(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 cheering crowd of crypto enthusiasts at a coastal 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 very beginning of its experiment as the first nation in the world to use cryptocurrency as legal tender.
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Now, a year after the trip, there are far fewer fireworks. Adoption has been slow to develop, and 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 — not even close — but it also hasn’t brought the financial ruin that some have warned of. Or not yet.
“Nobody talks about Bitcoin here anymore. It was kind of forgotten,” said former El Salvador central bank chief 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, sparking a frenzy in the cryptocurrency community while drawing criticism from skeptics including bond traders and the International Monetary Fund. Bitcoin’s September 7th debut was plagued with technical issues, leading to an inauspicious start. Undeterred, Bukele — sporting “laser eyes” in his Twitter profile picture — fired back at the naysayers as he welcomed bitcoin supporters and crypto executives into his presidential office, where he continues to host them to this day.
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As part of the rollout, Salvadorans were offered government-issued digital wallets preloaded with $30 worth of bitcoins to help kick things off. By law, taxes can be paid in bitcoin and businesses must accept it as a form of payment unless they are technologically unable to do so. But the coin’s volatility scared off users, and the cryptocurrency saw wider adoption in countries with poor payment networks or strict exchange controls, such as Argentina, Venezuela and Cuba, Acevedo said. “We have a good payment network in El Salvador, so why transfer money with cryptocurrency?” he said.
Most Salvadorans have not 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 in the run-up to its launch as legal tender and continued to add to its stockpile, apparently “buying the dip” during periods when bitcoin fell. The result? Sitting on losses.
A series of recent surveys found that only a relatively small proportion of respondents continue to use digital wallets and few businesses have recorded bitcoin transactions. And the central bank says only 2% of remittances are sent through cryptocurrency wallets.
However, the government is still claiming victory. Bitcoin has attracted foreign investment and tourism and increased financial access to a largely unbanked population, according to Finance Minister Alejandro Zelaya. The government says its digital wallet, Chivo, has more than 4 million users. Tourism is on track to surpass pre-pandemic levels this year, and the central bank says 59 cryptocurrency and blockchain companies have registered offices in El Salvador.
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Zelaya says the administration still plans to issue a bitcoin-backed bond called a “volcano token” using blockchain technology, although he acknowledges that recent price declines have hurt sentiment. Advocates say El Salvador is in a position to woo companies in a promising industry and become a financial services hub in the future, creating high-tech jobs.
“To assume that cars failed because after the first year when Ford started production in 1896, no more than 2% of the population owned a car would be pretty short-sighted,” 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 a trading platform for the volcanic bonds and will apply for a license to operate in El Salvador once the government passes a digital securities law to support the issuance. Canada-based crypto 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 Chivo’s wallet, and a series of other companies have also worked on the country’s implementation.
“I don’t see the reception as 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, during which 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 seen a government 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 earn bitcoins came with a downside. The IMF has delayed approving a $1.3 billion program for the country, citing bitcoin risks. The government’s 2,381 bitcoins purchased 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 spent a total of $375 million on the rollout, including a $150 million fund to support the conversion of bitcoin to dollars and the money for the $30 sign-up bonus given to Chivo users.
“The Bitcoin experiment promoted by the Buchelle administration has significantly raised the risk perception of the market for the country,” said Fabiano Borsato, chief operating officer of Torino Capital LLC. “It applies in the context of fragile public finances, high and persistent fiscal deficits and doubts about the rule of law in the country. In our view, this will prevent El Salvador from obtaining financing in international markets on favorable terms in the short to medium term.”
Overall, Bukele remains extremely popular among Salvadorans, largely due to his crackdown on gangs, infrastructure investment and efforts to promote tourism, although many remain wary of Bitcoin.
A May survey by the Universidad Centroamericana Jose Simieon Canas in El Salvador found that 71.1 percent of respondents said the bitcoin law did nothing to improve their family finances. Those polled ranked bitcoin as the second biggest failure of Bukele’s policies over the past year, after accelerating inflation.
“If you go to any market in El Salvador, you’re more likely to get insulted than to be able to buy something in bitcoin,” said Laura Andrade, director of the university’s Public Opinion Institute, which conducted the survey. “It’s not part of people’s daily lives.”
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