Bitcoin Experiment in the "Land of Volcanoes": How El Salvador is Reshaping its Economy with Digital Currency?

Bitcoin Experiment in the "Land of Volcanoes": How El Salvador is Reshaping its Economy with Digital Currency?El Salvador, a Central American nation known for its stunning volcanic landscapes, has earned another label in recent years: "Bitcoin." In 2021, El Salvador became the first country in the world to adopt Bitcoin as legal tender, triggering global debate

Bitcoin Experiment in the "Land of Volcanoes": How El Salvador is Reshaping its Economy with Digital Currency?

El Salvador, a Central American nation known for its stunning volcanic landscapes, has earned another label in recent years: "Bitcoin." In 2021, El Salvador became the first country in the world to adopt Bitcoin as legal tender, triggering global debate. President Bukele ambitiously announced the construction of a "Bitcoin City" powered by volcanic energy, aiming to propel a nationwide Bitcoin experiment.

What lies behind El Salvador's deep-rooted connection with Bitcoin? It might stem from a "mysterious donation." In 2019, the beach town of El Zonte in El Salvador received an anonymous donation in Bitcoin, with the donor hoping to promote its everyday use. In gratitude, locals launched the "Bitcoin Beach Initiative," advocating for Bitcoin-based transactions. In its first year, the beach gained notoriety, attracting over 20,000 domestic and international customers. From shopping malls and hotels to street vendors selling roasted corn, daily transaction volumes reached over 1,000.

This "pilot experiment" arguably inspired El Salvador's subsequent Bitcoin-related policies. President Bukele views Bitcoin as the "golden key" to address the country's financial inclusion, remittance efficiency, and foreign investment attraction. To encourage Bitcoin usage, the government developed a digital wallet called Chivo, offering a $30 Bitcoin bonus upon registration. Additionally, the government installed 200 ATMs with Bitcoin exchange functionality. Driven by novelty and subsidies, many joined the bandwagon, even attracting foreign tourists. Walking the streets of El Salvador, one can witness people using Bitcoin to buy bread, dine at McDonald's and Walmart, and pay at gas stations.

However, problems arose over time. Digital wallets suffered frequent hacker attacks, locking accounts and making withdrawals impossible. Tech issues like wallet crashes, slow transfers, and frequent ATM malfunctions emerged, sparking public resentment. Transitioning from zero financial experience to forced digital currency and e-wallet adoption, citizens struggled to cope with the risk of malicious Bitcoin attacks.

Bitcoin's high volatility also impacted daily life. The price of a kilogram of tomatoes might be $3 one day and jump to $30 the next, creating unpredictable fluctuations and inconveniencing people. According to foreign media, only 20% of locals continued using the Chivo app after a year, and nearly 92% of merchants declared Bitcoin "unimportant" to them.

People also remain hesitant to use Bitcoin for remittances. El Salvador is known as a "labor country," with many Salvadorans working abroad for extended periods. Sending remittances back home typically involves hefty fees. Experts estimate that a quarter of El Salvador's GDP in 2020 stemmed from remittances, and using Bitcoin for transfers could potentially save nearly $400 million in fees. That was one of President Bukele's initial motivations for promoting Bitcoin. However, according to the Central American University's Public Opinion Institute, 88% of Salvadorans stopped using Bitcoin in 2023, with only 1% of remittances sent via Bitcoin. The latest data from El Salvador's Central Reserve Bank reveals that only 1.1% of remittances involved cryptocurrencies from January to August 2024.

The "Bitcoin City" announced by President Bukele remains stuck in the realm of wishful thinking. The government chose a site in a multi-volcanic region, aiming to leverage volcanic energy for Bitcoin mining. To fund city construction, the government announced the world's first sovereign blockchain bond the "Volcano Bond" aiming to raise $1 billion. However, due to Bitcoin's plunge, the bond issuance, initially scheduled for early 2022, was postponed. The country subsequently announced in December 2023 that the bond would be issued in the first quarter of 2024, but it has yet to materialize.

Ordinary citizens neither achieved Bitcoin-fueled wealth nor saw their lives become more convenient, but this doesn't seem to have shaken the Bukele government's confidence in its Bitcoin policy. In a recent interview, President Bukele stated that Bitcoin "didn't get adopted as widely as we hoped," but "it also gave us a brand, it brought us investment."

Indeed, beyond building financial infrastructure for the country, Bitcoin initially brought investment-related benefits, or rather a "buzz." Bitcoin has become a symbol and characteristic of El Salvador, attracting investor attention. Bitcoin mining pool OCEAN has established its new global headquarters in El Salvador, highlighting the country's potential as an innovation hub for Bitcoin operations. In August this year, Turkey's Yilport invested $1.6 billion to upgrade two ports in El Salvador, one of which is located near "Bitcoin City."

However, apart from the goals set by the Bukele administration, assessing the country's Bitcoin policy involves a crucial element: addressing the potential economic risks associated with it. The decentralized nature of cryptocurrency could introduce significant uncertainty to the national economy.

After the collapse of El Salvador's monetary system in 2001, the central bank ceased issuing the "Coln," the nation's sovereign currency, adopting the US dollar as legal tender instead. Amidst the current "de-dollarization" trend, the country has failed to reform its financial system or restructure its economy, instead relying on a new currency to solve its problems. President Bukele also aims to transform the future "Bitcoin City" into a "tax haven" for Bitcoin investors, proposing a 10% capital gains tax within the city, exempting residents from income, property, and purchase taxes.

This nation, lacking an effective financial regulatory framework, while attracting investment through Bitcoin, may also attract speculators who, leveraging Bitcoin's anonymity, could turn El Salvador into a "safe haven" for illegal activities. The resulting gray industries and illicit behaviors are difficult to monitor. Furthermore, a fully decentralized, non-state-controlled currency unrelated to the real economy prevents the central government from regulating the money supply based on economic conditions. This could further weaken the Salvadoran government's control over the economy and potentially disrupt the existing monetary and financial order. The International Monetary Fund (IMF) has recently urged El Salvador to scale back its Bitcoin policy and comprehensively reform its regulatory framework surrounding digital assets.

In fact, numerous Latin American countries have been embracing cryptocurrency in recent years. For instance, the Central Bank of Brazil is implementing cryptocurrency regulation in stages; Argentina has authorized Bitcoin and the stablecoin USDC as company registration capital; Uruguay has passed a cryptocurrency law recognizing cryptocurrencies as virtual assets in the country. Behind these endeavors lies the self-rescue efforts of many Latin American nations grappling with economic hardships, seeking to address challenges such as high inflation, political instability, and lack of traditional banking services.

Yet, cryptocurrencies currently face weak global regulation. While these countries pioneering cryptocurrency adoption are "leading the way," they must also erect regulatory safeguards. Otherwise, the Bitcoin "spewing" out of volcanoes could unleash unforeseen problems rather than wealth, much like a volcanic eruption.