What has happened a year after the legal circulation of bitcoin in El Salvador?

El Salvador woke up a year ago with a dual currency, the US dollar adopted at the beginning of 2001 and bitcoin, the cryptocurrency to which President Nayib Bukele attributed the power to provide immediate solutions to the economic problems of Salvadorans.

Since the approval of the Bitcoin Law -on June 5- the first criticisms arose for a public policy that had skipped -according to economists- any technical discussion in the Legislative Assembly that is dominated by the ruling party with the New Ideas party.

A year has passed, and bitcoin continues in its hurdle-jumping race according to experts, and the Salvadoran government’s commitment to convincing its compatriots in the United States to transfer their remittances through the platform created by the State Chivo Wallet It hasn’t given any results either.

“The bet has been unsuccessful for putting it in benevolent terms (…) no matter where you look at it, it is a resounding failure,” he says to the voice of america analyst Carlos Acevedo, former president of the Central Reserve Bank (BCR) in El Salvador and former World Bank economist, in Washington DC.

Reports from the BCR of the Central American country indicate that less than 2% of Salvadoran immigrants in the United States use the cryptoactive to send money to their relatives, a point that economists show as a “failure”.

“The president established that El Salvador was going to save some 600 million in commissions for the payment of sending remittances. If the BCR itself has been showing month after month that less than 2% of remittances are entering through digital wallets, I would evaluate it as a failure, “says Acevedo.

There is also no data on the other objective proposed by the Salvadoran government that bitcoin was the solution to the problem of financial exclusion of a large part of the Salvadoran population, explains to VOA the economist Tatiana Marroquín.

Hence the questioning for the implementation of a public policy executed with state resources, coupled with the lack of transparency add more questioning, Marroquín points out.

“So far it seems to me that it is a great failure to promote financial inclusion through bitcoin through different components, but one of the main ones is that the obstacle to financial inclusion that exists in El Salvador is not because there were no applications but because of capacity. of income and economic capacity of the population”, explains Marroquín.

Academic look at a monetary issue

The American economist Steve Hanke, a professor at Johns Hopkins University in Baltimore, Maryland, listed in an article published last Friday by National Review with the title “Verdict for the Bitcoin experiment in El Salvador: failure”, where this expert details one by one “the failures” of the process of adopting the cryptocurrency in the country and analyzes the aspects of “misrepresentation” that occurred in the creation of the law and its implementation.

And he adjusts his analysis with data that he offered during the current year -in other articles- since the government of El Salvador opted for bitcoin.

From his expertise as a professor of economic sciences, Hanke assures that “Bukele’s bitcoin project was based on false promises from start to finish. A total failure.”

“The first misrepresentation, and perhaps the most crucial, was Bukele’s qualification that the Bitcoin law is a ‘legal tender’ law. Well, the Bitcoin law was a law of forced bidding,” says the economist, from the mechanisms to force the Salvadoran economy to adopt bitcoin.

“Bukele’s second misrepresentation was that the Bitcoin law, and the Chivo Wallet that accompanies it, would result in a strong reduction in the cost of sending remittances to Salvadorans,” said the expert, arguing that by that time World Bank studies indicated that the cost of sending remittances to El Salvador is the lowest in the world. continent and sixth worldwide.

Opposite effect

For the economist Carlos Acevedo, there is no doubt that the adoption of bitcoin as the legal tender of the country, plus other distortions typical of the political moment in El Salvador such as “the setbacks in democratic institutions” are playing into effect contrary to what the government predicted.

The constant loss of confidence in the country’s ability to pay, not having an agreement with the International Monetary Fund (IMF) and the debt to be paid that looms in 2023 put the Salvadoran government’s economic strategy in greater doubt.

If to this is added, according to this expert, the option announced in November of last year by President Bukele to create a batch of bitcoin bonds of more than 1,000 million dollars to finance the construction of Bitcoin City without the need to rely on the multilateral organizations of the international consensus.

In this regard, the IMF has been clear that it will be difficult to untangle the negotiations for an agreement with El Salvador under this scenario and the country’s strategy in its commitment to cryptocurrency.

“The adoption of bitcoin as a currency raises a number of macroeconomic, financial and legal issues that require very careful analysis,” said Gerry Rice, an IMF spokesman in Washington DC.

He also argued that “crypto assets carry significant risks for the economy,” calling on the Salvadoran government for strict regulation and suggesting repeal of the law.

