Bitcoin was meant to transform El Salvador’s economy, catapulting the poor Central American nation into an unlikely harbinger of a financial revolution. But nearly a year after the country’s president, Nayib Bukele, shocked the financial world by making its most popular digital coin a national currency, his bet appears to be backfiring, highlighting the gap between utopian promises of cryptocurrency’s proponents and economic realities.
Last year, his government allocated the equivalent of 15% of its annual investment budget to try ingraining bitcoin into the national economy. It offered $30, nearly 1% of what an average Salvadoran earns in a year, to every citizen who downloaded a government-backed cryptocurrency payment app called Chivo Wallet; chivo means “cool” in local slang. Bukele claims that nearly 3 million Salvadorans, or 60% of adults, heeded his call.
Yet, after the initial uptake, the use of cryptocurrency has plunged. Only 10% of Chivo users continued making bitcoin transactions on the app after spending their $30 stipend, according to a survey conducted by three US-based economists in February and published by the National Bureau of Economic Research. Almost no new customers downloaded the app this year, the researchers found. “The government gave this project as much push as you could hope for, and it still failed,” said Fernando Alvarez, a University of Chicago economist and an author of the study.
Bukele’s bitcoin push was dealt a further blow by a global cryptocurrency sell-off that wiped away hundreds of billions of dollars from the value of digital assets since March. The government’s bitcoin holdings have lost about 60% of their presumed value during the recent market plunge. “People are scared of losing their money,” said Edgardo Villalobos, who coordinates vendors in capital city San Salvador.
The losses are increasing as the government struggles to subsidise rising costs of food and fuel and meet an upcoming $800 million debt payment. Eventually, Bukele will face a difficult choice of drastically cutting public spending or pushing the country into default.