New platforms and technologies are constantly being developed in the quickly changing world of cryptocurrencies with…
El Salvador’s Bitcoin Experiment is a phenomenon that people all over the world are still observing.
When cryptocurrency became globally acknowledged, governments all over the world had their own misgivings about its long-term viability. Previously, we outlined the countries that banned cryptocurrencies in their territories. Now, let’s take a look at the country that dared to declare Bitcoin as legal tender.
Here is how El Salvador and Bitcoin made a strong impression on the rest of the world.
El Salvador’s Bitcoin Experiment
June 9, 2021, marked a historic day in the cryptocurrency space as El Salvador adopted Bitcoin as legal tender. El Salvador’s Congress favored the Bitcoin Law. It received 62 out of 84 votes. Some call it a ‘supermajority’ approval.
After El Salvador President Nayib Bukele announced the voting results, the price of Bitcoin increased by 5%, giving it a value of $34,239.17.
The Bitcoin Law states that:
“The purpose of this law is to regulate Bitcoin as unrestricted legal tender with liberating power, unlimited in any transaction, and to any title that public or private natural or legal persons require carrying out.”
Because of this law, people can use BTC to pay their tax contributions and even just for commodities. It also removes capital gains tax from the said crypto coin. The national government also hoped it would improve financial inclusion.
Bitcoin Experiment: Bukele’s Expectations
On September 7, 2021, the Bitcoin Law was in full effect. Aside from improved access to financial services, President Nayib Bukele and his legislators hoped that it would help Salvadorans save $400 million (€338 million) being spent in their remittances.
This is because only 20% of El Salvador’s gross domestic product comes from the money that migrant Salvadorians send to their home country. According to World Bank data, around $6 billion or one-fifth of its GDP in 2019 came from their remittances.
Furthermore, in November 2021, Bukele announced the opening of a “Bitcoin City”. The eastern portion of La Union will serve as the location for Bitcoin City.
This chief energy source for this city will come from geothermal energy because there are surrounding volcanoes. He also said that the ecological city will not be charging taxes except for value-added tax (VAT).
Bitcoin-backed billion-dollar bonds that will come from El Salvador’s deal with Blockstream and iFinex will fund the Bitcoin City’s early developments.
Chivo Wallet in El Salvador
The Chivo Wallet is El Salvador’s official Bitcoin and Dollar wallet. It is also known as the world’s first-ever national crypto wallet that facilitates Bitcoin without any service charge or commission fee. It was launched on September 7, 2021, when the Bitcoin Law started its implementation.
Chivo gave $30 Bitcoin credit to every Salvadorian that can be used for dollar exchanges or cash withdrawals.
Chivo comes from a Salvadorian slang that means ‘cool’. However, just two months after its nationwide launch, the application became a headache for many citizens. It had technical glitches and people could not download the app. Some users also complained about the application’s non-functionality even after successfully installing it on their smartphones.
Aside from issues with its app functionality, some complaints came through about identity theft. There were Salvadorians who didn’t register to Chivo but they discovered several accounts that contained their ID numbers.
Moreover, Salvadorians themselves found it difficult to understand how to use cryptocurrency. Many of them couldn’t comprehend how to deal with Bitcoin and how it could possibly help their economic situation.
The faultiness of the Chivo wallet also contributed to the downfall of Bukele’s Bitcoin Experiment.
Update on the Bitcoin Experiment
Fitch Ratings’ February 2022 report showed that El Salvador’s Bitcoin usage was low with the currency losing around 60% of its value. Along with this, El Salvador is experiencing downward economic growth with a high deficit. This prompted Fitch Ratings to move El Salvador’s bond scores to CCC from a B- rating.
In January, Bukele tweeted that 60% of the Salvadoran population or roughly 4 million people were using Chivo wallets and that more of them were using the digital wallet instead of the usual bank accounts.
Data coming from the U.S. National Bureau of Economic Research (NBER) states that only 20% of citizens who downloaded Chivo continued to use it. Thus, disputing the claims that Bukele made.
In addition, a survey by El Instituto de Opinion Publica, a think tank based in El Salvador, found that 76 out of 100 small and medium businesses do not allow clients to pay with Bitcoin.
It is also this same think tank that discovered 7 out of 10 Salvadorans hold the opinion that the Bitcoin Law did not help or improve their family’s economic situation.
El Salvador’s Downward Spiral
A year after El Salvador’s adoption of Bitcoin as legal tender, the value of btc is only at around $20,000 compared to the $47,000 all-time high value back then. Also, the proposed Bitcoin City slash Ecological City hasn’t even started any kind of construction.
Reuters’ visit to the Conchagua volcano indicated no commencement or progress of the city that was supposed to be under development.
The position that El Salvador is in now further complicates its negotiations with the International Monetary Fund (IMF). The country is asking for a $1.3 billion loan to help with the problems it has encountered with issued bonds. The IMF is advising Bukele to reconsider the status of Bitcoin in his country.
The agency also strongly urges Bukele to remove Bitcoin as a legal tender or it will be difficult to obtain loans from the said institution. Alina Carare, head of the IMF’s mission in El Salvador stated:
“What we emphasize in the report is that having a digital wallet, that allows people to make digital means of payment and keep their savings there, especially in US dollars, can bring benefits to the economy as well as to growth but again, I’m emphasizing US dollar because Bitcoin have has bitcoin price is volatile.”
The World Bank shares similar sentiments with the IMF which is why they rejected El Salvador’s request for their help with the implementation of the Bitcoin Law.
Final Word on the Bitcoin Experiment of El Salvador
El Salvador is all over the news. And, it’s not for a good reason. Many people are complaining of the added economic hardship that they are experiencing. It seems that instead of focusing on livelihood or economic reform programs, their government’s focus is on forcing cryptocurrency into their economy.
May this Bitcoin experiment serve as a lesson and a warning to citizens and governments around the world. Cryptocurrencies work well as individual investments. It can boost profits when handled in small increments.
But to depend on your country’s future on Bitcoin? That would be the most irresponsible gamble anyone can make. It is not too late yet for El Salvador’s authorities to make the right decision for their citizens’ welfare.