San Salvador — Six months after the implementation of Bitcoin (XBT) as legal tender in El Salvador, its penetration among the population has been rapid, while its use as a means of payment in businesses has been slow, with the exception of the tourism sector, where its circulation is more prevalent.
However, the cryptocurrency’s impact on public policies has been decisive, as it is the reason cited by the International Monetary Fund to withhold a $1.3 billion loan that would help the Central American country balance its finances.
Key players in the Salvadoran economy tell Bloomberg Linea that Bitcoin has arrived in the country to stay, but that the cryptocurrency’s opportunities have been limited by a hasty, centralized implementation by the state, as well as by a lack of transparency.
El Salvador’s Bitcoin Law came into effect on September 7, 2021, with the promise of facilitating financial inclusion with the introduction of this digital method of payment, as well as boosting economic growth.
President Nayib Bukele also aspires for Bitcoin to become a channel for remittances from Salvadorans abroad, a flow of resources that in 2021 totaled $7.51 billion, according to the Central Reserve Bank (BCR), and which was an annual increase of 26.8%. If its adoption as means of remittance transfer is successful, Salvadorans could save some $400 million in commissions they currently pay to traditional channels, according to Bukele.
To meet these objectives, the government has promoted its digital wallet, Chivo Wallet, and installed a network of 201 bitcoin ATMs in El Salvador and 57 in the United States, in cities including Los Angeles, San Francisco, Houston, Dallas and Atlanta.
As part of its investment attraction strategy, the government is promoting two projects: a $1 billion Bitcoin Bond, the first sovereign instrument of its kind; and Bitcoin City, a city designed for crypto investors, which will cost some $500 million.
El Salvador wants to get in early in a sector that has high growth expectations. Bitcoin will have a limited issuance of 21 million units, which will generate scarcity and raise its price in the long term, Bukele has argued. “A gigantic price increase is only a matter of time”, he has said.
To implement the law, the Salvadoran government acquires the cryptocurrency, with the funds paid to a Bitcoin Trust (FideBitcoin) operated by Bandesal, which is known to have a limit of $150 million, but so far neither the bank’s investment policy or its detailed balance sheets have been disclosed.
The only channel for finding out about the Salvadoran government’s Bitcoin purchases has been President Bukele’s Twitter posts. From that source, it appears that El Salvador has acquired 1,801 bitcoins in nine transactions registered between September 6 and January 21, 2022.
Bloomberg Línea estimates that El Salvador has invested some $88.2 million in the acquisitions, with each Bitcoin costing the country an average of $48,997.62, meaning that the Central American nation needs Bitcoin to be priced at between $49,000 and $50,000 to at least break even.
Following these estimates, since December 4 of last year government Bitcoin investments were running at a loss, and which it has not been able to reverse. At the close of the first half-year since the legislation was passed, Bitcoin was worth $37,994, 22.4% below the amount spent to acquire the cryptocurrency.
Aversion and Distrust
According to Bukele, the official government app Chivo Wallet notched up 4 million users in January, 61.5% of the country’s total population. The wallet is only authorized for people over 18 years of age, and requires ID for Salvadorans to claim a $30 welcome bonus, credited in Bitcoin.
The enthusiasm to use the technology manifested in the first months following the cryptocurrency’s entry into circulation in the country has shown signs of decline in recent weeks, however. Jorge Hasbún, president of the Chamber of Commerce and Industry of El Salvador (Camarasal), says that fewer Salvadorans are now choosing to pay with Bitcoin.
In November last year, 22% of businesses received payments in the cryptocurrenc,y according to a Camarasal survey; in February 2022, the figure dropped to 14%. Moreover, 92% of respondents indicate that the impact of Bitcoin has made no difference to their business.
The attraction of the $30 bonus, which was intended to encourage users’ first contact with Bitcoin, has also worn off, he says. To make matters worse, the initial experience was marred by technical irregularities in the Chivo digital wallet: problems downloading it, errors in the balances, uncompleted transactions and identity theft have been the most vented failures by users on social networks.
“Nobody can tell you that the launch of the Chivo Wallet was successful, it was a launch with a lot of problems and instead of giving more confidence to the population about the use of cryptocurrencies and digital money, it generated more distrust,” Hasbún says.
The educational work on cryptocurrency prior to the entry of the law was also insufficient and Bitcoin now faces an uphill struggle, he adds. “It doesn’t start from zero, it starts from negative. There is no longer a lack of knowledge, but rather there is practically an aversion, a distrust after what happened with the Chivo Wallet”.
