El Salvador’s Bitcoin Experiment: Biggest Failure or Biggest Scam

Failure may be the best possible outcome of El Salvador’s bitcoin experiment, with former central bank governor Acevedo saying: “If the bitcoin law succeeds, the fall of bitcoin will be a disaster. The failure has saved us.”

El Salvador is a crypto haven for bitcoiners, and the country is one of the few places in the world where you can buy a cola or beer with bitcoin on the beach. In theory, you could use bitcoin to pay rent, buy a house, pay off your credit card, or buy Mayan pottery at your local market. 

However, El Salvador’s adoption of Bitcoin did not come true for crypto enthusiasts, but instead became a cautionary tale for us when a country adopts cryptocurrency, tries to integrate it into its own economy, and reinvents itself as a technology What happens when a friendly haven: ideals are plump, reality is skinny. 

A reporter from Barron’s recently traveled to El Salvador to learn about the impact Bitcoin has had on the country. A year ago, El Salvador passed a law establishing bitcoin as legal tender. In a decision that made history, President Nayib Bukele, 41, signed the Bitcoin Law last September, and El Salvador became the first in the world to fully legalize the domestic use of cryptocurrencies nation. Since then, banks, businesses and merchants of all sizes have been required to accept bitcoin along with the country’s other official currency, the U.S. dollar.

By almost every measure, Bitcoin adoption appears to be doing more harm than good. The government of El Salvador has poured scarce resources into cryptocurrencies and related projects, and as the price of bitcoin has collapsed, government finances have deteriorated, and almost no one but a few people in the capital and crypto-friendly beach spots are using bitcoin. 

“This Bitcoin experiment didn’t work out as well as many expected,” said economist Eswar Prasad, a Cornell University trade policy professor.

El Salvador's Bitcoin Experiment: Biggest Failure or Biggest Scam

Claudia Ortiz, opposition member of the El Salvador Congress

The collapse in cryptocurrency prices is arguably worse. Bitcoin has lost about $1.5 trillion in market value since November, scaring away many investors and leading to a sell-off in the broader cryptocurrency market. In the process, Bitcoin has caused dissatisfaction with some governments, who believe that Bitcoin poses a subversive threat to the government’s currency control, in addition, because “mining” consumes a lot of energy, Bitcoin is considered too much. Waste of electricity.

In El Salvador, cryptocurrencies still have supporters, notably the country’s President Bukele, a Twitter-loving millennial who sees cryptocurrencies as the economy’s savior. “We have to break the mold of the past and El Salvador has the right to move towards the first world,” Bukler said in announcing the Bitcoin law. 

Critics point out that, as it stands, Bitcoin is at best a distraction from deep-rooted economic problems and a mechanism for Bukler’s dictatorship. Indeed, Bitcoin has been a divisive force, sparking protests in the streets, and its critics fear retribution. 

“It’s either the biggest failure or the biggest scam,” said Claudia Ortiz, an opposition lawmaker in El Salvador’s congress, one of the few officials in the government to oppose Bukele .

Failed Bitcoin Experiment

On a macro level, El Saldovar’s introduction of Bitcoin has taken its toll. When Bukler was elected president in 2019, he accepted a debt-riddled country that, after the outbreak, increased government spending and worsened its fiscal position, with the country’s debt-to-GDP ratio rising to 85 percent by the end of 2021, up from 71 percent in 2020. %. 

El Salvador’s financial situation has become increasingly complicated in the eyes of creditors as Bukler began buying and legalizing bitcoin at a time of mounting debt, and the country’s sovereign bond yields have risen with it. The lack of hard currency has raised concerns about two $800 million government bonds due in January 2023 and 2025. As of July, the country had raised just $560 million to repay bondholders, according to Finance Minister Alejandro Zelaya. Zelaya conceded that repaying the full debt was “nearly impossible”.

El Salvador's Bitcoin Experiment: Biggest Failure or Biggest Scam

Despite the price crash, Bitcoin still has fans in El Salvador.

Former government officials see more fiscal problems ahead. Carlos Acevedo, former governor of El Salvador’s central bank, independent adviser and economist, said: “With international markets closed, I don’t think it is possible for the country to use the resources of the domestic market to repay the upcoming arrivals. bonds.” 

Confidence in Bukler’s rational use of government revenue was also undermined by his cryptocurrency plans. According to estimates by opposition leaders, the plan includes at least $250 million in “digital infrastructure” that is used for things like government-backed digital wallets — distributed to adult citizens and pre-loaded with 30 USD bitcoin bonus. The money was also used to set up more than 200 Bitcoin ATMs and a $150 million “Bitcoin Trust Fund” to ensure convertibility between the cryptocurrency and the U.S. dollar. 

Bukler widened the fiscal gap, and while the government declined to disclose its bitcoin holdings or spending, Bukler’s tweets showed that he purchased 2,381 bitcoins for the Treasury Department, spending about $107 million. As prices slid, Buchler repeatedly tweeted that he was “buying the dip.” Judging by the drop in Bitcoin’s price and Buchler’s tweets, his strategy resulted in losses of tens of millions of dollars. 

