Bitcoin Experiment in El Salvador: Ideal, Full, Realistic and Bony

The failure may be the best result of the Bitcoin experiment in El Salvador. Former Central Bank Governor Acevedo said: "If the Bitcoin Act is successful, the fall of Bitcoin will bring a disaster, and the failure of the Act will save us."

El Salvador is a cryptocurrency paradise in the eyes of bitcoin believers. It is one of the few places in the world where you can buy coke or beer with bitcoin on the beach. In theory, you can use Bitcoin to pay rent, buy a house, pay back your credit card or buy Maya pottery in the local market& nbsp;

However, the adoption of El Salvador Bitcoin did not make the dream of cryptocurrency enthusiasts come true, but rather became a cautionary tale, telling us what would happen when a country adopted cryptocurrency, tried to integrate it into its own economy, and reshaped itself as a technology friendly haven:The ideal is full, and the reality is skinny& nbsp;

A reporter from Barron Weekly recently went to El Salvador to learn about the impact of Bitcoin on the country. A year ago, El Salvador passed a law establishing Bitcoin as the legal tender. This is a historic decision. President Nayib Bukele, 41, signed the Bitcoin Law last September, making El Salvador the first country in the world to fully legalize the domestic use of cryptocurrencies. After that, banks, enterprises and businessmen of all sizes were required to accept Bitcoin together with the US dollar, another official currency of the country.

From almost all measures, the adoption of Bitcoin seems to do more harm than good. The Salvadoran government invested scarce resources in cryptocurrency and related projects. With the collapse of the price of Bitcoin, the government's financial situation deteriorated. Except for a few people in the capital and cryptocurrency friendly beach attractions, almost no one used Bitcoin& nbsp;

Eswar Prasad, a trade policy professor at Cornell University and economist, said: "The effect of this Bitcoin experiment is not as good as many people expected."

Claudia Ortiz, an opposition member of the Salvadoran Congress

The collapse of cryptocurrency prices can be said to have made things worse. Since November last year, the market value of Bitcoin has evaporated by about $1.5 trillion, scaring away many investors and causing the wider cryptocurrency market to be sold off. In this process, Bitcoin has aroused dissatisfaction from some governments. They believe that Bitcoin poses a subversive threat to the government's currency control. In addition, because "mining" consumes a lot of energy, Bitcoin is considered to be too wasteful of electricity.

In El Salvador, there are still supporters of cryptocurrency, especially the country's President Buckler, who is a millennial generation who loves Twitter and believes that cryptocurrency is the savior of the economy. Buckler said when announcing the Bitcoin Law: "We must break the past model, and El Salvador has the right to move forward to the First World."& nbsp;

Critics pointed out that from the current situation,Bitcoin at best distracts people from deep-rooted economic problems, and it is also a mechanism of Bukler's dictatorship. In fact, Bitcoin has always been a divisive force, triggering street protests, and its critics fear reprisals& nbsp;

"This is either the biggest failure or the biggest fraud," said Claudia Ortiz, an opposition member of the Salvadoran Congress, who is one of the few officials in the government who opposes Bucla.

Failed Bitcoin Experiment

From a macro perspective, Sardova's introduction of Bitcoin has caused losses. Bukler accepted a country with huge debts when he was elected president in 2019. After the outbreak of the epidemic, the government increased its spending and the financial situation further deteriorated. By the end of 2021, the proportion of the country's debt in GDP rose from 71% in 2020 to 85%& nbsp;

With more and more debts, Buckler began to buy Bitcoin and legalize it. In the eyes of creditors, El Salvador's financial situation was becoming more and more complex, and its sovereign bond yield also rose. The lack of hard currency has raised concerns about two types of US $800 million government bonds, which will mature in January 2023 and 2025 respectively. According to Alejandro Zelaya, the finance minister, as of July, the country had raised only $560 million to repay bondholders. Mr Zelaya admitted that it was "almost impossible" to repay all the debts.

Despite the price slump, Bitcoin still has fans in El Salvador.

Former government officials believe that there will be more financial problems in the future. Carlos Acevedo, former governor, independent adviser and economist of the Central Bank of El Salvador, said: "In the case of the closure of the international market, I do not think it is possible for this country to use the resources of the domestic market to repay the maturing bonds."& nbsp;

Confidence in Buckler's rational use of government revenue was also undermined by his cryptocurrency plan. According to the estimates of opposition leaders, the plan includes allocating at least $250 million to "digital infrastructure", which is used for things such as government supported digital wallets - distributed to adult citizens, and pre loaded with a $30 Bitcoin bonus. This money is also used to set up more than 200 Bitcoin ATMs and a $150 million "Bitcoin Trust Fund" to ensure the convertibility between cryptocurrencies and the United States dollar& nbsp;

Bukler widened the financial gap. Although the government refused to disclose its Bitcoin holdings or spending, Bukler's tweet showed that he had purchased 2381 Bitcoins for the Ministry of Finance, spending about 107 million dollars. As prices fell, Buckler repeatedly pushed that he was "bargain hunting". Judging from the drop in the price of Bitcoin and Buckler's tweets, his strategy has caused losses of tens of millions of dollars& nbsp;

