El Salvador’s bet on bitcoin pushes country to the brink of bankruptcy

THE NEW YORK TIMES – THE bitcoin should transform the economy of El Salvadorcatapulting the impoverished Central American nation into the unlikely herald of a financial revolution.

But about a year after the country’s president, Nayib Bukeleshocking the finance world by making the national currency its most popular digital currency, the gamble appears to be backfiring, underlining the lapse between the utopian promises of cryptocurrency proponents and economic realities.

The government’s holdings of bitcoin have lost approximately 60% of their assumed value during the recent market crash. Bitcoin usage among Salvadorans has plummeted, and the country is running out of cash after Bukele failed to raise new funds from cryptocurrency investors.

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Still, financial mishaps haven’t detracted from Bukele’s popularity. Polls show that more than 8 in 10 Salvadorans continue to support the president, thanks in part to his widely supported crackdown on criminal gangs and his fuel subsidies, which have eased the fallout of global inflation in their country.

Car manufacturer banner informs payment in bitcoin, listed national currency of San Salvador for a year
Car manufacturer banner informs payment in bitcoin, listed national currency of San Salvador for a year Photograph: Jose Cabezas / REUTERS

But Bukele’s failure to meet his stated goals on bitcoin — to bring investment to the country and financial aid to the poor — has exposed the limitations of his image-focused authoritarian governance, critics say. It also raised doubts about the financial sustainability of his ambitious plan to modernize El Salvador at the expense of democratic governance.

Last year, the Bukele government allocated the equivalent of 15% of its annual investment budget in an attempt to incorporate bitcoin into the national economy.

The government offered $30, about 1% of what the average Salvadoran worker earns in a year, to all citizens who download a government-backed cryptocurrency payments app called Chivo Wallet; chivo means “nice” in local slang.

Bukele claims that approximately 3 million Salvadorans, or 60% of the adult population, responded to his call.

Still, after an initial boost, cryptocurrency usage has plummeted.

Only 10% of Chivo users continued to transact with bitcoin on the app after spending their allotted $30, according to a study by three US-based economists in February, published by the nonprofit National Bureau of Economics. Research. Almost no new users downloaded the app this year, the researchers found.

“The government gave this project as much stimulus as it could — and it still failed,” said Fernando Alvarez, an economist at the University of Chicago and one of the study’s authors.

Another survey by the Chamber of Commerce of El Salvador, conducted in March, found that only 14% of companies in the country have transacted in bitcoin since the cryptocurrency was introduced in the country in September, and only 3% said they perceived any commercial value. in it.

US-based Salvadorans also ignored Bukele’s call to use bitcoin to send money to their relatives in the Central American country. Digital payment apps like Chivo accounted for less than 2% of those shipments in the first five months of 2022, according to the Central Bank of El Salvador.

Bukele’s effort has also suffered from a global cryptocurrency sell-off, which has lowered digital asset values ​​by billions of dollars since March.

Crypto asset growth poses complex regulatory and legal challenges for countries

“People are afraid of losing money,” said Edgardo Villalobos, who coordinates the vendors at a large street market in downtown San Salvador, the capital of El Salvador. After the recent drops in value, he claimed that the $30 worth of bitcoin people receive when downloading Chivo is now worth $10 in digital currency.

Still, despite the setback, bitcoin enthusiasts and entrepreneurs argue that the introduction of digital currency has transformed El Salvador’s image and that the country has come to be seen as a technology trailblazer that has created opportunities for its citizens outside of traditional banking systems. .

“As advocates of financial freedom, we are on this path,” said Eric Gravengaard, director of Athena Bitcoin, a US-based cryptocurrency company that operates the network of cryptocurrency ATMs in El Salvador and processes bitcoin transactions for the largest networks. country retailers.

Critics claim that bitcoin has also failed in its promise to bring cryptocurrency entrepreneurs to the country.

Only 48 new bitcoin-focused companies have been registered in El Salvador since the cryptocurrency’s introduction, according to the country’s Central Bank; this represents less than 2% of all businesses opened since 2019. Almost all are startups that hire little local labor and bring little investment, said Leanor Selva, executive director at the National Association of Private Enterprises of El Salvador.

President of El Salvador, Nayib Bukele, during a press conference on June 28 this year, held in San Salvador.  Bukele instituted bitcoin as the national currency a year ago
President of El Salvador, Nayib Bukele, during a press conference on June 28 this year, held in San Salvador. Bukele instituted bitcoin as the national currency a year ago Photograph: Jose Cabezas / Reuters

“On a day-to-day basis, the impact was nil,” she said, adding that rather than attracting new investors, bitcoin scared away traditional investors worried about the cryptocurrency’s impact on economic stability.

Gravengaard replied by pointing out that 28 of his company’s 30 employees in El Salvador are local citizens. More generally, Salvador’s growing tech sector gives its young people the opportunity to build their careers in a country that has been one of the biggest sources of migrants to the US.

“It’s just a dream,” said Gerson Martínez, a bitcoin entrepreneur. “As a child of migrants who left El Salvador, this gives me a lot of hope.”

The drop in value has not deterred Bukele from his enthusiasm for bitcoin, which has earned him the adulation of the global cryptocurrency business community.

In a series of Twitter posts over the past year, Bukele announced that he has purchased around 2,400 bitcoin tokens since September, with an estimated value of $100 million. When critics accused him of financial irresponsibility, he responded by claiming he transacts over the phone while naked.

“Bitcoin is the future!” he claimed in a tweet posted on June 30, after announcing the latest cryptocurrency purchase during a sell-off. “Thanks for selling it cheap.”

It is unclear where the bitcoin assets are kept, how much they are worth, how they were paid, or even who owns the codes that prove their ownership.

People are afraid of losing money

Edgardo Villalobos, market supplier coordinator in San Salvador

Bukele’s press office, his finance minister, José Alejandro Zelaya, and his bitcoin adviser, Samson Mow, did not respond to requests for comment.

So far, Bukele’s bitcoin purchases have lost $63 million due to the cryptocurrency’s devaluation, according to an estimate published last week by Disruptiva magazine at Francisco Gavidia University in San Salvador.

Losses mount as the government struggles to subsidize rising food and fuel import costs and tries to meet its next debt burden.

Underscoring the funding challenges, Bukele last year cut transfers to local governments, forcing some mayors to cut back on public services like scholarships and investments in water infrastructure.

“The problem with bitcoin is that nobody is getting anything out of it,” said Salvadoran economist Carlos Acevedo, a former director of the country’s Central Bank. “It is an investment that does not bring social benefits.”

The fall in cryptocurrency values ​​has already derailed one of the main platforms in Bukele’s financial experiment: the issuance of the first government bond backed by bitcoin. The obligation would have allowed Bukele to avoid traditional financial institutions, such as the International Monetary Fund, which conditioned new financing to the country on financial discipline.

After announcing a $1 billion bitcoin-denominated bond, the government indefinitely postponed the project at the last minute in March, claiming that the war in Ukraine had worsened global financial conditions.

Economists say this has left the country with few valid options for making an $800 million payment on its debt due in January, as well as for subsequent payments over the next few years.

Finally, Bukele will face the difficult choice between drastically cutting public spending, at the risk of infuriating voters, or defaulting the country. A default would disrupt the flow of basic imports, reduce growth and could trigger a bank run.

“Bukele has shown that he cares more about his public image than he does about prudent management of the economy,” said Frank Muci, a public policy expert at the London School of Economics who has studied El Salvador’s bitcoin bond. “But eventually the bill will arrive, at great cost to the country.” / TRANSLATION BY AUGUSTO CALIL

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