvador.

Meanwhile, Luis Robles, father of three in the port city of La Union, pokes fun at the use of Bitcoin. He sees this as a major challenge, precisely because he is illiterate.

According to economists, Bitcoin could pose more risks to El Salvador, which has long been known as home to many criminal gangs. Making Bitcoin the national currency opens the door to illegal, anonymous transactions such as money laundering, tax evasion or ransom payments.

“PLAYING” WITH THE NATIONAL TAX?

On Twitter, however, President Bukele showed no interest in the criticism and kept updating on the country’s bitcoin-related moves. He recounted many of the government’s bitcoin purchases, which he describes as “bottom fishing.”

Last month, when the bitcoin price fell 27%, he said the El Salvador government bought 410 bitcoins for $15 million. “Some people sell really cheap,” the president wrote on Twitter.

While there is no public data on these transactions, some Wall Street analysts have calculated that the El Salvador government bought a total of about 1,800 bitcoins for about $85 million — a big figure for the economy is in the magnitude of just 27 billion dollars.

“President Nayib Bukele, a former nightclub owner and chief marketing officer, is gambling with taxpayers’ money while maintaining high levels of public spending, which is vital to his reputation,” commented Carlos Acevedo, former Governor of the Central Bank of El Salvador.

Although Bitcoin has been an official means of payment since September last year, it is rarely used in daily transactions – Photo: WSJ

Since El Salvador made the USD its official currency 20 years ago, according to Mr. Acevedo, the country can no longer print money when needed like most other countries, but must earn USD through exports, remittances, tourism or loans. Under the government of Mr Bukele, who was elected president in 2019, the country’s budget deficit has doubled to nearly 6% of GDP in 2021.

Meanwhile, the El Salvador government’s plan to issue bitcoin bonds is also considered risky. El Salvador’s traditional government bonds were among the worst-performing emerging markets last year, trading at deep discounts and returning nearly 17% due to heightened risk of default.

El Salvador’s bitcoin bonds are not expected to be issued until this month or March at the earliest on a limited platform. El Salvador’s government says it will use half of the funds raised – $500 million – to buy more bitcoin and the rest to invest in infrastructure development, including a futuristic bitcoin city, a tax-free zone where entrepreneurs can “mine” bitcoin using nearby volcanic energy.

This bitcoin bond has a tenor of 10 years and a yield of 6.5% with a yield after the first 5 years after El Salvador started selling some of its bitcoin holdings at a price expected to be higher than today and a to make a profit.

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