For a country with an annual budget of 8 billion US dollars, this loss is not too big, but the opponents are angered. "It's like gambling with the public funds of a poor and heavily indebted country. A country that needs these resources now can't wait for them to increase in value in an uncertain time," said opposition MP Georges& nbsp;

Turning El Salvador into a "Bitcoin ATM" also upset lending institutions such as the International Monetary Fund (IMF). The Salvadoran government applied for a package of loans to the IMF in 2020, and was negotiating a $1.3 billion loan agreement when Bucla signed the Bitcoin Law. The talks have broken down, partly because the IMF is worried that Bitcoin will bring instability. In a statement to Barron Weekly, IMF said: "When negotiating the loan plan, we must take into account all factors that will bring vulnerability to the economy, including issues related to Bitcoin as the legal tender."

Students taking Bitcoin classes

Buckler seems determined to make El Salvador a global center for bitcoin users, whether miners or bitcoin tourists. Last November, when the price of Bitcoin reached a peak of about 68000 dollars, he announced the plan to issue Bitcoin backed bonds, aiming to provide funds for the construction of the coastal "Bitcoin City" at the foot of Konchagua volcano. Bukler said that the city would become a tax haven for cryptocurrency investors, without paying income tax, property tax and purchase tax. El Salvador also intends to attract crypto miners who need to use large amounts of electricity by generating geothermal energy from volcanoes.

However, the issuance of bonds originally scheduled for March this year has been postponed. El Salvador itself is also "mining", and part of the electricity comes from the geothermal energy of an existing factory. However, the construction of this volcano driven "Bitcoin City" is slow and embryonic. Carlos Martinez, an electrical engineer at the University of El Salvador, said that volcanoes are not even a viable geothermal reservoir.

Buckler had promised to use Bitcoin to provide banking services for people without bank accounts, so that El Salvador could quickly enter the digital era, but this commitment has not yet been fulfilled. In addition to coastal areas, only a small number of people are using cryptocurrencies. In a country where applications like PayPal's Venmo are not yet popular, this may not be surprising. More than 4 million Salvadorans have downloaded an electronic wallet called Chivo. In a country with a minimum daily wage of $13, the pre deposited Bitcoin bonus of $30 in the electronic wallet is undoubtedly very attractive& nbsp;

However, according to a recent study, only 20% of people use the app after spending their bonus. Nearly 92% of SMEs said that Bitcoin was not important to them. "Bitcoin is absolutely irrelevant to this country," said Luis Membre ñ o, an economist in El Salvador and a critic of the Bitcoin Law, who fled abroad for fear of government persecution.

Students who use Bitcoin to buy lunch 

El Salvador continues to fight gangs, poverty and rising unemployment. Critics say that if Bitcoin brings any impact, it only affects crypto tourists, technicians and elites with extensive contacts& nbsp;

Bukler did not give an interview on this article, and a government spokesman did not arrange for any official to give an interview on this article.

The Paradise of the Minority

To learn about the use of Bitcoin in El Salvador, the best place is the beach, especially El Zonte, which is called "Bitcoin Beach" by cryptocurrency enthusiasts. It is one of the few places in El Salvador that are most willing to accept Bitcoin& nbsp;

There, you may meet Wilfredo Urias, a 28 year old surfer who runs his own surfing school, in part because he makes profits from Bitcoin trading. Urias bought his first $100 Bitcoin in 2020. As the price soared, it quickly became $500, and then continued to trade and make profits. Finally, the money earned was enough to buy 12 surfboards and hire coaches, some of whom hoped to get paid in the form of Bitcoin. Urias said Bitcoin was "very beneficial" to El Zonte.

The story of Urias does not represent the experience of most Savardos. Few of the merchants or shops that the reporter of Barron Weekly met installed QR code readers for transaction processing, and they did not think there was any reason to install them& nbsp;

"Tourists don't shop, they just come for sightseeing," said a local market vendor, explaining why she didn't accept Bitcoin as a payment method.

Cryptocurrency mining facilities in tropical forests

Others said that their sales had declined due to hackers' attacks on digital wallets. A basket seller on El Zonte Beach said that his wallet was locked due to a hacker alarm, and he could not withdraw funds or accept more Bitcoin payments. He said: "It's better to continue to use cash than virtual currency. I don't plan to use Bitcoin anymore."

