A year on, El Salvador’s bitcoin experiment is stumbling

A view of the Gulf of Fonseca islands from the top of the Conchagua Volcano, projected site for the Bitcoin City according to El Salvador President Nayib Bukele, in Conchagua, El Salvador Aug 19, 2022. REUTERS/Jose Cabezas

CONCHAGUA, El Salvador – A year after El Salvador adopted bitcoin as legal tender, the area where the world’s first cryptocurrency city was meant to be built – a circular metropolis powered by a volcano – is still dense jungle.

President Nayib Bukele had promised that “Bitcoin City” would be a tax haven for crypto investors and miners equipped with an airport, residential and commercial areas, and a central plaza designed to look like a bitcoin symbol from the sky.

“Invest here and make all the money you want,” he said dressed all in white and wearing a reversed baseball cap, in front of hundreds of bitcoin enthusiasts in November 2021.

But on a recent visit to the area in the shadow of the Conchagua volcano in the east of the Central American country, Reuters found no heavy machinery, construction workers, or raw materials to indicate any progress towards building this grand symbol to bitcoin.

To many it has become, instead, a symbol of folly as bitcoin has crashed.

“This experiment has been very risky, too risky for a poor country,” said Oscar Picardo, director of the Institute of Science, Technology and Innovation at the private Francisco Gavidia University.

“It has been seen that (bitcoin) is a very speculative, highly variable financial asset,” he added.

A major part of the problem is that the drop in the value of bitcoin and other cryptocurrencies has alienated investors.

When El Salvador, one of the poorest countries in Latin America, adopted bitcoin as legal tender on September 7, 2021, the cryptocurrency was close to $47,000.

A year later, it is worth less than half and on Tuesday was trading at around $19,770.

Gloria Barcia shows her Bitcoin wallet at her store in the town of Conchagua, near the projected site for the Bitcoin City. REUTERS/Jose Cabezas

The Bukele government declined to comment for this story but has defended doubling down on bitcoin -including the acquisition of 2,381 bitcoins- assuring it is a long-term plan.

It says its bitcoin policy has attracted investments, reduced bank commissions to zero, increased tourism and promoted financial inclusion. But the price drop has elevated El Salvador’s financial risk, complicating its search for funds to pay $1.6 billion worth of sovereign bonds due in 2023 and 2025.

The International Monetary Fund has called on El Salvador to reverse bitcoin’s status as legal tender citing financial, economic and legal concerns; complicating a deal with the lender.

The use of the cryptocurrency has also failed to catch on, experts said.

Neither the presidency nor the ministry of finance would share figures on the use of bitcoin through the government’s bitcoin digital wallet Chivo.

But a survey by the National Bureau of Economic Research (NBER), a U.S.-based NGO, found that only 20% of Salvadorans who downloaded the Chivo app continued to use it after spending the $30 that the government gave in free credit to promote its use.

The study indicates the vast majority of Chivo downloads occurred in 2021, specifically in September, and that almost no downloads have taken place so far in 2022.

In theory, developing nations like El Salvador are ideal candidates for cryptocurrency adoption due to a continued reliance on cash and a largely unbanked population.

But, according to the April report, “bitcoin is not being widely used as a medium of exchange” because users “do not understand it, they do not trust it, it is not accepted by businesses, it is very volatile, and it involves high fees.”

Despite Salvadoran law requiring all companies to accept cryptocurrency, only 20% do so, according to the survey that interviewed 1,800 Salvadoran households.

Jesus Caceres’ small watch store in central San Salvador is one business that does. Three signs read “We accept bitcoin,” but the 47-year-old watchmaker has only ever made two sales with the cryptocurrency.

“One for $3 and one for $5, it was $8 in total. From then on, no one has approached me,” he said.

The government has also encouraged Salvadorans working abroad to send money home through the Chivo government wallet, or other private ones, without charging commissions. Known as remittances, those transfers from abroad represent 26 percent of the GDP of the Central American country, one of the highest percentages in the world.

But according to statistics from the central bank, between September 2021 and June 2022, the country received nearly $6.4 billion dollars in remittances and less than 2 percent was transferred by digital cryptocurrency wallets.

Like the use of bitcoin, the government shares few details about “Bitcoin City”. But its future looks increasingly uncertain since the issuance of the “Bitcoin Bond,” which Bukele said would support the city’s construction, has been postponed following the cryptocurrency crash.

Residents of the place where the city is planned, between the Conchagua volcano and the Gulf of Fonseca on the Pacific coast, feel the majority of the country’s 6.5 million inhabitants will not be favored.

“It doesn’t benefit us poor people at all,” lamented fisherman and farmer Jose Flores, 48, who has lived in Conchagua for over three decades.