A year later, the bitcoin experiment in El Salvador stumbles

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CONCHAGUA, El Salvador, September 7 (Reuters) – A year after El Salvador adopted bitcoin as legal tender, the area where the world’s first cryptocurrency city was to be built – a circular metropolis powered by a volcano – is another dense jungle.

President Nayib Bukele had promised that “Bitcoin City” would be a tax haven for crypto investors and miners equipped with an airport, residential and commercial areas and a central square designed to look like a bitcoin symbol seen from the sky. .

“Invest here and make all the money you want,” he declared all in white and wearing a reverse baseball cap, in front of hundreds of bitcoin enthusiasts in November 2021.

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But on a recent visit to the region in the shadow of the Conchagua volcano in the east of the Central American country, Reuters found no heavy machinery, construction workers or raw materials to indicate progress toward the construction of this great symbol in bitcoin.

For many, it has instead become a symbol of madness as bitcoin crashed.

“This experiment was very risky, too risky for a poor country,” said Oscar Picardo, director of the Institute of Science, Technology and Innovation at the private Francisco Gavidia University.

“We have seen that (bitcoin) is a highly speculative and highly variable financial asset,” he added.

A big part of the problem is that the decline in value of bitcoin and other cryptocurrencies has alienated investors.

When El Salvador, one of the poorest countries in Latin America, adopted bitcoin as legal tender on September 7, 2021, the cryptocurrency was close to $47,000. Read more

A year later, it was worth less than half and trading Tuesday at around $19,770.

The Bukele government declined to comment on this story, but defended doubling bitcoin – including acquiring 2,381 bitcoins – saying it is a long-term plan.

He claims his bitcoin policy has attracted investment, reduced banking fees to zero, increased tourism, and promoted financial inclusion.

But lower prices have increased El Salvador’s financial risk, complicating its search for funds to pay $1.6 billion in sovereign bonds maturing in 2023 and 2025.

The International Monetary Fund called on El Salvador to rescind bitcoin’s status as legal tender citing financial, economic, and legal concerns; complicate a deal with the lender.

The use of cryptocurrency also failed to catch on, experts said.

Neither the presidency nor the finance ministry would share figures on bitcoin usage through the government’s bitcoin digital wallet, Chivo.

But a survey by the National Bureau of Economic Research (NBER), a US-based NGO, found that only 20% of Salvadorans who downloaded the Chivo app continued to use it after spending the $30 that the government granted free credit to promote its use.

The study indicates that the vast majority of Chivo downloads took place in 2021, specifically in September, and that almost no downloads took place so far in 2022.

In theory, developing countries like El Salvador are ideal candidates for cryptocurrency adoption due to a continued reliance on cash and a largely unbanked population.

But, according to the April report, “bitcoin is not widely used as a medium of exchange” because users “don’t understand it, they don’t trust it, it’s not accepted by businesses, it is very volatile, and it involves high fees.”

Despite Salvadoran law requiring all businesses to accept cryptocurrency, only 20% do so, according to the survey that polled 1,800 Salvadoran households.

The small watch shop of Jesus Caceres in the center of San Salvador is one company that does. Three signs read “We accept bitcoin”, but the 47-year-old watchmaker only made two sales with the cryptocurrency.

“One for $3 and one for $5 was $8 total. Since then, no one has approached me,” he said.

The government has also encouraged Salvadorans working abroad to send money home through the Chivo government wallet, or other private wallets, without charging commissions. Known as remittances, these transfers from abroad account for 26% of the Central American country’s GDP, one of the highest percentages in the world.

But according to central bank statistics, between September 2021 and June 2022, the country received nearly $6.4 billion in remittances and less than 2% was transferred through digital cryptocurrency wallets.

As with the use of bitcoin, the government shares few details about “Bitcoin City”. But its future looks increasingly uncertain since the issuance of the “Bitcoin Bond”, which Bukele said would support city building, was postponed in the wake of the cryptocurrency crash.

Residents of where the city is planned, between the Conchagua Volcano and the Gulf of Fonseca on the Pacific coast, believe the majority of the country’s 6.5 million people will be disadvantaged.

“It does not benefit us poor people at all,” lamented fisherman and farmer Jose Flores, 48, who has lived in Conchagua for more than three decades.

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Reporting by Nelson Renteria; Written by Sarah Kinosian; Editing by Diego Ore, Stephen Eisenhammer and Alistair Bell

Our standards: The Thomson Reuters Trust Principles.

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