Bitcoin has even made it more complex to use ATMs. Bitcoin ATM converts traditional currency into Bitcoin and stores it in a digital wallet, but the speed is very slow. It took six hours for a $20 Bitcoin deposit to appear in the reporter's Chivo wallet. The transaction fee of Bitcoin ATM is subsidized by the government, and the transaction fee is usually high. However, when the reporter bought snacks, the money in the electronic wallet was almost useless, because only 3 of the 10 merchants were willing to accept Bitcoin payment& nbsp;

However, in the capital of El Salvador, cryptocurrencies continue to develop, and Strike, Bitrifill and Binance have all settled in. At a weekly gathering of Bitcoin enthusiasts held in a luxury bar, participants gathered to share ideas about apps and tips on obtaining residence permits, buying property or investing& nbsp;

"If you own Bitcoin and fiat currency, you live in two worlds, but in El Salvador, the two worlds are integrated," said Dallas Rushing, a California application developer who came to El Salvador as a cryptocurrency tourist& nbsp;

Bitcoin investors are very interested in buying real estate. William Velasco, the co-founder of a real estate brokerage company, said: "We have noticed that foreigners from countries where we never thought we would invest have flooded in."& nbsp;

At the same time, non-profit organizations are trying to teach students to use cryptocurrency. A non-profit organization called "My First Bitcoin" offers courses all over the country. "Bitcoin can promote this country to enter the digital economy," said Napoleon ó n Osorio, a lecturer who had just returned from a school in Apaneca, a highland town rich in coffee beans. But he also said that the task of popularizing Bitcoin to the public is arduous and requires a lot of education, time and technology investment.

Hugo Guevara, leader of La Criba community;

Outside the cryptocurrency circle, Bitcoin has hardly brought a particularly significant impact. rememberRecently, I saw in Conchagua, the planning site of the future Bitcoin City, that street vendors were setting up stalls, walking around, fighting flies and waiting for shoppers. Few people can imagine what the future "Bitcoin City" will look like, and even fewer people are familiar with how to use Bitcoin.

Local officials are not sure how to view Bitcoin City. Oscar Parada, the mayor of the neighboring city La Uni ó n, said,He did not know when or where the construction would begin,He also said that the construction of infrastructure will be a challenge. Pallada, a member of the New Ideas Party led by Bukler, said that he had never paid much attention to Bitcoin,"I don't think it is necessary at present, but it will be necessary in the medium and long term."

La Criba is one of the communities that have felt the impact of the construction of "Bitcoin City". La Criba, a poor fishing village near Konchagua volcano, is also the development target of "Bitcoin City". There are more than 50 families living there, living on fishing and agriculture. As developers hope to turn the area into a destination for cryptocurrencies, local residents are under pressure to sell their land, usually at a high discount& nbsp;

Hugo Guevara, a 61 year old resident of La Criba and community leader, said: "We are on call at any time& nbsp;

CBDC or stable currency is more promising

Some might say that El Salvador has never been an ideal place to experiment with Bitcoin. Its Internet penetration rate is only 50%. Commercial transactions are mainly conducted through cash or credit cards supported by hard currency.

Bitcoin may have a better prospect in countries without a stable monetary or financial system. The problem of hyperinflation in such countries is corrosive, and people worry that they cannot use their savings. El Salvador does not have these problems. Since 2001, the country has used the US dollar as its official currency. It is difficult to compete with the US dollar with any other currency, let alone something as confusing as Bitcoin. Bitcoin is a set of software rules with a history of only 13 years. It has no intrinsic value and only exists on computers around the world in the form of code& nbsp;

It seems unlikely that more countries will follow El Salvador's example (this is the greatest hope of Bitcoin enthusiasts). In April this year, the Central African Republic designated Bitcoin as the legal tender, but its Supreme Court set obstacles to the use of Bitcoin.

The opposition of the IMF, the World Bank and the international bond market to the Bitcoin may prevent other governments from doing so. At present, cryptocurrency is still the channel to launder money and evade government sanctions, and the damage to the environment caused by "mining" makes cryptocurrency controversial in any country, especially when other types of cryptocurrency have surpassed Bitcoin's energy intensive transaction processing system.

Even if Bitcoin is more stable, traceable and environmentally friendly, its technology is not designed for the whole country. Bitcoin's blockchain processes 7 transactions per second, while the Visa credit card network can process 24000 transactions per second. Although the additional "lightning" network can process Bitcoin transactions faster, it increases the complexity of the system and cannot solve the high potential costs and congestion problems on the original blockchain.

A portion of El Salvador's $250 million digital infrastructure budget is used to set up 200 Bitcoin ATMs& nbsp;

David Yermack, a professor of finance at New York University, said: "Bitcoin cannot even meet the needs of a small country. This is a cautionary tale."& nbsp;

This is not to say that digital currencies or point-to-point transactions through applications are useless. In Kenya, people can deposit traditional currency into accounts stored on mobile phones through a mobile application, and transfer money through SMS. Compared with Western Union and other commercial services, the central bank's digital currency (CBDC) costs less when making international remittances or transfers, which will be of great benefit to El Salvador and other countries where a quarter of GDP comes from remittances.

In fact, the future of token currency is more likely to be CBDC or stable currency. China has successfully launched CBDC, and the Bahamas CBDC "Shayuan" has also been officially launched. The "Shayuan" can be loaded into smart phone applications and used in resorts or anywhere where cash is used. CBDC is also being studied in dozens of other countries, including the United States& nbsp;

The failure may be the best result of the Bitcoin experiment in El Salvador. Former Central Bank Governor Acevedo said: "If the Bitcoin Law is successful, the fall of Bitcoin will bring a disaster, and the failure of the Bitcoin Law has saved us."

Article | Sabrina Escobar, writer of Barron Weekly