Months after El Salvador adopted Bitcoin as legal tender, has the cryptocurrency worsened the country’s financial prospects?
By Simeon Swaby
A young autocrat, a country in debt, and the monumental collapse of a digital currency- this is the current reality facing the Central-American nation of El Salvador. After the country’s adoption of bitcoin as an official currency in September of last year, El Salvador has experienced a decrease in bonds, and massive rise in its debt after Bitcoin plunged in value.
This was before the country’s current president, 40-year-old Nayib Bukele, made the decision to invest over $15 million into bitcoin during its dip in value. With the value of bitcoin continually dropping over time, it’s unknown if the president’s gamble will truly pay off. Now, with the country’s finances in a rockier position than ever, the International Monetary Fund (IMF) has urged the country to drop bitcoin as a legal tender, citing risk in issuing government bonds with an unstable currency.
The idea of bitcoin as legal tender isn’t new in El Salvador. In fact, there were experiments with the idea long before the bitcoin law was passed. In the small seaside town of El Zonte, activists have utilized bitcoin services to aid the community in transactions. Bitcoin Beach, as it’s called, helps community members pay for certain utilities such as electricity, food, and medical care, all in bitcoin. So far, its utilization has been fairly popular in the community, with many claiming that its cheaper remittances and its easy access to banking, makes it a better alternative to traditional Salvadorian banking. Eventually, Salvadorian politicians took notice, and sought to duplicate its success across the nation.
President Bukele himself has been a staunch believer in bitcoin’s ability to provide economic freedom to the people of El Salvador. In a public video released months before bitcoin’s adoption, Bukele stated that, “what is intended with the bitcoin law is to connect our country with the rest of the world to attract foreign exchange, investments, tourism, and to boost our economy.”
The young president, known for his down-to-earth yet authoritarian approach to politics, has made many lofty promises to the people of El Salvador since taking office on June 1, 2019. One of his biggest promises was to reduce El Salvador’s unprecedented criminal activity, which at the time, was one of the highest on Earth. Since then, crime has gone down to historic lows. Bukele claims that this feat was accomplished through policies which prioritized tougher policing and enforcement, along with programs in schools and communities that would keep young people off the street. However, a report from Insight Crime, an organization that reports on large-scale criminal activity in the Americas, suggests that part of the reason for this drop in crime has been due to alleged “informal pacts” between Bukele’s administration and the many gangs of El Salvador, though Bukele vehemently denies this.
That’s not the only improvement Bukele has promised. He also declared that he would crack down on corruption in the government. While Bukele has put his claims into action, consolidating a large amount of power in the government, and even approving a plan to fire judges above the age of 60, Bukele has also cracked down on civil dissent and has silenced many of his detractors. With his approval ratings among the public still high, his administration has ushered in a new era in Salvadorian politics; one of outward friendliness paired with a tyrannical crackdown on freedom of speech.
Now with the adoption of bitcoin, the president aims to achieve the last of his primary goals, being the complete reinvigoration of the El Salvadorian economy.
He announced his plans to make Bitcoin into an official currency in June, and signed the decision into law later that same month. Bukele and many others had hoped that the introduction of the currency would allow Salvadorians, a majority of which don’t have bank accounts, an opportunity to take control of their finances, and be a more active participant in the formal economy.
However, the reactions to this new change have been mixed at best, and its effects on the economy have yet to truly manifest. In a poll conducted by UCA, a Jesuit university based in El Salvador, only 32% percent of a selected 1,281 people agreed with the new policy, while the majority 67.9%, disliked the idea of using bitcoin as legal tender. Many have cited bitcoin’s volatility as a major reason for their disapproval.
In addition, the government has set a precedent of overzealous government spending in bitcoin, that could lead to a skyrocket in debt. Already, the government has sunk $10 million to $22 million on the currency, one which has the potential to crash at any moment. On the same day that the bitcoin law was enacted, the currency crashed by more than 15%, forcing the government to have to pay millions to ensure its stability. More recently, however, bitcoin’s price has been dropping drastically, with the currency now being 45% lower than what it was in mid-November. Estimates from the IMF suggest that at its current pace, El Salvador’s public debt will rise to 96% of its GDP by 2026.
And that’s not to mention the massive planned “bitcoin city,” the country plans to build. Planned to be constructed next to the Conchagua Volcano, the city will utilize geothermal energy to power its bitcoin mining operations, theoretically allowing the city to run on 100% green energy. The city would also be exempt from most taxes, only featuring a 13% value added tax which will go to paying the aforementioned government bonds. Among all the projects involving bitcoin, this project seems to excite Bukele the most. But with the country’s rising debt and the unpopularity of bitcoin, it’s hard to say if Buekele’s dreams will ever be fully realized.
Bitcoin still has its fans though. For those who lack bank accounts, bitcoin provides a way for lower-income individuals to deposit and withdraw money easily. It even allows for customers to send transactions through email to small business owners. However, there’s always the risk of the value of bitcoin dropping, leaving countless with less recourse to pay for the necessities they need to survive.
At this time, bitcoin remains a truly contentious topic among Salvadorians. On the day of its enactment, 1000 protestors stormed the streets to speak against the policy. In the future, the effects of bitcoin will be more clear to see, but for now, Salvadorians can only wait and see.