President Bukele’s Finance Minister, Alejandro Zelaya, has said for his part that “no multilateral organization is going to force them to do anything, absolutely”, with which he made it clear earlier this year that the distinguished economic project of the Bukele administration would run its course, and the successive purchases of more bitcoins in the second half of this year indicate the decision made.

The proposal for the circular city of digital technology was presented by the president at a meeting of bitcoin evangelists – as the followers of the cryptocurrency are called – on a Salvadoran beach where it continues to circulate.

Acevedo believes that the current scenario could be different if at this time the crypto asset was at the price that his followers speculated, that at the beginning of 2022 it would be above 100,000 dollars per unit, but the effect has been the opposite, the currency fell and fluctuates around $20,000.

During this year, the purchases of the 2,300 bitcoins made by the Salvadoran government are well above what the cryptocurrency is currently valued at. The economist Acevedo told VOA that only 80 of the bitcoins bought and announced by Bukele on his social networks are below 20,000 dollars, for the rest El Salvador is losing money.

What do some Salvadorans think?

Arleth Guevara, a merchant from downtown San Salvador, told the voice of america that at first there was more enthusiasm but then it weakened, however there is still interest: “It has been declining perhaps due to lack of knowledge about the currency, but in my business a lot of people only have money in bitcoin and if you don’t accept it, you lose the sale”.

Guevara said that he is even planning to attend a seminar to get information. “I am going to find out how much bitcoin is worth, when one can redeem it, I hope to learn and implement all of that.

“The experience has been quite good since we have had several transactions in this type of currency. As a restaurant we have been open to being able to accept them,” he explained to the VOA René Alemán, manager of the Cha Cha Chá restaurant in San Salvador.

He explained that “there are facilities” to use it, alluding to the infrastructure to carry out transactions.

However, he said that in this order they dominate “payment by cards, in cash and in bitcoin.” He added that those who use bitcoin the most are foreigners (80% of bitcoin payments in his restaurant correspond to foreigners), locals (20%).

Alemán also explained that foreign customers who pay with bitcoin are mostly Europeans and Americans.

Salvadoran Santos Eliseo Ramírez, manager of a hair salon in the capital San Salvador, said it is rare to receive payments in bitcoin.

“Actually the current currency is the dollar,” he said.

Economic weakening of El Salvador

The expert in remittances and development of the Inter-American Dialogue in Washington DC, Manuel Orozco, comments to the voice of america that one year after the adoption of bitcoin “the experiment” in El Salvador clearly shows the laws of the market economy.

And that the low yield given by bitcoin shows that the political intention of the government is far from the economic reality of the Central American country.

Contrary also to what the Salvadoran government and its followers of bitcoin argued that the rest of the countries would continue in a cascade effect with their “monetary policy”, considering that the country was “breaking barriers” for an economy of the future.

For Orozco, the problem lies in the fact that “the value of a currency is sustained by the supply and demand of the weight of an economy. If its economy is weak, its currency will also be. Since 2020, El Salvador entered into greater economic weakening, and the political environment reduced the foreign and domestic investment climate; the result has been a greater dependence on remittances and lower productivity. Bitcoin could not solve these challenges of the country’s economy, and rather, added higher costs to the country’s fiscal deficit ” Orozco explains to VOA.

In this sense, he adds that it should not surprise anyone that the value of adopting the currency as a currency is insignificant for salvadorans in their day-to-day life, and less so in the world of transfers “where what prevails is to transact with a currency that have economic weight, like the dollar”, he points out.

A position shared by the economists Tatiana Marroquín and Carlos Acevedo, since it is estimated that 1.5 million Salvadorans opened the account of Chivo Wallet to obtain the $30 bonus “given” by the government, when subscribing, but after that they put aside and continued to use the country’s strong currency, the dollar.

Another aspect that has marked the first year of bitcoin in El Salvador, experts say, is the “total lack of transparency” in the use of public funds authorized by the same Legislative Assembly to start the cryptocurrency.

“As there is no transparency or access to portfolios of how public resources have been used” it is difficult to quantify and make a more exact measurement of the impact of bitcoin on the economy and public finances.

Salvadoran President Nayib Bukele has assured his followers that his strategy with bitcoin “is simple: while the world falls into tyranny (we) will create a haven for freedom”, his followers have replicated the call for investors to run to the small country, but they still haven’t arrived.

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