Bitcoin Failure: El Salvador Faces Struggles After Enforcing Bitcoin
El Salvador adopted Bitcoin as a national currency and now it is close to its downfall. How did Bitcoin impact El Salvador and what are the ongoing effects?
The real reason Bitcoin failed so quickly
The main problem with this new regulation was the approach. The official payment method was a Bitcoin wallet named Chivo, specifically an app that citizens can use to buy and sell Bitcoin. It seemed a success at first, with many people rushing to download it.
How Chivo became a double-edged sword
Even though it started strong, this app was a significant loss as people were eager to get their hands on the government’s $30 incentive given upon downloading Chivo.
People would either transfer the incentive into another account or cash it out. Statistics show that people did not trust it enough to transfer money to this account or they couldn’t even use it.
People started using Chivo maliciously
Those who actually ventured themselves to actually use it noticed that the app completely missed the requirements to check the users’ photos as it only verified the date of birth and the national identity card number.
This had a devastating outcome for many users since there have been many identity fraud attempts registered. As a result, many would create fake Chivo accounts, using other people’s information to transfer the $30 incentive.
From instant success to utter flop - Protests arise
Apart from those who downloaded the app and used it to get the incentive, many people did not even get the app. And the people’s fuming reactions did not fail to come through!
After the launch of Chivo, a vast number of street protests against the mandatory Bitcoin implementation began and continued for months. The result was the cessation of promoting the Chivo app on TV, social media, radio channels, and others. The ads on buses or vans were even taped with plastic, hiding the Chivo logo.
After all, Salvadorans would much rather prefer dollars instead of virtual money!
Why did El Salvador adopt Bitcoin in the first place?
Even though the economical result was disastrous, the initial plan was actually to attract investors!
Back in September 2021, Salvadoran President Nayib Bukele made Bitcoin a national legal tender alongside the American dollar.
The president of El Salvador decided to implement Bitcoin because the U.S dollar depreciated Salvador’s economy. This change should have reduced the costs of transfers and boosted the national economy by attracting investors and encouraging domestic consumption.
Although these assumptions may be fulfilled at some point, Bitcoin is a speculative crypto asset, so there is no guarantee that it could ever stabilize due to its volatility.
Could this disaster have been prevented?
The International Monetary Fund (IMF) declared, back in July 2021, that “Cryptoassets are unlikely to catch on in countries with stable inflation and exchange rates, and credible institutions. Their value is just too volatile and unrelated to the real economy.”
IMF invokes other reasons not to implement Bitcoin as a legal tender such as:
- Risks to consumer protection;
- Negative effects on financial integrity;
- Financial instability.
IMF threatens El Salvador to give up Bitcoin
El Salvador keeps maintaining Bitcoin as a legal tender despite the IMF’s reaction.
According to the IMF, there are many disadvantages when adopting Bitcoin as a legal tender. By making Bitcoin a legal tender, it is mandatory to be embraced by creditors in payment of any monetary obligations such as taxes.
Also, the country adopting such currency can pass laws to encourage the use of such crypto-assets, mainly as a means of payment for everyday purchases. El Salvador went ahead and passed the “Bitcoin Law.”
Moreover, the IMF stated that Bitcoin is unlikely to catch on in a country “with stable inflation and exchange rates and credible institutions.”
The Bitcoin implementation drew other countries’ attention
A month after Bitcoin was adopted as legal tender by Salvadorans, the Bank of Spain issued a report. It analyzed the irregularities which citizens had to go through.
The Bank of Spain also addressed the issues caused by the enormous fluctuation of Bitcoin, the digital fraud following the Chivo launch, the complexity of user access codes, and the irreversible nature of the payment.
Salvadorans react negatively to Bitcoin
According to a Central American University (UCA) poll, Salvadorans have not adapted to the new regulations; more than 67.9% strongly disagree with the recent implementation. Only 32% consider Bitcoin to be a promising move.
After implementing the “Bitcoin Law” in 2021, credit agencies suffered a downgrade in their credibility. This means that lending money entails considerable risk, and more interest will be applied to any debt acquired. This implies that these new regulations will impact Salvadorans.
Moreover, the loan solicited by El Salvador from the IMF is postponed, as the IMF strongly opposes the adoption of Bitcoin as a national currency.
Economist Luis Membreño stated that the IMF has made it clear that if the country does withdraw the Bitcoin law, there will be no negotiations for an agreement to get a loan.
The usage of the Chivo wallet
|Knowledge about Chivo||68%||32%|
|Used Chivo to pay taxes||5%||95%|
|Received remittances through Chivo in Bitcoin||11%||89%|
A study performed by the National Bureau of Economic Research valued that 95% of people didn’t even use Chivo to pay taxes.
When it comes to the Chivo app, which seemed at first to be a success, it turns out that people did not trust it. Apart from the significant problems people faced when it was launched, such as identity fraud, problems downloading the app and installing it, and fluctuations in balances, people stopped using the app after obtaining the incentive.
According to the NBER’s (National Bureau of Economic Research) survey, in the first quarter of 2022, the Chivo app had “almost no new adopters.” The report also showed that “20% of businesses have started to accept BTC as a payment method”, even though it is still a mandatory form of payment.
Bukele announced plans for “Bitcoin City”
The bitcoin experiment had a moment of popularity in the cryptocurrency world because Bukele announced plans for a “Bitcoin City” to create a smart city entirely based on bitcoin.
Initially, this implementation was to be paid for by a $1 billion bitcoin-backed bond that would be used 50/50 to build the mining facilities and buy more bitcoins.
However, plans have changed. The offering was scheduled for March 2022, and it still is a work in progress because of unfavorable market conditions.
Why Bitcoin should not be a legal tender
As IMF already stated, a country which adopts a new law involving crypto assets as legal tenders will face the ensuing struggles and risks:
- Nobody can refuse to use cryptocurrency as a payment method, especially business owners;
- Government revenues could be exposed to exchange rate risk if a crypto asset’s taxes were quoted in advance;
- Households and national businesses will have little incentive to price or save in Bitcoin;
- When the value of the legal tender is based on speculation, any economic activities can become detached from the real economy, with the risk this entails for domestic prices;
- Money laundering and debit and credit card fraud is also easy to access.
The IMF declares that “even in less stable economies, the use of a globally recognized reserve currency such as the dollar or euro would likely be more alluring than adopting a crypto asset.”
Did other countries adopt Bitcoin as a legal tender?
During this time, El Salvador was the only country that adopted bitcoin as legal tender. More countries have started to adopt passive laws regarding Bitcoin regulations. Bitcoin is not prohibited in such countries, and it is not recognized as legal tender. For instance, several top online casinos allow users to use crypto as a preferred currency method.
Bitcoin is considered property for tax purposes.
The future lies unsure as we have yet to see if other countries are willing to join the Bitcoin path.
- Cryptoassets as National Currency? A Step Too Far
- El Salvador’s law: a meaningful test for Bitcoin
- The Bank of Spain report
- One-fifth of businesses in El Salvador now accept Bitcoin: NBER study
- IMF urges El Salvador to remove Bitcoin as legal tender
- IMF’s Silence Signals El Salvador Needs to Abandon Bitcoin to Secure $1.3B Loan
- Majority of Salvadorans do not want bitcoin, poll shows
- Bitcoin-Bond Sale Flop Deepens Debt Market Rout in El Salvador
- Cleaning up Crypto
- ARE CRYPTOCURRENCIES CURRENCIES? BITCOIN AS LEGAL TENDER IN EL SALVADOR – NATIONAL BUREAU OF ECONOMIC RESEARCH