El Salvador marked the anniversary of its adoption of bitcoin as legal tender this month following a year of dramatic ups and downs fueled by severe crashes in the value of the cryptocurrency.
El Salvador, which phased out its colón currency in 2001 in favor of the United States dollar, officially adopted bitcoin as the nation’s second legal tender on September 07, 2021. The adoption of bitcoin is the cornerstone of an ambitious plan by President Nayib Bukele, an avid cryptocurrency enthusiast, to transform the country’s ailing economy and lessen its dependence on the dollar, intrinsically tying bitcoin to the nation’s future.
“Tomorrow, for the first time in history, all the eyes of the world will be on El Salvador. Bitcoin achieved this,” Bukele said one day before bitcoin became legal tender.
While the use of bitcoin or any other cryptocurrency as form of payment is in itself an optional and not unusual practice — especially for those that do not have access to traditional forms of international electronic payment processors or access to banking institutions — El Salvador is the first country in the world to pass a piece of legislation that gives proper legal tender status to bitcoin, which forces all commercial establishments in the country to accept it as a form of payment.
The move met with significant popular opposition in the immediate aftermath of bitcoin being legalized. A Central American University (UCA) poll conducted in September 2021 found that 67.9 percent of the population disagreed with the move and many did not know how to use bitcoin for their transactions. One week after the move, thousands flocked to the streets to protest against the “Bitcoin Law” that made it happen.
The main obstacle facing Bukele’s ambitious bitcoin gambit has been the volatile nature of bitcoin’s value, which has significantly plummeted during the first year of El Salvador’s bitcoin adoption. Bitcoin lost roughly 60 percent of its value in the span of a year.
On its first day as an official Salvadoran currency, bitcoin lost $10,000 of its value after hovering at roughly $50,000 per coin.
Earlier in May, and amidst another bitcoin market crash that saw the cryptocurrency lose 50 percent of its peak value, Bukele decided to “buy the dip” (purchasing an asset after it has dropped in price) and adquired an additional 500 bitcoins for the country’s reserves for a total of $15.3 million — roughly $30,744 per bitcoin.
On September 7, 2022, its value hovered below $19,000.
The heavy bitcoin-related losses jeopardize El Salvador’s plans to obtain funds to pay $1.6 billion of sovereign bonds due in 2023 and 2025 to avoid a potential default of the country. On Monday, el Salvador issued an offer to buy back a portion of its sovereign debt bonds.
Bukele’s bitcoin adoption plan also involved the use of the state-operated Chivo Wallet application. Chivo (a Salvadoran slang term for “cool”) launched alongside the legal adoption of bitcoin, offering $30 worth of bitcoin to Salvadoran citizens who signed up on the platform. The platform also launched with companion ATMs deployed across the nation to facilitate bitcoin-USD exchange operations.
During its first year, the Chivo platform has been plagued by numerous technical issues and cases of identity theft that have caused some users to suddenly lose their money, triggering further distrust in its users. The platform’s incompatibility with other cryptocurrency wallets has also caused problems for tourists seeking to pay with their own cryptocurrency wallets or platforms of choice.
El Salvador’s La Prensa Gráfica newspaper published a poll on September 10 regarding the use of the Chivo platform. The results indicated that while 54.8 percent of the citizens had at some point installed the state-operated wallet on their devices, only 28.3 percent still had it on their phones.
The Chivo platform was also intended to facilitate the reception of remittances from abroad, but by mid-August 2022, reports estimate that only two percent of remittances made to El Salvador were sent via the Chivo platform. The government of El Salvador considers the data on remittances sent through its bitcoin wallet a state secret, so no exact statistic is available.
By March, a poll conducted by El Salvador’s Chamber of Commerce and Industry showed that only 14 percent of companies reported to have carried out bitcoin transactions since its adoption as legal tender, with 90 percent of the companies answering that bitcoin’s adoption had little to no impact in their sales.
Bukele’s transformation of El Salvador through Bitcoin also call for the construction of “Bitcoin City,” an income and capital gains tax haven to be located in the Southeastern region of La Unión. The city, Bukele has promised, will be powered by the thermal energy of the nearby Conchagua volcano, which would also provide power for all of the city’s cryptocurrency mining operations.
Funding for the construction of the city will come through the sale of the nation’s debt via a $1 billion “Volcano Bond” backed by bitcoin, according to the state. The heavy crashes in bitcoin’s value throughout its first year as the nation’s legal tender caused the bonds to be delayed in March and are yet to launch. One year later, construction of the ambitious city is yet to begin.
While the first year of El Salvador opting to become a cryptocurrency economy did not result in any major financial revolution, bitcoin in the long term remains a viable asset for the country and the region generally – assuming bitcoin’s value does not crash beyond repair.
Bitcoin, and cryptocurrencies in general, despite their volatility, can help tech-savvy individuals receive remittances and send aid while bypassing the scrutiny of their governments, a particularly useful service for those living in the region’s communist dictatorships.
Christian K. Caruzo is a Venezuelan writer and documents life under socialism. You can follow him on Twitter here.