In the area of remittances, the cryptocurrency has also failed to attract a significant critical mass. Fewer than 2% of remittances are transferred each month through digital wallets, according to central bank information, despite the fact that the government application offers a zero-commissions service.
Carlos Acevedo, economist and former president of the BCR, doubts that Salvadorans actually receive the service for free. Behind the scenes, operating costs will be passed on either through hidden commissions or through taxes, he says
Chivo Wallet has a zero-charge policy when interacting within its own ecosystem, but outside of it, users must pay transfer commissions at bureaux de change and those of the Bitcoin network itself. This incurs added costs that, in the end, may be deterring Salvadorans from sending remittances, Acevedo says.
The price of Bitcoin has historically been marked by volatility, and which is another reason that explains Salvadoran’s caution in their approach to the new legal tender, says Ricardo Castaneda, El Salvador country coordinator at the Central American Institute for Fiscal Studies (ICEFI).
“Citizens have already experienced firsthand the volatility of this crypto-asset, and just as some have possibly made gains, others have already seen losses,” says Castaneda.
Positive Effects in Tourism, Investments
However, Bitcoin does have the potential to attract investors and turn El Salvador into a technological development center, and not only locally, but on a regional scale, according to Will Hernández, director of growth and business development at Paxful Latin America, a crypto exchange that facilitates the conversion of Bitcoin, Tether and Ethereum (XET) to 455 options, whether into other electronic wallets or cryptocurrencies, or into credit and debit cards, banks and cash payments.
“The whole world has its eyes on El Salvador because we are the first country [to adopt the cryptocurrency as legal tender]. And companies will come that will want to hire marketing and business development personnel, but not only thinking about El Salvador, but also thinking regionally,” he says.
Since the entry into force of the Bitcoin Law in El Salvador, Paxful has seen a 400% increase in the number of users, a 212% rise in the number of transactions, and a 194% increase in transaction volume, Hernández says.
Hernández adds that the company has installed its Bitcoin House in the country, a neutral meeting space that seeks to promote education for both companies and individuals, through talks and training sessions in different aspects of blockchain technology.
“El Salvador is now a laboratory where companies will come to test their products, they will need systems engineers, blockchain programmers, bitcoin programmers and the education opportunities will be there,” Hernández says.
On the other hand, the country’s tourism industry is seeing benefits from the use of Bitcoin. “More and more tourism establishments are accepting Bitcoin in their operations, on a national scale. Of the total number of transactions they carry out, 20% are with the cryptocurrency”, according to a report from the Presidential Press Secretariat.
A survey by the Ministry of Tourism detected a 30% increase in visitors in the months of November and December, directly correlated with the interest aroused by the cryptocurrency. “The implementation of Bitcoin benefited the sector. More tourists and investors have come to see how the cryptocurrency works,” according to El Salvador’s Tourism Minister Morena Valdez.
El Salvador received 1.4 million tourists last year, a recovery from the 707,041 it received in 2020, but still below pre-pandemic levels. In 2019, for example, the country reported 2.6 million tourist arrivals.
The State: A Centralizing Agent Impeding Potential
Six months is enough time to study the first takeaways from Bitcoin’s use in the country, and analyze how to take advantage of blockchain technology and anticipate new strategies going forward, according to Leonor Selva, executive director of El Salvador’s national association of private enterprise (Anep).
“Six months allow us to see some trends, perhaps it is not a final verdict, but it is telling us that the population is not perceiving inherent benefits of Bitcoin as legal tender,” he told Bloomberg Línea.
For Selva, the Salvadoran state is emerging as a centralizing agent of Bitcoin in the country, and which limits the potential for the implementation of blockchain technology. Instead, the government’s role should be transformed toward that of a facilitator, without imposing Bitcoin, but rather opening the panorama to other cryptocurrencies and developments.
“It would be beneficial above all not to tie the country’s public finances to a single cryptocurrency, but to develop a voluntary market based on technology, both with cryptocurrencies and blockchain,” Selva says.
To make the use of crypto more dynamic, a formula needs to be created incorporating education and transparency, and generating the conditions for the private sector to push forward technological innovation, according to Camarasal’s Hasbún.
“FideBitcoin should have a public record, like with Covid-19 cases, day by day: how much we have actually lost, how much has been sold, we don’t know. That makes the International Monetary Fund, the World Bank, the bond buyers, all of them, nervous, because they say: maybe they are going to tell me the money is for one thing and they are going to use it for another,” Hasbún says.
Translated from the Spanish by Adam Critchley