Robert Steinadler, 3 months ago
Bitcoin became legal tender in El Salvador on September 7th, 2021. Yesterday, the Bitcoin community was celebrating the anniversary and the historic moment for Bitcoin. What has become of the idea of implementing Bitcoin as a currency on a national level, and how is El Salvador doing? Let’s take a look at the upside and the downside of making BTC legal tender in a country that has been facing a lot of struggles in the past three decades.
After the law came into effect a gold rush set in. Almost every international company that is active in the Bitcoin industry went to El Salvador to become part of the vision. And that vision is still big. Starting with its own wallet called Chivo, hundreds of Bitcoin ATMs, and a $30 handout in Bitcoin for every citizen who decided to use Bitcoin and register with Chivo.
Along with the kick start of Bitcoin adoption came the plan of building a “Bitcoin City” that is supposed to profit from a new set of tax laws making Bitcoin related business and investors effectively tax-exempt. Making it attractive for the Bitcoin industry to settle down in El Salvador rather than other places in the world. In order to finance the project, El Salvador is looking forward to raising $1 billion through a Bitcoin powered “Volcano Bond”.
While the plan to build the city was never set into motion, there was a huge side effect for the country that was related to the Bitcoin adoption. According to the Minister of Tourism, Morena Valdez, the sector increased by 30 % in 2021 with over 1.4 million travelers visiting El Salvador.
One of the most pressing problems for El Salvador is raising capital. The country’s bonds are considered to be highly toxic, and the IWF has repeatedly criticized the decision to opt for Bitcoin. President Bukele needs the IWFs approval to borrow more money. This has created a very unsatisfying situation, since the IWF demands that the country reverts the decision prior to lending out more money. In effect, El Salvador is in a desperate situation since $1.3 billion are on the line and there is no hope that the IWF will change its stance.
Even more important, Salvadorans are not so much interested in using Chivo for their day-to-day payments. According to several reports, most registered citizens chose to withdraw the $30 in Bitcoin almost immediately. It seems that poverty is the reason for that behavior, and it is only reasonable to take what you can rather than trying to stay invested in Bitcoin. So far, only 2 % of all registered users keep using Chivo and Bitcoin.
Another important factor are the heavy losses that El Salvador is facing since the country bought over 2,000 BTC during last year’s record-breaking bull market. At the same time, the Bitcoin bonds are stuck and so is the plan to build the Bitcoin city. With civil unrest, increasing gang violence, and a president who faces opposition against his fateful decision to opt for plan B, things are not looking too good currently.
It is important to remember that El Salvador is a place that had to face many problems before Bitcoin became legal tender. A civil war disrupted the country for 30 years and gangs are in control of large parts of the country. This is not a climate where anything could be successful without facing serious problems to begin with.
El Salvador is a failed state in some regards, but unfortunately chances are higher than last year that the country will have to deal with another throwback. The world is in an economic crisis and smaller countries have huge problems mitigating the impact of that crisis. With the war in Ukraine, record inflation, disrupted supply chains and a chance that COVID might come back in winter, things are not looking too good.
Only time will tell if Bitcoin will manage to beat the odds for El Salvador or if the country is forced to submit to the IWF and revert all its policies.
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