Eight months after its September rollout, it’s become evident that El Salvador’s much-hyped experiment with making bitcoin a legal tender has been a failure so far.
President Nayib Bukele’s policy was never popular, having been met with substantial protests at its launch and widespread apathy after that.
But at least it was fiscally successful. Despite a bumpy first day — bitcoin dropped from $52,600 to $46,800 on Sept. 7 — it climbed fairly steadily through mid-November, peaking at almost $68,800 on Nov. 10, a short-term gain that made Bukele look prescient, despite widespread opposition from citizens, more than three-quarters of whom called for the law’s repeal in a poll four days before it went into effect.
See more: Poll Shows 70 Pct of Salvadorans Are Anti-Bitcoin
Then the bottom dropped out. The bitcoin bear market hit in the second week of November, dropping as much as 50%, far below the average price of $48,000 that El Salvador paid for its 1,801 BTC.
Even that average came after President Bukele “bought the dip” on Jan. 21, at $36,450. At this writing, the price is $38,800.
Nope, I was wrong, didn’t miss it.
El Salvador just bought 410 #bitcoin for only 15 million dollars ?
Some guys are selling really cheap ??♂️ https://t.co/vEUEzp5UdU
— Nayib Bukele (@nayibbukele) January 21, 2022
Meanwhile, the cost of making the No. 1 cryptocurrency a form of legal tender on par with the U.S. dollar was huge.
The International Monetary Fund (IMF), a strong critic from the start, said in February that the cost of implementing the program — including a $30 incentive for every citizen who downloaded the country’s Chivo digital wallet needed to make payments in bitcoin, the R&D of the wallet itself and building up a network of crypto ATMs throughout the country — was 1% of the country’s gross domestic product (GDP). And that’s not counting the cost of the 1,801 bitcoins President Nayib Bukele has purchased.
See more: Bitcoin-as-Currency Experiment Costs El Salvador 1% of Its GDP, IMF Reports
Interest Falling
According to the National Bureau of Economic Research (NBER), That hasn’t improved, which released a report last month finding that in the first quarter of 2022, the Chivo wallet had “almost no new adopters.” The report also said that its use for remittances — a key goal with a strong economic benefit due to their traditionally high cost — “is at its lowest point since Chivo Wallet’s launch.”
Which was never very high, the group said, estimating that only 60% of the eligible citizens had downloaded a Chivo wallet, and just one in five used it after spending the bonus.
That has been the experience on the ground, according to Salvadoran Banking Association (ABANSA) President Raúl Cardenal. On Feb. 25, he told La local news outlet Prensa Grafica that banks had not seen any significant uptake of bitcoin.
Despite the requirement to accept bitcoin to pay off loans and for other services, as of the end of the year the association’s members had seen “no large number of transactions from customers to [pay off] any type of loans,” he said.
Perhaps even more tellingly, just 2% of remittances collected by Salvadorans came in bitcoin, despite the extraordinarily high costs of those small cross-border transactions, which can run 5% to 10% or more, making remittances seem like they should be low-hanging fruit.
Indeed, a September study by PYMNTS and the Stellar Development Foundation found that 23% of U.S. consumers who send remittances have used cryptocurrencies.
Also read: The Digital Currency Shift: The Cross-Border Remittances Report
The bigger losses
And yet, the expense was in some ways the least of Bukele’s costs.
For one thing, the young president, who has complete control of the Legislative Assembly, expended a great deal of political capital: Not only were there protests at the outset, but the Chivo wallet rollout was disaster, with serious technical problems and widespread fraud and hacking.
Also read: Glitches, Fraud and High Fees Upset El Salvador’s Bitcoin Chivo Wallet Users
Then there was the external economic and credibility damage. Aside from being widely criticized by international economic organizations and governments — most notably the U.S. — the IMF has blocked a planned $1.3 billion loan El Salvador needs to pay off debt coming due early next year and has made it fairly obvious that loan won’t happen while bitcoin remains an official currency.
See more: IMF’s Silence Signals El Salvador Needs to Abandon Bitcoin to Secure $1.3B Loan
The markets have had much the same reaction, with Moody’s and Fitch’s slashing the country’s credit rating far into junk territory, substantially driving up its borrowing costs.
Also read: Weeks Before Bitcoin Bond Launch, Fitch Slashes El Salvador’s Credit Rating
Nor is the international lender of last resort likely to improve its opinion of bitcoin as a legal tender now that it is spreading.
The poor and war-torn Central African Republic followed El Salvador’s footsteps last week, making bitcoin an official currency. The CAR’s move on April 27 made little sense as just one-third of the country’s population has even a mobile phone, and just 4% have internet access, needed to use a cryptocurrency.
See more: Central African Republic, Like El Salvador, May Soon Regret Adopting Bitcoin
Bond bombs
However, the bitcoin experiment was highly popular in the cryptocurrency world, especially as Bukele also announced plans for a “Bitcoin City” on the slope of a volcano that would include geothermally powered bitcoin mining in an all-crypto economy.
Initially, this was to be paid for by a $1 billion bitcoin-backed bond that was to be used 50/50 to build the mining facilities and buy more bitcoins.
Nicknamed the “Volcano Bond,” both the government and company bragged that it was going to issue it tokenized on a blockchain claimed it would be oversubscribed by at least $500 million.
See more: Blockstream CSO: $500M Committed to El Salvador Bitcoin Bond
Yet it was postponed repeatedly, and most recently Finance Minister Alejandro Zelaya said it would be postponed indefinitely due to the uncertain economic conditions caused by Russia’s invasion of Ukraine, and the subsequent sanctions and political instability that was causing investors to pull back from higher-risk investments.
Also read: Volatility, Political Turmoil Put El Salvador’s Bitcoin Bond Plans in Further Jeopardy
But with Bukele having pushed back harder and harder as criticism mounted, it’s not very likely that he’ll back down without a crisis. Having called out groups ranging from Bloomberg to the U.S. Congress, the political retreat will be beyond embarrassing when it comes.
See more: El Salvador President’s Twitter Battles Risk Painting Nation Further Into Corner
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