El Salvador a little over a year after the Bitcoin Law

Just over a year has passed since 7 September 2021, when through the Bitcoin Law, El Salvador decided to embrace the adoption of the best-known digital currency, making it legal tender in the country.

Last June, parliament approved the Bitcoin Law, proposed by notoriously crypto-friendly President Nayib Bukele, to effectively make Bitcoin legal tender in the country.

At first, the decision met with many dissenting opinions in the country. In September, thousands of people protested the decision. The International Monetary Fund threatened not to provide a loan if the Bukele government did not retrace its steps.

How El Salvador’s Bitcoin Law works

In the end, Bukele resisted and began launching initiatives related to Bitcoin development, such as making the world’s first city entirely dedicated to the digital currency. Or that of using geothermal energy from the dozens of volcanoes in the country to power cryptocurrency mining.

It launched a state loan backed by Bitcoin. On several occasions, the central bank has bought Bitcoin on the market. But not all of these initiatives have been successful.

The sharply negative cryptocurrency market in these last five months of 2022 has certainly had a negative impact on a country like El Salvador, which is already heavily indebted, with a high inflation rate and widespread poverty among the population.

Certainly, the fact that the value of Bitcoin, since September 2021 (when it was about $46,000) has lost more than 50% of its value, has affected the purchases made by the country’s bank. 

The approximately $20 million purchased in the first two months would have been practically halved. In any case, according to some calculations, so far the country would be at a loss across all 10 purchases of digital currency made throughout this year since the Bitcoin Law was passed.

According to some analysts, Bitcoin below $30,000 could eventually even result in a default risk for the country.

There are many experts who say El Salvador’s experiment can be defined as a real failure, as suggested by BitTorrent founder Bram Cohen a month ago:

The same thing may be going on in El Salvador. Now that there's a cheap-but-annoying method of doing remittances using crypto, the banks have had to cut rates to the point where their slightly better user experience is worth the price

— Bram Cohen🌱 (@bramcohen) September 6, 2022

But clearly, President Bukele, who often floods social media with messages praising Bitcoin and the merits of the choice made by El Salvador, does not think so. 

The benefits of the Bitcoin Law in El Salvador

The country’s Central Bank claimed that thanks to Bitcoin, 70% of the population that did not have access to the banking system now has the ability to make transactions and receive remittances from abroad.

In addition, according to government sources, the Bitcoin Law also had important impacts on the tourism industry, also attracting many curious people to see how the system worked. In the first six months of 2022, according to data from the country’s tourism agency, arrivals would surge by 82%, with about 1.1 million tourists arriving.

But the problem lies in the very difficult economic situation, which severely affects one of the world’s poorest countries like El Salvador. El Salvador’s debt-to-GDP ratio – a key metric used to compare what a country owes with what it generates – will reach nearly 87% this year, fueling fears that the nation is ill-equipped to pay off its loan obligations. 

And for these reasons, it seems difficult to make precise calculations on whether or not the experiment will be effective, not least because as early data shows, Bitcoin adoption in the country still seems quite low.

According to Bloomberg Economics data, El Salvador would be one of the most default-prone countries in the world. And it certainly does not appear that Bitcoin adoption has had a positive effect on this, quite the contrary. 

Yet in the country, President Bukele still seems to have very high approval ratings, even for this choice of his judged by many to be a gamble. According to a recent poll by the renowned specialized agency Gallup, he would even be the most liked president in all of South America.

CID Gallup, a Costa Rican consulting firm, surveyed 1,200 citizens in 13 different Latin American nations and the poll clearly showed that President Bukele is by far the most popular, with an 86% approval rating.

Nayib Bukele continues to believe in the potential of Bitcoin

Bukele did much better than the leaders of major Latin American economies such as Mexico and Argentina (but the poll did not include all countries in the region).

However, this is not to say that the Bitcoin Law can be called a success in the country. Because those who have visited El Salvador in recent months have noticed how the digital currency is very little used and even businesses are rather reluctant to accept it as a means of payment.

Yet the benefits provided by the Bitcoin Law to encourage the use of digital currency are many. As part of the law, prices are now sometimes listed in Bitcoin, tax contributions can be paid with the digital currency, and Bitcoin exchanges will not be subject to capital gains tax. 

Most importantly, Bukele promoted the law as a way to expand financial inclusion – which is no small feat for a country where, as mentioned, about 70% of the population does not have access to traditional financial services, according to the Bitcoin law.

The Chivo wallet for spending Bitcoin

To facilitate the use of cryptocurrencies, the government launched a virtual wallet called “Chivo,” which offers fee-free transactions, allows fast cross-border payments and requires only a cell phone plus an Internet connection. 

But many citizens had huge problems using this wallet, both because it often did not work and because there were many cases of hacking.

And this is also why Bitcoin adoption in the country has reportedly not taken off; in fact, according to some, it has been a complete fiasco. 

A survey published in March by El Salvador’s Chamber of Commerce and Industry found that more than 86% of businesses would never make a sale in Bitcoin and only 20% of businesses accept Bitcoin, despite the fact that the Bitcoin law passed in June 2021 obligates all merchants to accept Bitcoin as a form of payment.