El Salvador’s Bitcoin Experiment, One Year On
On September 7, 2021, El Salvador adopted Bitcoin as legal tender currency. Its adoption, observed one year later has been hailed a resounding success, utter failure, and various gradients in between.
The numbers look good. GDP has increased, exports have as well, and violence in the region has hit an all-time low. But underneath the numbers is something more insidious that can permanently ruin El Salvador’s reputation.
By the Numbers
Enduring through a bear market, and the second year of COVID-19, El Salvador allegedly achieved the following metrics:
- 10.3% GDP increase
- 19.5% export increase
- 3.3% remittances for family use increase
- 70.2% remittances for investment increase
- 4.3% increase in economic activity volume
- One of the lowest regional outmigration rates to the U.S.
- A 62-year record of private investments
- 30% increase in tourism
A Short History
The U.S. supported El Salvador’s right-wing government during the 13-year civil war that plagued the country from 1979 till 1992. That includes the massacring of thousands of civilians, which caused a wave of refugees flowing north, eventually settling in Los Angeles. Survivors of the conflict, now living in tough neighborhoods, formed gangs like MS-13.
In 1996, President Bill Clinton signed the Illegal Immigration Reform and Immigrant Responsibility Act, which essentially fast-tracked the deportation of thousands of Salvadorans back to Central America. Gangs that had formed in LA blossomed in San Salvador, turning MS-13, and its counterparts, into transnational criminal organizations.
On March 26, 62 people were murdered across El Salvador — one of the most violent days the country has experienced since the civil war. Salvadoran President Nayib Bukele, a self-declared “cool dictator” and the “CEO” of El Salvador, imposed a state of emergency the next day. Rather quickly, El Salvador exchanged the highest murder rate for highest incarceration rate — approximately 2% of adults.
Under the current state of emergency, Bukele and his Nuevas Ideas party have suspended all civil liberties in the name of fighting rampant gang violence. Police have triple-digit daily arrest quotas and the goal, according to some, is to arrest all of the alleged 70,000 gang members in El Salvador. In the first 10 weeks, 36,000 people were arrested. Human Rights organization Cristosal reported that at least 63 people have died in detention as of July 20, when Bukele extended the state of emergency a fourth time. He claims the false arrest rate is no more than 1%.
More shocking, a recent poll found that 87% of Salvadorans support the “state of exception.” On September 4, the presidential office of Bukele tweeted that there had been 190 days without murder in El Salvador. If true, this would transform the country from one of the most dangerous in the world to the safest in Latin America, almost instantly, according to Bukele. Meanwhile, prisoners later released have said they’ve seen multiple men die in prison in just 24 hours.
Behind the Numbers
So where does Bitcoin fit in?
During a video presentation at a bitcoin conference almost a year ago in Miami, Bukele announced that his country would be the world’s first to adopt the digital token as legal tender. That day, the global crypto markets crashed. Reports of fraud and identity theft followed. Rampant technological problems were reported with Chivo, the official wallet of El Salvador, where citizens would receive $30 worth of Bitcoin in exchange for joining.
Chivo offers no-fee transactions and allows for quick cross-border payments. For a country predominantly relying on cash, and where roughly 70% of the country is unbanked, Chivo was meant to offer a convenient way to incorporate rural individuals into the economy. The plan also involved installing bitcoin ATMs across the country, and requiring businesses to accept cryptocurrency.
The president also announced his plans, in November, to build a “Bitcoin City” near Conchagua volcano in south eastern El Salvador. The city, planned to have residential and commercial areas, as well as restaurants, entertainments, and an airport, will cost around $1B to develop. El Salvador plans to make this raise through “Bitcoin Bonds,” in partnership with Blockstream.
All in, the government has spent around $375M on the bitcoin rollout, $120M on the $30 Bitcoin gift to each citizen, and $104M to buy Bitcoin holdings. Plus the unrealized losses since Bitcoin’s price dive, the country has spent around $425M on Bitcoin adoption. But Bukele doesn’t seem phased. “Stop looking at the graph and enjoy life,” he advised. Less than two weeks later, he bought $1.5M, or 80 bitcoins, in the dip.
While in theory this rollout plan looks promising, here’s what happened:
Rampant identity theft meant that Salvadorans signing up for Chivo to redeem their free $30 worth of Bitcoin found their new accounts drained. Hundreds of Salvadorans posted these incidents on social media, and Cristosal received 755 reports of identity theft. Contrary to Bukele’s claim, a study published by the U.S. National Bureau of Economic Research showed that only 20% of those who downloaded the wallet continued to use it after spending the $30 bonus.
Local reports show that Bitcoin ATMs are being moved or decommissioned, as they haven’t been used in over a year. Businesses have opted to remove their “Bitcoin Accepted” signs, mostly due to the low demand for Bitcoin as a payment mechanism. Booths created to install ATMs remain empty, and the official social media accounts for Chivo have been inactive for months.
Bitcoin City is funded by bitcoin bonds, also dubbed “Volcano bonds” which were officially delayed on March 22, and have yet to be released. Bitfinex, the key infrastructure partner of El Salvador, and Tether chief technology officer Paolo Ardoino revealed that current delays can be attributed to the internal security issues between El Salvador’s forces and the gangs. This has diverted the focus of government resources, he says. But given that Bukele has extended the state of emergency four times, it is possible the hold on Bitcoin City’s development could be indefinite.
The government owes about $800M, due in January 2023. The high risk of defaulting on its sovereign debt led Fitch to downgrade El Salvador’s long-term foreign currency issuer default rating from B- to CCC in February 2022, and from CCC to CC in September 2022. The most recent downgrade, according to Fitch, is due to El Salvador’s external liquidity positions and constraint market access “amid high fiscal financing needs and a large USD800 million external bond” make “default of some sort probable.”
In August, polls showed that 65% to 70% of Salvadorans opposed the adoption of Bitcoin. While conflating internal strife between citizens, gangs, government, and security forces with the adoption of Bitcoin would be problematic, the incorporation of Bitcoin during such a volatile time made the project almost destine for failure. The Bitcoin project was a tangled mess of private interests, some foreign, and government. Few outsiders know where the Bitcoin is and who holds it. Wherever it is, it is in the red. As the Intercept put it, “Bukele essentially imposed Bitcoin on the country by presidential fiat.”
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