(Bloomberg) — El Salvador President Nayib Bukele took the stage last year to fireworks and AC/DC’s “You Shook Me All night Long,” announcing to a crowd of crypto enthusiasts at a beachside confab that Bitcoin would revolutionize his country. It was November, the digital token had just hit new all-time highs, and El Salvador was at the beginning of its experiment as the first nation in the world to use cryptocurrency as legal tender.
Most Read by Bloomberg
Now, a year after the trip, there are far fewer fireworks. Adoption has been slow, and the sharp declines in Bitcoin’s price from those highs last fall have dampened the early euphoria that swept the nation. Bitcoin hasn’t replaced El Salvador’s hard currency, the US dollar — it’s not even close — but it also hasn’t brought the economic disaster that some have warned of. Or not yet anyway.
“No one really talks about Bitcoin here anymore. It’s kind of forgotten,” said the former head of El Salvador’s central bank, Carlos Acevedo. “I don’t know if you’d call it a failure, but it certainly wasn’t a success.”
Bukele captivated the world last year when he made Bitcoin an official currency alongside the dollar, sending the cryptocurrency community into a frenzy while drawing criticism from skeptics including bond traders and the International Monetary Fund. Bitcoin’s debut on September 7 was beset by technical glitches, which made for an inauspicious start. Undeterred, Bukele – with “laser eyes” in his Twitter profile photo – barked at critics while welcoming Bitcoin supporters and crypto executives to his presidential office, where he continues to host them to this day.
Read more: Bitcoin sparks wave of speculation in El Salvador
As part of the rollout, Salvadorans were offered government-issued digital wallets preloaded with $30 worth of Bitcoin to help kick things off. By law, taxes can be paid in Bitcoin and businesses will have to accept it as a form of payment unless they are technologically able to do so. But the currency’s volatility has scared off users, and cryptocurrencies have seen wider acceptance in countries with poor payment networks or tight currency controls, such as Argentina, Venezuela and Cuba, Acevedo said. “In El Salvador we have a good payment network, so why transfer money with cryptocurrencies?” he said.
Most Salvadorans haven’t poured large sums of money into Bitcoin, saving many from the recent bear market, Acevedo said. The same cannot be said for the government itself, which began buying the token last year before it was launched as legal tender and has continued to add to its stockpile, apparently “buying the dip” during periods when Bitcoin was down. The result? He is sitting on losses.
A series of recent surveys found that only a relatively small minority of respondents continue to use digital wallets, and few businesses have recorded Bitcoin transactions. And the central bank says only 2% of remittances have been sent through cryptocurrency wallets.
However, the government is still claiming victory. Bitcoin has attracted foreign investment and tourism and increased financial access to an unbanked population, according to Finance Minister Alejandro Zelaya. The government says its digital wallet, Chivo, has more than 4 million users. Tourism is accelerating to surpass pre-pandemic levels this year, and the central bank says 59 cryptocurrency and blockchain companies have registered offices in El Salvador.
Read more: Bitcoin bet pays off, El Salvador says
Zelaya says the administration still plans to issue a Bitcoin-backed bond, dubbed the “volcano of the volcano,” using blockchain technology, though he admits recent price declines have hurt sentiment. Proponents say El Salvador is in a position to attract companies in a promising industry and become a financial services hub in the future, creating high-tech jobs.
“Assuming that cars were a failure because after the first year Ford started production in 1896, 2% of the population would not be myopic enough,” said Paolo Ardoino, chief technology officer at Bitfinex. “The government has a long-term vision. The crypto industry is highly technological and this is the type of industry that everyone should want in their country.”
Bitfinex will serve as the trading platform for the volcano bond and will apply for a license to operate in El Salvador once the government approves a digital securities law to support the issuance. Canada-based cryptocurrency lending and savings company Ledn has seen a 678% increase in users in El Salvador over the past year, according to co-founder Mauricio Di Bartolomeo. New York-based AlphaPoint was hired to fix bugs in the Chivo wallet, and a number of other companies have also worked on the rollout in the country.
“I don’t see adoption that low. I see a country where everyone has a Bitcoin wallet and everyone knows what Bitcoin is,” said Simon Dixon, founder of crypto finance startup Bank to the Future, during an August visit to El Salvador, where he met Bukele. Bank to the Future is currently hiring in El Salvador and plans to open an office there, he said. “This is the first time I’ve come across an administration that has a president who has put together a team that really works with the urgency and impact of a fast-growing company.”
But Bukele’s desire to win over Bitcoiners has a downside. The IMF has delayed approving a $1.3 billion program for the country citing risks from Bitcoin. The 2,381 Bitcoins the government bought with public funds are worth $47.2 million at current prices, less than half of what the administration paid for them. Moody’s estimates that the government has spent a total of $375 million on the launch, including a $150 million fund to support Bitcoin-dollar conversions and the money for the $30 sign-up bonus given to Chivo users.
“The Bitcoin experiment promoted by Bukele’s management has significantly increased the market’s perception of the country’s risk,” said Fabiano Borsato, Chief Operating Officer of Torino Capital LLC. “It is implemented in a context of fragile public finances, high and persistent budget deficits and doubts about the rule of law in the country. This, in our opinion, will prevent El Salvador from accessing financing in international markets under favorable conditions in the short and medium term.”
Overall, Bukele remains extremely popular among Salvadorans, largely due to its crackdown on gangs, infrastructure investment, and efforts to boost tourism, even though many remain wary of Bitcoin.
A May poll by El Salvador’s Universidad Centroamericana Jose Simieon Canas found that 71.1% of respondents said the Bitcoin law did nothing to improve their family’s finances. Respondents ranked Bitcoin as Bukele’s second biggest policy failure in the past year behind accelerating inflation.
“If you go to any market in El Salvador, you’re more likely to get an insult than to be able to buy something in Bitcoin,” said Laura Andrade, director of the university’s public opinion institute, which conducted the poll. “It’s not part of people’s daily routine.”
Most Read by Bloomberg Businessweek
©2022 Bloomberg LP