El Salvador’s Bitcoin experiment falters one year after its launch

A year after Bitcoin was introduced as a means of payment, few people in El Salvador are using the cryptocurrency.

The area where the world’s first cryptocurrency city was to be built -a circular metropolis that will use the energy of the Conchagua volcano to mine the digital currency– is still a 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 plaza that would look like a Bitcoin symbol from the sky.

“Invest here and make as much money as you want,” he said, dressed all in white and wearing an upturned baseball cap, in front of hundreds of Bitcoin enthusiasts in November 2021.

However, 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 progress in building this prominent symbol for Bitcoin.

For many, it has become a symbol of folly as bitcoin has crashed.

“This experiment was very risky, too risky for a poor country,” analyzed Oscar Picardo, director of the Institute of Science, Technology, and Innovation at the private Francisco Gavidia University.

“It has been shown that (Bitcoin) is a very speculative, highly volatile financial asset,” he added. A big part of the problem is that the decline 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 a legal tender on September 7, 2021, the cryptocurrency was worth nearly US$47,000.

A year later, it is worth less than half that, trading at around US$19,770 on Tuesday, September 6.

The price drop has increased El Salvador’s financial risk and made it harder to find funds to repay US$1.6 billion in government bonds due in 2023 and 2025.

The International Monetary Fund has called on El Salvador to reverse Bitcoin’s legal tender status, citing financial, economic, and legal concerns, making it difficult to reach an agreement with the lender.

The use of the cryptocurrency also has not caught on, experts say. Neither the presidency nor the Ministry of Finance would disclose figures on the use of bitcoin through the government’s “Chivo” digital bitcoin wallet.

However, a survey conducted by the National Bureau of Economic Research (NBER), a U.S.-based nongovernmental organization, found that only twenty percent of Salvadorans who downloaded the Chivo app continued to use it after spending the US$30 the government provided as free credit to promote its use.

The study shows that most Chivo downloads occurred in 2021, particularly in September, and almost no downloads have occurred so far in 2022.

In theory, developing countries like El Salvador are ideal candidates for cryptocurrency adoption, as they still rely on cash and have a largely unbanked population.

However, the April report states, “Bitcoin is not widely used as a medium of exchange because users don’t understand it, don’t trust it, businesses do not accept it, it is very volatile, and there are high fees.”

Although Salvadoran law requires all businesses to accept cryptocurrencies, only twenty percent do, according to the survey, which polled 1,800 Salvadoran households.

The government has also encouraged Salvadorans working abroad to send money home through the government’s Chivo wallet or other private wallets without being charged.

These remittances from abroad, known as remittances (home remittances), account for twenty-six of the Central American country’s GDP, one of the highest percentages in the world.

But according to Central Bank statistics, the country received nearly US$6.4 billion in remittances between September 2021 and June 2022, and less than two percent were transferred through digital cryptocurrency wallets.

With information from Latina Press