The loss was modest for a country with an annual budget of $8 billion, but opponents were incensed. “It’s like taking a gamble with the public money of a poor and indebted country, and a country that needs these resources now can’t wait for them to increase in value in an uncertain time,” said Opposition MP K Ortiz. 

Turning El Salvador into a “Bitcoin ATM” has also rattled lenders such as the International Monetary Fund (IMF). El Salvador’s government applied for a loan package from the IMF in 2020 and was negotiating a $1.3 billion loan agreement when Bukele signed the Bitcoin Act. The talks have broken down, in part because the IMF is concerned about the instability that Bitcoin will bring. In a statement to Barron’s, the IMF said: “When negotiating loan options, all factors that create vulnerabilities to the economy must be taken into account, including issues related to bitcoin as legal tender. .”

El Salvador's Bitcoin Experiment: Biggest Failure or Biggest Scam

students in bitcoin class

Bukler, on the other hand, seems determined to make El Salvador a global hub for bitcoin users, both miners and bitcoin tourists. When bitcoin peaked at around $68,000 last November, he unveiled plans to issue bitcoin-backed bonds aimed at financing the construction of a coastal “Bitcoin City” at the foot of the Conchagua volcano . The city will become a tax haven for cryptocurrency investors without paying income tax, property tax and purchase tax, Buchler said. El Salvador also intends to attract crypto miners that need to use a lot of electricity by generating geothermal energy from volcanoes.

However, the bond issue originally scheduled for March this year has been delayed. El Salvador is “mining” itself, with some of its electricity coming from geothermal energy from an existing plant. But the construction of this volcano-driven “Bitcoin City” has been slow and rudimentary. The volcano isn’t even a viable geothermal reservoir, said Carlos Martinez, an electrical engineer at the University of El Salvador.

Bukler’s promise to bank the unbanked with bitcoin, quickly moving El Salvador into the digital age, remains unfulfilled. Aside from the coasts, only a fraction of the population is using cryptocurrencies, perhaps unsurprisingly in a country where even apps like PayPal’s Venmo are not yet widespread. More than 4 million Salvadorans have downloaded the e-wallet called Chivo, and in a country where the minimum daily wage is $13, the e-wallet’s pre-deposited bitcoin bonus worth $30 is certainly attractive. 

Yet according to a recent study, only 20% of people use the app after spending their bonuses. Nearly 92% of SMEs say Bitcoin is not important to them. “Bitcoin is absolutely irrelevant to this country,” said Luis Membreño, an El Salvadoran economist and critic of the Bitcoin law who has been living in exile for fear of government persecution.

El Salvador's Bitcoin Experiment: Biggest Failure or Biggest Scam

Student using bitcoin to buy lunch 

El Salvador continues to struggle with gangs, poverty and rising unemployment. Critics say that if bitcoin has had any impact, it has only affected crypto tourists, techies and well-connected elites. 

Bookler was not available for an interview for this article, and a government spokesman declined to arrange for any officials to be interviewed for this article.

a paradise for the few

The best place to see how Bitcoin is being used in El Salvador is the beaches, especially El Zonte, dubbed “Bitcoin Beach” by crypto enthusiasts, one of the few areas in El Salvador that is most willing to accept Bitcoin . 

There, you might meet Wilfredo Urias, a 28-year-old surfer who started his own surfing school in part because of his profits from bitcoin trading. Urias bought his first $100 bitcoin in 2020, it quickly became $500 as the price soared, then continued to trade and profit, eventually earning enough to buy 12 surfs Board and hire coaches, some of whom want to be paid in bitcoin. Urias said Bitcoin was “very beneficial” for El Zonte.

Urias’s story is not representative of the experiences of most Salvadorans. Few of the merchants or stores Barron’s reporters met have installed the QR code readers needed to process transactions, and they didn’t see any reason to do so. 

“Tourists don’t shop, they just come to see,” said a vendor at a local market explaining why she didn’t accept bitcoin as a payment method.

El Salvador's Bitcoin Experiment: Biggest Failure or Biggest Scam

Cryptocurrency mining facility in tropical forest

Others say their digital wallets have been hacked and their sales have dropped. A basket vendor on the beach of El Zonte said his e-wallet was locked due to hacker alerts and could not withdraw funds or accept more bitcoin payments. “It’s better to keep using cash than virtual currency, and I’m not going to use bitcoin anymore,” he said.

Bitcoin even makes using ATMs more complicated. Bitcoin ATMs, which convert traditional currency into bitcoin and store it in a digital wallet, were slow, and it took six hours for a $20 bitcoin deposit to appear in the reporter’s Chivo e-wallet. Transaction fees for Bitcoin ATMs are subsidized by the government, and transaction fees are often high. However, when the reporter bought snacks, the money in the e-wallet was almost useless, because only 3 of the 10 merchants encountered were willing to accept bitcoin payment. 

But in El Salvador’s capital, cryptocurrencies continue to grow, with companies such as Strike, Bitrefill and Binance settling in. At a weekly gathering of bitcoin enthusiasts in a luxury bar, attendees come together to share ideas for the app and tips for getting a residence permit, buying property or investing. 

