Saturday, December 3, 2022
  • El Salvador’s master plan included the launch of a Bitcoin volcanic bond; cryptocurrency-backed government borrowing
  • Just 6 months after it came into effect, the country’s Bitcoin wallet counted 4 million users
  • El Salvador did two separate things; adopt Bitcoin as a currency and convert the country’s reserves to Bitcoin

In September 2021, El Salvador became the first country to adopt the cryptocurrency Bitcoin as a legal tender. The unprecedented move sent shockwaves throughout the world. While El Salvador is neither the biggest nor the most prominent nation, no nation has shown such a bullish attitude towards cryptocurrency.

Since then, the Central African Republic has also adopted Bitcoin as a legal tender. After a year of using the leading cryptocurrency as legal tender, what does El Salvador have to show for it?

When they announced the move to adopt Bitcoin, there were many questions. President Bukele pointed out that by adopting Bitcoin, the country wanted to increase financial inclusion, cut reliance on the US Dollar, attract foreign direct investment and create jobs in the struggling Central American nation.

Read: El Salvador hosts 44 countries to discuss the future of bitcoin in governance

The move would also include the radical shift of holding national reserves in Bitcoin. Proponents of Bitcoin argued that El Salvador’s move was an inspired one. At the time, it was hard to argue with them as Bitcoin rallied to new highs and was widely tipped to cross the US$70000 mark in 2022.

That hasn’t, of course, been the case. Bitcoin gave up close to 70% of its value from its all-time high. Critics now feel some degree of vindication.

El Salvador’s master plan included the launch of a Bitcoin volcanic bond; cryptocurrency-backed government borrowing. The ambitious plan was presented as the Rosetta Stone that would tie everything together. That plan has suffered multiple setbacks, and to date, there is no certainty over its launch.

There has been consistent pressure on San Salvador from the World Bank and International Monetary Fund to drop Bitcoin.

Since El Salvador’s adoption of Bitcoin and buying it for government reserves, the cryptocurrency has tanked drastically, and their borrowing plan has failed to materialise. Had the project been a failure? To really grade the choice to adopt Bitcoin in El Salvador, we need to dig a bit deeper.

What has worked with BTC

Quite a few things have gone right with the use of Bitcoin as a reserve currency and legal tender.

Bitcoin schools and hospitals in El Salvador

El Salvador reaped big rewards in the early days of purchasing Bitcoin for reserves. They decided to direct the surplus windfall towards constructing schools and hospitals. This infrastructure the country greatly needed was counted as an early win for El Salvador’s Bitcoin era.

Bitcoin improves El Salvador Financial inclusion

El Salvador’s financial landscape wasn’t pretty. Figures as high as 80% were thrown around for the unbanked population. Just 6 months after it came into effect, the country’s Bitcoin wallet counted 4 million users. That is nothing to sneeze at in a nation of just under 6.4 million people. It’s safe to say on the financial inclusion front El Salvador has succeeded with BTC.

Cross-border financial flows

Cross-border remittances have received a shot in the arm thanks to the country using Bitcoin. The improvement in quantity is significant though not miraculous. What is impressive is the reduction in costs of moving money into and out of El Salvador. Cutting out the middleman has worked very well here.

Tourism on the up in El Salvador

Tourism in El Salvador has also enjoyed significant improvement. Recording an 80% in tourism arrivals in 2021 to 1.2 million visitors, the country has already welcomed 1.1 million visitors in the first half of 2022. While I’m all for quoting stats and “the numbers, don’t lie”, thinking we need to take these figures with a pinch of salt.

Both these increments can be easily attributed to easing restrictions as we have adjusted to the pandemic. Prior to the pandemic, El Salvador tourist arrivals averaged around 2.2 million. So perhaps we can say, based on 2022 data, that adoption of Bitcoin has returned tourism to pre-pandemic levels.

What hasn’t worked with BTC

A few things haven’t gone El Salvador’s way when it comes to Bitcoin usage. And the effects are mainly on using Bitcoin as a reserve currency.

Crypto winter frostbite

The crypto winter has hit the world, but it certainly hits differently when the fortunes of an entire nation are contingent on a digital asset that loses close to three-quarters of its value.  By mid-2022, El Salvador had purchased 2301 BTC  at an estimated cost of US$104 million. At present, the same is worth roughly US$45 million. Just as they reaped the rewards of the bullish early days, their reserves have now taken a huge hit.

Bitcoin Volcano fails to erupt

The Bitcoin Volcanic bond has certainly been one of the major talking points of El Salvador’s plan. While it certainly has a radical name, it’s not quite as out of the box as it sounds.

El Salvador simply plans to borrow US$1 billion, half of which will go towards a smart city dubbed Bitcoin city and the other half to buy Bitcoin reserves. The plan is to share proceeds of appreciation in the Bitcoin portion of the fund with contributors to the fund.

‘Everybody’ hates Bitcoin

While El Salvador found many reasons to gravitate towards Bitcoin, the move has not been universally accepted. In fact, multilateral financial institutions, the World Bank and the IMF have repeatedly made calls for Bukele to drop the cryptocurrency.

The pushback has limited El Salvador’s access to international financial markets. This makes a bad situation worse and has the potential to reverse what progress may have been made by the country.

Bitcoin adoption in El Salvador: Pass or fail

While I cannot render a verdict on the progress El Salvador has made with Bitcoin with authority; I believe it’s fair to say El Salvador has recorded undeniable successes. 20 schools and hospitals, increasing the financially included population by roughly 40%, all while lowering the cost of cross-border financial flows; nothing can take away from these victories.

The adoption of Bitcoin as a reserve currency hasn’t quite gone their way, but there is still optimism about the cryptocurrency, and I’m the long run, the move will likely come off as inspired genius. The  Bitcoin Volcano project is a little more complicated. It’s been delayed, but that does not equal being denied. Sure many will be bearish on the idea after the hiccups and delays, but that doesn’t mean it won’t happen or work for that matter.

Bitcoin adoption in Africa

El Salvador was, of course, the first country to adopt Bitcoin as legal tender, which was newsworthy. For Africans, it was a little more relatable than just being the first but a country with similarities with many African countries. Poor economic fundamentals, low access to critical factors such as electricity or internet, and burdened by errors of the past.

Recently CBK chief remarked that holding Kenya’s reserves in Bitcoin was craziness that warranted a jail term. However, using the US dollar as a reserve currency also comes with its problems. Even gold reserves don’t constantly enjoy sunny days.

In the discourse, it sometimes slips to notice that El Salvador did two separate things; adopt Bitcoin as a currency and convert the country’s reserves to Bitcoin. Although they came together, these ideas or actions are severable from each other.

Adopting Bitcoin has improved two very important things in the financial flow cost and inclusion rates. When applied to this purpose, there are very few reasons to argue against what the adoption of cryptocurrency can bring to a nation.

Holding reserves in Bitcoin has been more of a rollercoaster ride in the short 12 months. El Salvador saw the best of Bitcoin in the early days and the worst of it in recent times. While nobody can say what the future holds for certain, the move isn’t a failure.

In fact, El Salvador’s decision to cash in on the gains and solidify the to infrastructure the country needed is the icing on the cake. If they continue to move this wisely, they could smile for a long time.

What’s your verdict on El Salvador’s entanglement with Bitcoin a year later?

Read: IMF to assist El Salvador in bitcoin currency implementation despite past stance

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