El Salvador’s broken bitcoin dream

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Remember El Salvador?

One year ago today, El Salvador became the first country to make bitcoin legal tender, or an official currency, alongside the US dollar. But laser-eyed President Nayib Bukele’s dream of Salvadorans buying pupusas with digital wallets isn’t working out.

At worst, the national experiment is being called a total failure and at best, according to El Salvador’s former central bank chief Carlos Acevedo, “No one really talks about bitcoin here anymore. It’s kind of been forgotten.”

Altogether, the Salvadoran government has spent over $100 million of public funds on bitcoin since its adoption as legal tender, and it’s still feeling bullish, buying $1.5 million more of bitcoin in late June. But, given bitcoin’s price plunge since last fall, the value of its investment has crumbled by more than half, according to Bloomberg.

The bad bet comes as the country’s economic growth is slowing, which is exacerbated by mounting national debt. And the global bankers who could help El Salvador don’t seem to understand “buying the dip”: The International Monetary Fund has pushed back on the country’s request for a $1.3 billion loan, raising red flags about its crypto investments.

What was the point of this anyway?

El Salvador spent a big chunk of bitcoin on incentivizing adoption—$30 in bitcoin was given to every citizen who downloaded the national cryptocurrency wallet app, Chivo. How’d that go? According to a survey from the US National Bureau of Economic Research…

  • Over half of Salvadoran households have downloaded the app since then, most in the first month.
  • But 20% didn’t spend the free bitcoin at all. An additional 60% spent the gifted funds and never made another transaction using the app again.

The small group of Salvadorans who actively use Chivo are overwhelmingly young, educated, and “banked,” meaning they have traditional bank accounts. It’s not exactly the target audience: During his speeches hyping up bitcoin, Bukele said making it legal tender would help “unbanked” Salvadorans (~70% of households) gain access to the security of digital banking without having to open a traditional bank account.

What about Bitcoin City? El Salvador’s plan to build a tax-free city on the side of a volcano where the restaurants, bars, and sports teams all pay homage to bitcoin is on hold. In order to build the city, the government plans to raise $1 billion by selling bitcoin-backed bonds, but the bond issuance keeps getting delayed.