A year later, El Salvador’s bitcoin experiment stumbles
By Nelson Renteria
CONCHAGUA, El Salvador (Reuters) – A year after El Salvador adopted bitcoin as legal tender, the area where the world’s first cryptocurrency city was supposed to be built – a circular metropolis powered by a volcano – remains dense jungle.
President Nayib Bukele had promised that “Bitcoin City” would be a tax haven for crypto investors and miners equipped with an airport, residential and commercial areas, and a central square designed to look like a bitcoin symbol from the sky.
“Invest here and make all the money you want,” he said dressed in all white and wearing a backwards baseball cap, in front of hundreds of bitcoin enthusiasts in November 2021.
But on a recent visit to the area in the shadow of the Conchagua volcano in the east of the Central American country, Reuters found no heavy machinery, construction workers or raw materials to indicate any progress towards building this major symbol of bitcoin.
For many, it has instead become a symbol of folly as bitcoin has crashed.
“This experiment has been very risky, too risky for a poor country,” said Oscar Picardo, director of the Department of Science, Technology and Innovation at the private Francisco Gavidia University.
“It has been seen that (bitcoin) is a very speculative, highly variable financial asset,” he added.
A big part of the problem is that the fall in the value of bitcoin and other cryptocurrencies has alienated investors.
When El Salvador, one of the poorest countries in Latin America, adopted bitcoin as legal tender on September 7, 2021, the cryptocurrency was close to $47,000.
A year later, it’s worth less than half that, trading on Tuesday for around $19,770.
The Bukele government declined to comment for this story, but has defended the doubling of bitcoin – including the acquisition of 2,381 bitcoins – and assured that it is a long-term plan.
It says the bitcoin policy has attracted investment, reduced bank commissions to zero, increased tourism and promoted financial inclusion. But the drop in prices has increased El Salvador’s financial risks, complicating the search for funds to pay $1.6 billion in government bonds due in 2023 and 2025.
The International Monetary Fund has urged El Salvador to reverse bitcoin’s status as legal tender citing economic, financial and legal concerns; complicates an agreement with the lender.
The use of the cryptocurrency has also failed to catch on, experts said.
Neither the presidency nor the finance ministry would share figures on the use of bitcoin through the government’s bitcoin digital wallet Chivo.
But a survey by the National Bureau of Economic Research (NBER), a US-based NGO, found that only 20% of Salvadorans who downloaded the Chivo app continued to use it after using the $30 the government provided in free credit for to market use.
The study indicates that the vast majority of Chivo downloads occurred in 2021, specifically in September, and that almost no downloads have taken place so far in 2022.
In theory, developing countries like El Salvador are ideal candidates for cryptocurrency adoption due to a continued reliance on cash and a largely unbanked population.
But according to the April report, “bitcoin is not widely used as a medium of exchange” because users “don’t understand it, they don’t trust it, it’s not accepted by businesses, it’s very volatile, and it involves high fees.”
Despite Salvadoran law requiring all companies to accept cryptocurrency, only 20% do so, according to the survey that interviewed 1,800 Salvadoran households.
Jesus Caceres’ small watch shop in downtown San Salvador is a business that does just that. Three signs read “We accept bitcoin”, but the 47-year-old watchmaker has only made two sales with the cryptocurrency.
“One for $3 and one for $5, it was $8 total. From then on, nobody approached me,” he said.
The government has also encouraged Salvadorans working abroad to send money home through the Chivo government wallet, or other private ones, without charging commissions. These transfers from abroad, known as remittances, represent 26% of the Central American country’s GDP, one of the highest percentages in the world.
However, according to central bank statistics, between September 2021 and June 2022, the country received nearly $6.4 billion in remittances and less than 2% was transferred by digital cryptocurrency wallets.
Like the use of bitcoin, the government is sharing few details about “Bitcoin City”. But the future looks increasingly uncertain since the issuance of the “Bitcoin Bond,” which Bukele said would support the city’s construction, has been postponed following the cryptocurrency crash. Residents of the site where the city is planned, between the Conchagua volcano and the Gulf of Fonseca on the Pacific coast, feel that the majority of the country’s 6.5 million inhabitants will not be favoured. “It does not benefit us poor at all,” lamented fisherman and farmer Jose Flores, 48, who has lived in Conchagua for over three decades.
(Reporting by Nelson Renteria; Writing by Sarah Kinosian; Editing by Diego Ore, Stephen Eisenhammer and Alistair Bell)
