El Salvador is the first country in the world to make bitcoin its legal tender since September 2021. The president of the country, Nayib Bukele, has issued a bill to Central America’s Congress so that his idea would become legal. He believed more jobs would be generated and the country would experience financial inclusion. And since more than half of the country’s population didn’t have bank accounts, this should’ve become a life improvement tool. People could check what the bitcoin price is on Binance and make any transactions to support the lack of financial services as an alternative to the country's financial condition.
However, the president’s decision doesn’t seem to fit the country’s needs. It looks like few people have downloaded the cryptocurrency app provided by the government for making transactions, and even fewer people have used it. Only a small consumer group, consisting of young and educated adults, are active on the app.
The real problem is that people weren’t prepared for such a change, and El Salvador has since faced challenges. Consequently, experts and financial institutions, such as the IMF, state the risks of sudden crypto adoption in a developing country with low economic performance.
Limited use of Bitcoin
The International Monetary Fund released a statement on the 10th of February, 2023, analyzing the consequences of bitcoin adoption in El Salvador. The organization concluded that serious risks had been avoided until now since the usage of bitcoin was low enough to prevent further complications. However, the country’s financial integrity and stability are compromised, and there are many issues with consumer protection.
In this regard, the IMF accentuates the importance of transparency in this situation, which the government has lacked, especially in the bitcoin purchases from the beginning of the coin’s adoption. At the same time, the state-owned digital wallet, Chivo, has also raised questions on governance, consumer security, and data safety. The IMF believes transparency is vital for evaluating fiscal incidents and counterparty risks.
Slow Bitcoin adoption
The country’s slow adoption could’ve been profitable if the economy had been prepared. Given that more than a year has passed since the adoption and the risks associated are still present, combined with the economic shocks the whole world has been through, the country’s economy has expanded too fast. In spite of this fact, the Salvadoran Treasury can’t yet access international capital markets, which affects the country’s capacity to improve.
The adoption might’ve taken so long also due to the people’s lack of credibility. For example, in the summer of 2022, after a few months of bitcoin adoption, most citizens avoided using it. There were many reasons for that; some people only didn’t want to be involved in something new, while others didn’t even have access to the internet or electricity. Although internet usage has increased in the past year, from 6.53 million citizens (as of January 2022), only 3.30 million use the internet.
The root of the problem stands in people’s resources, education and culture. Bringing a digital tool that even experts can’t handle and use appropriately since it’s highly volatile is a grave mistake. Many other challenges needed to be addressed for the sake of the country’s financial stability.
The issues that need to be addressed
The IMF stated that two main problems need to be addressed. The first one is implementing better Anti-Money Laundering policies since the country's risk index reached 4.83 in 2021, according to Statista. The survey showed how El Salvador went through a period between 2017 and 2019 when corruption, financial standards and political disclosure were affecting the country’s financing. And although the risks have dropped significantly before the bitcoin acceptance, it is estimated that the money laundered every year starts from $378 million and can reach up to $946 million.
The second issue has to do with increasing fiscal transparency. Of course, it doesn’t have to do with bitcoin adoption only but with general financial actions. For example, before the Covid-19 outbreak, when the IMF approved a considerable fund to help get through the economic impact of the pandemic, El Salvador’s government refused to manage them publicly. Access to information has been obstructed, and the Anti-Corruption Unit of the Ministry of Finance was shut down.
El Salvador was repeatedly using the protection of constitutional rights when the Institute for Access to Public Information (IAIP) interfered so that information could become accessible, but these efforts were in vain. However, the government still managed to secure millions of donor funds without supervision.
The increase in national debt
Along with the Bitcoin adoption, the Salvadoran government has buried the country in debt. The $800 million sovereign bond that El Salvador had to pay up until January 2023 has been reimbursed, but another one will be issued around 2025. These debts are a consequence of crypto volatility that the government hadn’t considered when more than $106 million were invested in bitcoin only last year. However, the IMF vehemently opposed this decision.
As a way to face these consequences, the country has decided to use bonds to pay off debts, also called Volcano Bonds. Their purpose is to pay down sovereign debt, fund the Bitcoin City and create more mining infrastructure. The president thought about using the region’s geothermal energy to supply this city, which accounts for a quarter of the country’s energy. Although this project is considered unnecessary and energy waste, the city is already planned to be built near Conchagua.
It's still unknown if the city will add some sort of value to the country or benefit the citizens because the future value of BTC might increase or not, depending on many factors. However, if the project flops, the people would have to pay around $1.65 billion in fiat money to cover this financial destabilization.
El Salvador is going through a rough time regarding its financial services, but since bitcoin adoption has been promoted, the country has more debt and less money for the people. The IMF has suggested the government improve some aspects regarding anti-laundering and fiscal transparency, but it’s still unknown if the president will take action.
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