El Salvador, which announced Bitcoin (BTC) as legal tender on 5 June 2021 at Bitcoin Miami 2021 conference, has now gone through lots of challenges.
The announcement of El Salvador President Nayib Bukele took the world by surprise and the crypto market was at around $1.6 trillion with the BTC price at $37,689.
President Bukele said that by September Bitcoin would become legal, as the parliament was yet to pass the bill that would make this legal.
After the announcement, the crypto market started rising and when the law was passed by the parliament on 7 September 2021, the BTC price increased to $46,810, which later went on to touch a new high of $67,566 on 8 November 2021.
During the one-year period, El Salvador also received threats from the International Monetary Fund (IMF), and World Bank to pull back from making BTC legal tender as other countries also asked to reconsider their decision.
But President Bukele did not buckle to the pressure and decided to go ahead. Before launching, the country also started buying BTC from the market and decided to airdrop $30 in BTC to El Salvadorians before the launch.
As of 9 May 2022, El Salvador’s current total reserve of BTC is around 2301. Recently, the country purchased 500 BTC worth $15.5 million. The country also lost the value of the BTC it held, which was purchased at the rate of over $50,000 to $65,000 per BTC between September 2021 to January 2022.
President Bukele stressed that Bitcoin can solve the problem of 70% of their citizens who don’t have access to financial services and BTC adoption can save the country $400 million in remittances charges.
El Salvador which uses the US dollar as legal tender made it clear that it will also remain legal tender along with BTC.
After the law came into force, the country also rolled out its own BTC wallet called Chivo, which was built by the Mexican crypto trading platform Bitso.
So far the wallet is now used by over 4 million users, which has a population of 6.49 million. It is also working to install more than 150 Bitcoin ATMs across the country.
Due to some major concerns with the wallet, El Salvador has partnered with US-based crypto wallet provider AlphaPoint to address some concerns about Chivo.
Speaking on the Chivo wallet, Bitso’s chief corporate and regulatory affairs officer Felipe Vallejo last month said that 20% of all Salvadorans still use the Chivo wallet even after spending the $30 airdrop in BTC they received from the government.
Adding further, Vallejo said that they are working with the government to increase the adoption rate by educating people about crypto and blockchain.
Building Bitcoin city
The country announced the setting up of a Bitcoin city, which will be built using $500 million from the $1 billion bonds raised to fund it. The city will be built on a volcanic island.
The other $500 million would have been used to build out energy and Bitcoin mining infrastructure in the region.
Giving out more information on the crypto bond, El Salvador said that it will be a 10-year bond that will be backed by Bitcoin and will carry an interest of 6.5%. To issue the bond, the government will grant a license to Bitfinex Securities.
However, this seems to delay further, as El Salvador is not in a position to pay a sovereign debt worth $800 million that will mature in January 2023.
As the country relies on the US dollar for all its financial needs and its debt is 90% of its GDP, it will not be possible for the President to repay it, like IMF, World Bank and other financial institutions are not happy with El Salvador’s decision to back BTC.
Challenges ahead
Giving out more details on the sovereign bonds, an economist from the London School of Economics said that El Salvador has very fragile public finances, as the cost of the pension funds, insurance funds, and the entire local banking system has government bonds on their balance. But, if foreign bonds default there will be a spillover effect, causing failure in the banking system.
The balance of the whole financial system will take a large hit and a country that has dollars as a legal currency would run on the banks; people might withdraw their money from the banks and keep it at home as physical cash from banks in the US, which might cost banks failure.
In El Salvador, there is no one to bail out the bank. Another problem is multilateral institutions that lend money to El Salvador; might just stop lending.
On the Bitcoin legal tender issue, the economist said El Salvador has spent around $400 million to make BTC happen since September 2021, but it is unclear how much tax revenue it has brought so far.
Fresh hopes
In order to share the Bitcoin experience, President Nayib Bukele hosted a meeting with 32 central banks and 12 financial authorities from 44 countries in Guatemala on 17 May where officials from Africa, Asia, and Latin America were invited to discuss financial inclusion and the digital economy.
In a series of tweets on 16 May 2022, the president released the names of the participants including Banco de Moçambique; Bank Al-Maghrib (Morocco); Bank of Sierra Leone; Bank of Zambia; Central Bank of Lesotho; Central Bank of Liberia; Central Bank of Sudan; Financial Regulatory Commission of Mongolia; Ministry of Finance, Zambia; Palestine Monetary Authority; Reserve Bank of Malawi; Central Bank of Egypt; Central Bank of Jordan; Central Bank of Nigeria; Ministère de l’Economie, des Finances et du Plan du Sénégal; Superintendencia de Bancos de la República Dominicana; Banque Centrale de Mauritanie; Banque Centrale du Congo; Central Bank of Armenia; Bangladesh Bank; National Bank of Rwanda.
Other names were Nepal Rastra Bank; Sacco Societies Regulatory Authority (SASRA) Kenya; State Bank of Pakistan; Superintendencia General de Entidades Financieras de Costa Rica; Superintendencia de la Economía Popular y Solidaria de Ecuador; Banco Central de El Salvador; Central Bank of Eswatini; Ministry of Finance of Eswatini; Central Bank of The Gambia; Comisión Nacional de Bancos y Seguros de Honduras; Direction Générale du Trésor, Ministère des Finances et du Budget, Madagascar; Maldives Monetary Authority.
Only time will tell whether El Salvador is able to pay its sovereign debt. However, its finance minister has said that all the debt will be paid on time, and there will be no delay.
A small Central American nation with limited resources is taking a plunge in disrupting the financial sector and if it goes through, it can show a way to many small nations that have attended the meeting in Guatemala.
