EL SALVADOR: In September 2021, El Salvador passed the Bitcoin Law. It became the first country in the world to adopt a cryptocurrency, Bitcoin as national currency. The main currency of El Salvador is still the U.S. dollar. However, all traders must now also accept Bitcoin.
President Nayib Bukele is the country’s charismatic millennial leader. He claims to have purchased 2,400 bitcoin tokens at more than $100 million, Rolling Stone magazine reports.
Central to the crypto rollout was the incredibly buggy Chivo Wallet, the official government-endorsed bitcoin wallet. As a promotion, the government promised $30 to everyone who downloaded and registered with the app. (The full-time minimum wage in El Salvador is only around $300 a month.) From its launch, the app was riddled with problems and became a magnet for fraud. There were nearly a thousand cases of identity theft in the wallets during its first three months.
Seven out of 10 Salvadorans oppose the Bitcoin Law, according to a 2021 opinion poll conducted by the University of Central America.
El Salvador has a population of 6.4 million and is one of the most densely populated countries. Interestingly, more than 1.5 million El Salvador citizens live abroad. Remittances sent by El Salvador citizens living abroad finance the majority of trade deficit.
The cost of making a bank transfer from the US to El Salvador is on average three percent of the transfer amount. The US is a major expat destination for El Salvadorians. As of 2020, El Salvador received approximately $6 billion in remittances. The remittances are equal to 24 percent of GDP, almost the same as their exports of goods and services at 26%. An estimated $180 million was lost in fees rather than contributing to the wellbeing of El Salvadorians. Using bitcoin to transfer money to El Salvador can generate a substantial amount of savings in fees. In addition, the anonymity provided by bitcoin will remove any legal concerns regarding transferring money to El Salvador. Finally, the senders will not be burdened by the transfer amount restrictions imposed by the banks and other online financial intermediaries. Yet, the high volatility of bitcoin is the major hurdle in maximising the remittances received the AIIA explains in their article.
Due to market fluctuations, the government’s bitcoin holdings have lost 60 percent of their value. El Salvador’s national debt is $23 billion, $800 million of which needs to start being paid to the International Monetary Fund (IMF) by 2023.
In November 2021, Bukele announced a new project called “Bitcoin City,”, a tax-free crypto mining hub. To finance this walled crypto city of the future, the government hopes to entice investors through its $1 billion worth of its bitcoin-backed “volcano bonds.” Five hundred thousand would go to building infrastructure, and the other half million would be used to buy more bitcoin.
The issuance of the bitcoin-backed volcano bonds are intended to save the country from defaulting. However have reportedly been delayed likely due to a lack of investors. The IMF estimates the country’s public debt could be over 95 percent of its GDP by 2026.
Concern over the nation’s ability to get the funding it needs to roll over looming debts pushed S&P Global Ratings to downgrade the nation to CCC+ this month, a move that put it on par with Ukraine and Argentina.
EDITORS COMMENT: AIIA seems to think the Government is trying to use Bitcoin as national currency to minimise the cost of receiving money from its expats. That loss represents almost 1% of GDP in bank transfer fees. Bitcoin could lose that in just its volatility. The Government is allowing anonymous Bitcoin and that is not good either. It opens the country up to the impact of the black economy. Cryptocurrency is not backed by gold or silver. If the internet goes down what then?
SOURCES:
Photo: Jose Cabezas- Reuters
Content: Rolling Stone Magazine, Australian Institute of International Affairs