“If you own bitcoin and fiat, you’re living in two worlds, but in El Salvador, those two worlds merge,” said Dallas Rushing, a California-based app developer who Come to El Salvador as a cryptocurrency tourist. 

Bitcoin investors are interested in buying property, said William Velasco, co-founder of a real estate brokerage firm: “We noticed that foreigners from countries we never thought would invest here There’s a huge influx of people.” 

Meanwhile, nonprofits are trying to teach students to use cryptocurrencies. A nonprofit called My First Bitcoin runs courses across the country. “Bitcoin can propel this country into a digital economy,” said Napoleón Osorio, a lecturer who had just returned from a bitcoin class at a school in the coffee-rich highland town of Apaneca . But he also said that popularizing bitcoin to the masses is a daunting task that requires a lot of education, time and technology investment to achieve.

El Salvador's Bitcoin Experiment: Biggest Failure or Biggest Scam

La Criba Community Leader Hugo Guevara 

Outside of the cryptosphere, Bitcoin has had little or no particular impact. The reporter Few people can imagine what the future “Bitcoin City” will look like, and even fewer are familiar with how to use Bitcoin.

Local officials aren’t sure what to make of “Bitcoin City.” Oscar Parada, the mayor of the neighboring city of La Unión, said he did not know when or where construction would begin, adding that building the infrastructure would be a challenge. Parada, who is a member of Buchler’s New Ideas party, said he has not been paying much attention to bitcoin. “I don’t think it is necessary at the moment, but it will be necessary in the medium and long term.”

La Criba is one of the communities that has felt the impact of building a “Bitcoin City.” La Criba, a poor fishing village near the Conchagua volcano, is also the target of the development of “Bitcoin City.” There are more than 50 families living there and they make a living by fishing and farming. As developers look to turn the area into a cryptocurrency destination, local residents are under pressure to sell their land — often at a steep discount. 

“We’re always on call,” said Hugo Guevara, a 61-year-old La Criba resident and community leader, pointing to a rundown aluminum-roofed cement hut nestled between sand and lush mangroves. “We’re living this way because we can’t build better homes because we’re afraid we’ll be kicked out tomorrow.” 

CBDC or stablecoins are more promising

One could argue that El Salvador was never an ideal place to experiment with bitcoin, with only 50% internet penetration in the country, and commercial transactions mostly carried out with cash or credit cards backed by hard currency.

Bitcoin may have better prospects in countries without stable currencies or financial systems, where hyperinflation problems are erosive and people worry about not being able to tap their savings. El Salvador doesn’t have these problems, the country has had the US dollar as its official currency since 2001, and it’s hard to compete with the US dollar with any other currency, let alone something as confusing as Bitcoin, which is a set of only 13-year-old software rules, with no intrinsic value, exist only as code on computers around the world. 

As for whether more countries will follow El Salvador’s lead (the best hope of Bitcoin enthusiasts), it seems unlikely. In April, the Central African Republic made bitcoin legal tender, but the country’s Supreme Court has placed obstacles to its use.

Opposition to bitcoin by the IMF, World Bank and international bond markets may prevent other governments from doing so. Cryptocurrencies are still a conduit for money laundering and evasion of government sanctions, and the environmental damage caused by “mining” makes cryptocurrencies controversial in any country, especially as other types of cryptocurrencies have surpassed Bitcoin’s energy-intensive transaction processing system.

Even if Bitcoin is more stable, more traceable, and more environmentally friendly, its technology is not designed for the entire country. Bitcoin’s blockchain processes seven transactions per second, while the Visa credit card network can process 24,000 transactions per second. While the additional “Lightning” network could process bitcoin transactions faster, it adds complexity to the system and doesn’t address the high potential fees and congestion issues on the original blockchain.

El Salvador's Bitcoin Experiment: Biggest Failure or Biggest Scam

Part of El Salvador’s $250 million digital infrastructure budget goes to setting up 200 bitcoin ATMs. 

“It’s a cautionary tale that Bitcoin can’t even meet the needs of a small country,” said David Yermack, a professor of finance at New York University. 

But that’s not to say that digital currencies or peer-to-peer transactions via apps are useless. In Kenya, people can deposit traditional currencies into accounts stored on their phones through a mobile app and transfer money via text message. Central bank digital currencies (CBDCs) have lower fees when making international money transfers or transfers compared to commercial services such as Western Union, a huge benefit for countries such as El Salvador, where a quarter of GDP comes from remittances .

In fact, the future of tokenized money is more likely to be a CBDC or stablecoin. China has successfully launched a CBDC, and the Bahamas CBDC “Sand Dollar” has also been officially launched. The “Sand Dollar” can be loaded in a smartphone app and used in resorts or anywhere cash is used. Dozens of other countries such as the United States are also Research CBDC. 

Failure may be the best possible outcome of El Salvador’s bitcoin experiment, with former central bank governor Acevedo saying: “If the Bitcoin Law succeeds, the fall of Bitcoin will be a disaster,” The failure of the Coin Act saved us.”

By Sabrina Escobar, Barron’s Contributor

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/el-salvadors-bitcoin-experiment-biggest-failure-or-biggest-scam/
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