Thank you for reading the news about technology: Bitcoin experiment in El Salvador did not save the country’s economy and now with the details
Cairo – Samia Sayed – El Salvador bets on Bitcoin for its economic rescue, but the adventurous experiment has not yet borne fruit as President Najib Abu Kila had hoped.
The value of state-owned cryptocurrencies has halved. Also, nationwide adoption of Bitcoin has not worked out so far, and more importantly, the country quickly needs a lot of cash to pay off its debt of more than $ 1 billion next year..
According to the Arab Technical News Gateway, this comes at a time when the price of Bitcoin has fallen by more than 70% from its peak in November 2021, and more than 55% from the time when Abu Kaileh announced his plan..
Meanwhile, El Salvador’s economic growth has slowed, its deficit remains high, and the country’s debt-to-GDP ratio will reach nearly 87% this year, raising fears that El Salvador is ill-equipped to meet its borrowing obligations..
And it’s not Bitcoin’s fault that the government is heading for financial ruin, and has an unrealized paper loss in the cryptocurrency of about $ 50 million, less than 0.5% of the national budget..
In total, the entire experiment and all associated costs cost the government about $ 374 million. But that number is not much, especially considering that El Salvador has $ 7.7 billion in outstanding bonds.
Negotiations with international lenders have stalled in part because they are unwilling to give money to a country that spends millions of tax dollars on a crypto-currency whose price is highly volatile..
Rating agencies downgraded El Salvador’s credit score due to uncertainty over the country’s financial future, given the acceptance of Bitcoin as a legal tender. This means that it is now more expensive for President Bukele to borrow much-needed money..
As for the financial situation, El Salvador has a lot of bonds trading at a huge discount, and the country is heading for a debt default..
The president linked his political fate to this coded experiment. As a result, there is very little incentive to make it work in the long run, and in the meantime pay off the country’s debt. Abu Kila faces re-election for another five-year term in 2024.
And it all comes as El Salvador faces impending deadlines to repay billions of dollars in debt, including an $ 800 million Euro bond that expires in January..
El Salvador has been trying since early 2021 to obtain a $ 1.3 billion loan from the International Monetary Fund. But this loan appears to be out of reach due to the president’s refusal to heed the organization’s advice to abandon Bitcoin as a legal tender..
The president’s efforts to consolidate his power have also increased the risk premium. In addition, El Salvador cannot print money to support its financial resources.
El Salvador converted to the dollar in 2001, which means that he abandoned his local currency in favor of the US dollar.
Only the Federal Reserve can print more dollars. Meanwhile, its other national currency, Bitcoin, is being honored for the fact that it is also impossible to coin from the air..
In September 2021, El Salvador became the first country to adopt Bitcoin as a legal tender. The initiative included the purchase of cryptocurrency with public funds, as well as the launch of a national virtual wallet called Chevu that offers fee-free transactions and enables fast cross-border payments..
For a country with a largely cash economy, where 70% of citizens do not have bank accounts, credit cards or other traditional financial services, Chivu’s goal was to offer a method suitable for those who were not previously part of the banking was not. system.
The experiment also included building a nationwide infrastructure for Bitcoin ATMs across the country. Except that all companies must accept cryptocurrency.
The president increased the lead in November when he announced plans to build a Bitcoin city next to the Conchagua volcano in southeast El Salvador..
The Bitcoin-funded city offers significant tax concessions, and geothermal energy flowing from a nearby volcano provides electricity to crypto-miners..
Cryptocurrency will not solve security and economic productivity problems
The government has spent about $ 375 million on bitcoin, including a $ 150 million trust fund designed to instantly convert bitcoin into dollars, $ 120 million in a $ 30 reward for every citizen who installs a Chevu wallet, and about $ 104 million that the government has publicly acknowledged that spending on bitcoin.
These expenses, plus $ 50 million in unrealized losses in the Bitcoin wallet, mean that the country has spent about $ 425 million on the experiment as a whole..
But after nine months of this nationwide bet on Bitcoin, it does not appear to be fulfilling many of its great promises.
President Bukele tweeted in January that the application has 4 million users (out of a total population of 6.5 million). But a report by the U.S. National Bureau of Economic Research showed that 20% of those who installed the wallet continue to use it after spending the $ 30 bonus..
And it turns out that the amount of cryptocurrency transactions is very low. There were also problems related to the portfolios issued by the state. Some have experienced technical issues with the application.
Other Salvadorans have reported cases of identity theft. The hackers used their national identity number to open the Chifu e-wallet to get $ 30 in free bitcoins provided by the government as an incentive to join..
Another hope for Chivo’s wallet was to help save hundreds of millions of dollars in transfer fees. Overpayments represent more than 20% of El Salvador’s GDP.
Existing services may charge a fee of 10% or more for those international transfers, which can sometimes take days to arrive..
But recent data in 2022 shows that 1.6% of transfers were sent via digital wallets. In terms of accepting merchants, a survey found that 86% of businesses have never sold products for Bitcoin..
Bitcoin City remains closed, as is the sale of its $ 1 billion Bitcoin bonds, which were frozen in March due to unfavorable market conditions..
Tourism industry has grown due to Bitcoin
The Bitcoin experiment in El Salvador may be struggling at the moment. But it was undoubtedly a victory in terms of attracting Bitcoin tourists. While El Salvador suffered unrealized losses on its Bitcoin investments, it gained a lot in terms of tourism..
It attracted many people who believed in cryptocurrency and a lot of capital from these people. And if you think of unrealized losses as a marketing campaign, El Salvador has achieved what it wanted. And they, like Costa Rica, spend billions of dollars on marketing campaigns.
The tourism industry has risen by 30% since the Bitcoin Act came into force in September. The country’s tourism minister also notes that 60% of tourists now come from the United States.