El Hodlador

Where empanadas are fresh and the bitcoin is tender

Welcome back. Remember when El Salvador became the first country to make bitcoin legal tender last year? Controversial stuff. The crypto community was ecstatic, proudly celebrating El Hodlador’s move as a milestone in Bitcoin’s journey to mass adoption. Meanwhile, the Peter Schiffs of this world were happy to point out that El Salvador’s plans were nothing short of crazy.

Today, let’s take a look at who gets to say I told you so.

—Angelina

Bukele’s Ambitious Plans

Reddit

September 7, 2021. The day bitcoin became legal tender in El Salvador. It was supposed to kick off a new era for the country. President Nayib Bukele captivated Salvadorans with his promise that Bitcoin would revolutionize their debt-ridden nation, bringing prosperity and innovation to a country whose annual GDP growth has long been stuck in the low single digits.

How it started

Bukele, complete with laser eyes on his Twitter profile, believed that the introduction of Bitcoin to the country’s economy would advance El Salvador. His reasoning:

  • The majority of Salvadorans don’t have a bank account, limiting their access to the global financial system. BTC adoption could help bank the unbanked.

  • Remittances (money sent back to El Salvador from citizens working abroad) make up one-quarter of the country’s GDP. Paying them in BTC could reduce the high transaction fees of cross-border payments.

  • El Salvador’s economy is heavily reliant on the U.S. dollar, its primary currency. BTC could provide more independence.

  • As an early adopter of Bitcoin, El Salvador could attract foreign investment, Bitcoin miners, and crypto businesses to boost its lagging economy.

To kick things off, all Salvadorans received access to the national crypto wallet with $30 worth of BTC. Businesses were advised to accept BTC as payment unless they were technologically unable to do so. Bukele announced plans to build “Bitcoin City,” a carbon neutral tax haven shaped like a coin. He also promised to launch the world’s first sovereign Bitcoin bond to fund the city and make it “the Singapore of Latin America.”

How it’s going

Making promises is easy. Keeping them is the tricky part (ask Elon Musk). One year after adopting bitcoin as legal tender, President Bukele hasn’t fulfilled his ambitious goals.

  • Bitcoin hasn’t replaced the U.S. dollar as El Salvador’s hard currency. In fact, only a small number of Salvadorans actually use crypto. Very few businesses registered any transactions in BTC over the last year and 60% of users who initially downloaded the national crypto wallet never made another transaction after spending their first $30 of BTC.

  • Only 2% of remittances flowing into El Salvador are paid in crypto.

  • The Bitcoin Volcano Bond and Bitcoin City remain a distant reality.

  • El Salvador is struggling to meet its debt payments. And international lenders are unwilling to help, worried by the increase in public debt and financial instability that the Bitcoin implementation brought. The IMF even urged Bukele to strip BTC of its legal tender status.

On the surface, it appears Bitcoin isn’t the saving grace El Salvador thought it might be. “If you go to any market in El Salvador, you’re more likely to receive an insult than be able to purchase something in Bitcoin,” said Laura Andade, director of Universidad Centroamericana’s public opinion institute.

But it’s not a complete failure: El Salvador’s tourism industry is up 30% since introducing Bitcoin as legal tender. The move also succeeded in attracting some foreign capital—according to the country’s central bank, 59 blockchain companies have registered in El Salvador since last September.

Plus? It’s still early. “Assuming cars were a failure because after the very first year Ford started production in 1896 no more than 2% of the population had a car would’ve been quite myopic,” said Paola Ardoino, CTO of Bitfinex.

Big picture: While it may be too early to declare El Salvador’s Bitcoin experiment a failure or a success, it’s never too early to read the room.

Bukele, who briefly changed his Twitter bio to “world’s coolest dictator,” has failed to do so. Instead of swallowing the orange pill, Salvadorans have headed to the streets in protest of Bukele’s increasingly authoritarian rule. Yet El Salvador’s government continues to crack down on citizens speaking out against Bitcoin and prioritize the promotion of crypto over citizens’ basic needs—such as clean water.

For widespread bitcoin adoption to take off in El Salvador, its government needs to ensure that the average Salvadoran (not just the crypto-savvy elite) gets a piece of the cake too.

And that’s what you need on your radar this week in crypto. Btw, if you’re in for some entertainment go watch Bukele’s performance at the Miami Bitcoin conference in 2021, complete with AC/DC soundtrack, UFOs, and backwards baseball cap. See you back here on Tuesday!