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It has been a year since El Salvador adopted Bitcoin as its second legal tender, together with the US dollar.
Has it been a success? a failure?
As often, the reality is full of nuances, but categorical headlines do get more clicks, and the mainstream media was unanimous and quick to call the Bitcoin law a failure.
Let’s try to get a bigger picture and see for ourselves the impact Bitcoin had on different aspects of Salvadoran economy.
For a country with over 70% of unbanked population and heavily reliant on international remittances, Bitcoin does look like a good idea, even to sceptics. The first figures related to the government-backed Chivo wallet seemed to support this point: official report cited 2.8 million domestic downloads of the Chivo wallet, i.e. over two-thirds of the country’s adult population.
However, months later, it appears that only about 21% of Salvadorans are actively using it.
A widely cited study by the National Bureau of Economic Research (Cambridge, MA) that surveyed 1’800 Salvadorans in April 2022 found that only 68% of the respondents knew about Chivo, 78% of those tried to download it (the others did not trust the government or Bitcoin), and only 40% of the latter kept using it after spending the $30 bonus.
Bitcoin adoption is not taking as well and as quick as it was hoped for, the major obstacles being lack of knowledge, mistrust in the system (Chivo is a custodial wallet), and Bitcoin volatility.
On a good note, all these problems can be tackled: education, self-custody wallets, integrating stablecoins… and of course time.
According to President Bukele’s tweets, the country bought 2’381 BTC for its treasury at an average price of around $45k. This investment has since been divided by two (on paper, for none of it was sold).
How bad is it? Well, a paper loss of less than 0.5% of the annual budget is hardly a catastrophe, especially for people familiar with Bitcoin price cycles. What’s more, the whole Bitcoin program does not weight so much in the country’s economy.
El Salvador has a $8 billion annual budget, and the $107 million price of its Bitcoin reserve represent only 1.3% of it. Together with a $150 million “Bitcoin trust”, created to ensure BTC-USD convertibility, and around $100 million of infrastructure and incentives (Chivo wallet, ATMs, $30 bonus), the whole Bitcoin adventure so far has cost 4.4% of the annual budget.
This is not much for a bet on a future, but the very fact that this money went to developing crypto industry has provoked an outrage from many crypto haters, among which the most powerful is probably the IMF.
Poor indebted countries without hard currency rely heavily on international organizations to stay afloat: unlike the US, they cannot print more dollars to repay their debt ? El Salvador’s current debt-to-GDP ratio is 84%, which is dangerously high for a poor country, and its sovereign bonds have been trading with big discount lately, signalling market’s doubts.
To help boost the economy, El Salvador has been trying to secure a $1.3 billion loan from the IMF since the early 2021. However, the IMF does not like Bitcoin, and it has been using the perspective of the loan to try and strong-arm El Salvador into abolishing the law. So far these efforts have yielded no result, with President Bukele defending the country’s right to make its own monetary choices.
As to the country’s solvency, in the end of July the President announced the intentions to repurchase sovereign bonds maturing in 2023 and 2025, somewhat reassuring the markets. The liquidity should come from the Central Bank reserves (previously untapped) and a regional lender. Following the news, the bonds due in 2025 rose more than 11% to trade at 30 cents on the dollar, those due in 2023 trade at about 75 cents on the dollar, but El Salvador is still in dangerous waters.
Last year, the Salvadoran government announced “Bitcoin city”, a project of a tax haven for crypto investors and miners, who would be able to use its cheap and green volcano energy to build an international crypto hub.
El Salvador was planning to issue $1 billion worth of BTC-backed bonds in March 2022 to finance the project, but had to postpone it due to the difficult international situation.
Reuters wrote that “to many, it [the project] has become the symbol of folly”. To us, thinking big and luring a fast-growing industry into a previously inconspicuous country is one of the few things that could help it raise from poverty. However, project postponing was a good idea: in the midst of a bear market, sky-rocketing inflation, war in Ukraine and the looming energy crisis, the timing did not seem right indeed.
In the meantime, El Salvador’s bold stance has attracted numerous crypto companies, from miners to service providers. What’s more, while only a handful of countries could recover their tourism to pre-pandemic levels, El Salvador saw an increase of 6% vs 2019 (source: World Tourism Organization) – the phenomenon, which, according to President Bukele, can be explained by two things: Bitcoin and surf.
? This year hasn’t been easy neither for Bitcoin, nor for the world, and the timing of the Salvadoran Bitcoin experiment couldn’t be more unfortunate.
? However, despite the crypto crash and the distrust of Bitcoin still prevailing among El Salvador people, Bitcoin law put this small Central American country on the international map, and managed to create conditions for the development of the high-added-value crypto industry.
? Falling out with the IMF is a negative consequence, but it is far from certain that it would have granted the loan, even if El Salvador did cave in and abolish the law. What’s more, the IMF’s official goal is to “achieve sustainable growth and prosperity” (and not to maintain dollar dominance, as one could have thought), and it is important – for all of us – that El Salvador reminds the IMF of its mission and proves that Bitcoin is not an impediment.
The verdict? Salvadoran Bitcoin bet has generated a lot of buzz and set the foundation for the crypto industry development – and all this at a relatively low cost (IMF’s loan possibility notwithstanding). So far it didn’t have much impact, however, if it does pay off, El Salvador would gain much more than it bet – isn’t this a textbook example of a successful risk strategy?