El Salvador: Mixed Results One Year After Bitcoin Legalized as Official Currency

El Salvador was the first country to legalize bitcoin as an official currency. A year after this formalization – that was September 7, 2021 – the results are mixed. As Maria Aguirre summarizes: 2021 was “a good year, but over the past five months, bitcoin has only fallen. However, we are trying to keep using it,” said a trader from El Zonte, a resort town where cryptocurrency has been embraced with enthusiasm.

Small return. In June 2021, El Salvador’s parliament passed a law that makes the oldest cryptocurrency the legal currency in the country, along with the dollar. Since then, merchants, restaurants, businesses, and even the government have been forced to accept bitcoin as a means of payment.

Bitcoin in El Salvador: “Money Titanic” for some, an alternative to the dollar for others

El Salvador’s main goal through this decision was to facilitate remittances from about three million emigrants, mostly in the United States, to their relatives back home by saving bank fees. These movements amounted to about $6 billion (5 billion euros) in 2020, equivalent to about 23% of El Salvador’s gross domestic product, according to Reuters. For President Naiba Bukele, bitcoin will save Salvadorans $400 million in banking costs when sending money from the diaspora.

A year later, the result is far from what was expected: “less than 2%” of remittances from expats went through cryptocurrency, notes Carlos Acevedo, former president of the Central Bank of El Salvador. “For a while, yes, I used bitcoin. But the way things are going, I no longer have confidence,” says Carmen Mejia, a 22-year-old student who has returned exclusively to the dollar.

70% of Salvadorans dispute the recognition of bitcoin as an official cryptocurrency


Although the story went well. In the first four months after formalization, the device enabling the use of bitcoin was downloaded to mobile phones 4 million times for a population of 6.6 million in El Salvador. In September 2021, Bitcoin was worth about $45,000. And even $68,000 in three months.

In euphoria, the President of El Salvador announced that he would build a public veterinary hospital with the winnings. He then floated the idea of ​​issuing a billion dollar cryptocurrency loan to build Bitcoin City.

Cryptocurrencies: El Salvador wants to build a new city called… “Bitcoin City”

The backlash has since arrived. The dizzying fall of bitcoin, which is currently below the $20,000 mark, has delayed these grand projects.

In El Zonte, Maria still believes this and refers to the advice of the beach resort “experts”: “When bitcoin drops, you must not touch it (change in dollars) or you will lose everything.”

$57 million loss

According to financial ratings agency Moody’s, Nayib Bukele’s government “spent about $375 million to roll out bitcoin, including about $106 million from the Treasury to buy bitcoin, resulting in unrealized losses of roughly $57 million.”

President Bukele, however, is set to bounce back by taking advantage of the fall: he bought 80 bitcoins for El Salvador at $19,000, bringing the country’s basket to 2,381 bitcoins purchased over the past twelve months. In June, he preached “patience” and recommended “stop looking at the curve” of the bitcoin-dollar rate.

For the former Central Bank president, the president’s bet on bitcoin has “failed”, at least for now. But “this is not a failure yet, because (the market) can recover”, taking bitcoin and the country out of the “crypto winter”.

Bitcoin, Ethereum… How cryptocurrencies can change the nature of money

Tensions with the IMF

However, the collapse of bitcoin does not only have a “psychological effect on people.” Its passage also “complicated” El Salvador’s negotiations with the International Monetary Fund (IMF) for a $1.3 billion loan, Carlos Acevedo further notes. former President of the Central Bank. The institution has always been hostile to El Salvador’s decision and has repeatedly called for it to “repeal the legal status of bitcoin”.

Faced with the risk of default on a debt service that exceeds 80% of GDP, President Bukele announced in July a plan to buy back bonds maturing in 2023 and 2025 so that the country does not run out of liquidity.

“Country risk” has certainly improved from 35% to 25%, but “it is inconceivable that El Salvador could return to traditional borrowing markets until country risk falls to at least 5%,” says Carlos Acevedo.

The IMF recommends that El Salvador deprive bitcoin of the status of legal tender

(with AFP)

Back to top button

Adblock Detected

Please consider supporting us by disabling your ad blocker.