The Land of Volcanoes, the Dream of Bitcoin: El Salvador's Foray into Digital Currency

The Land of Volcanoes, the Dream of Bitcoin: El Salvador's Foray into Digital CurrencyEl Salvador, a country in Central America, is known as the "Land of Volcanoes" due to its numerous volcanic formations. In recent years, another label, "Bitcoin," has become strongly associated with the nation, attracting global attention

The Land of Volcanoes, the Dream of Bitcoin: El Salvador's Foray into Digital Currency

El Salvador, a country in Central America, is known as the "Land of Volcanoes" due to its numerous volcanic formations. In recent years, another label, "Bitcoin," has become strongly associated with the nation, attracting global attention. Recently, the Salvadoran government announced it would begin paying all public sector salaries in Bitcoin, further expanding the cryptocurrency's use within the country. This news once again stirred up a wave within the cryptocurrency world. What is the deep connection between El Salvador and Bitcoin? The story might be traced back to a "mysterious donation."

In 2019, the beach town of El Zonte in El Salvador received an anonymous donation in Bitcoin. The donor hoped to foster the integration of Bitcoin into everyday life. To express gratitude for this donation, local residents initiated the "Bitcoin Beach Initiative," encouraging the use of Bitcoin for transactions. Within its first year, the town gained immense notoriety, drawing over 20,000 consumers from within and outside the country to experience Bitcoin payments. From shopping malls and hotels to street vendors selling roasted corn, over 1,000 Bitcoin transactions occurred daily. This "pilot experiment" arguably provided "inspiration" for El Salvador's ensuing series of Bitcoin policies.

In 2021, El Salvador became the first country globally to adopt Bitcoin as legal tender. President Nayib Bukele also announced plans to build a "Bitcoin City" powered by geothermal energy. Thus, a "nationwide Bitcoin adoption" experiment officially began in this Central American nation, with a population of over 6 million and an area exceeding 20,000 square kilometers. President Bukele outlined three key objectives for this experiment: financial inclusion, efficient remittances, and attracting foreign investment.

El Salvador is a country where numerous citizens lack bank accounts. To encourage Bitcoin usage, the government developed a digital wallet called Chivo, and upon successful registration, individuals received a Bitcoin bonus equivalent to $30. Additionally, the government installed 200 ATMs with Bitcoin exchange capabilities. Driven by these policies, many citizens joined the movement, enticed by novel experiences and substantial subsidies. Even foreign tourists flocked to the country. Walking through the streets of El Salvador, people could use Bitcoin to buy street bread, make purchases at McDonald's and Walmart, and pay for gas at gas stations.

However, as time passed, challenges surfaced. Merchants reported frequent hacker attacks on digital wallets, resulting in account lockouts and inability to withdraw funds. Other technical issues included wallet crashes, extremely slow transfer speeds, and frequent ATM malfunctions. Consequently, protests erupted in the Salvadoran capital, with thousands taking part. The sudden and forceful adoption of digital currency, e-wallets, and new concepts, without prior financial experience, made it difficult for citizens to bear and accept the risk of malicious Bitcoin attacks.

The high volatility of Bitcoins value also brought problems. Yesterday, a pound of tomatoes might cost 3 dollars, but today it could jump to 30 dollars, creating significant inconvenience for people's lives. According to foreign media reports, after a year, only 20% of locals continued to use the Chivo app, while close to 92% of merchants stated that "Bitcoin is not important to them." People were also hesitant to use it as a regular remittance tool.

El Salvador is known as a country of "migrant workers." Many Salvadorans work abroad for extended periods and often face significant fees when sending remittances to their families. Experts estimate that in 2020, remittances accounted for a quarter of El Salvador's GDP. Using Bitcoin for transfers could have saved nearly $400 million in fees. This was one of President Bukele's initial motivations for promoting Bitcoin. However, according to a survey conducted by the University of Central America's Public Opinion Institute, in 2023, 88% of Salvadorans no longer use Bitcoin, and only 1% of remittances were sent via Bitcoin. The latest data from the Central Reserve Bank of El Salvador reveals that between January and August of 2024, only 1.1% of remittances involved cryptocurrencies.

Furthermore, President Bukele's declared intention to establish "Bitcoin City" remains in the realm of aspirational envisioning. The government chose a location in a volcanic region for the city, planning to utilize geothermal energy for Bitcoin mining. To finance the construction, the government announced the issuance of the world's first sovereign blockchain bond the "Volcano Bond," aiming to raise $1 billion. However, due to the Bitcoin crash, the bond issuance program, initially scheduled for early 2022, was postponed. Subsequently, the country declared in December 2023 that the bond issuance would take place in the first quarter of 2024, but as of now, it has yet to materialize.

Ordinary citizens have neither achieved wealth through Bitcoin nor experienced greater convenience, but this seems to have no impact on the Bukele administration's confidence in its Bitcoin policies. In a recent interview President Bukele stated that Bitcoin "has not been as widely adopted as we hoped," but "it has also given us a brand, it has brought us investment." Indeed, compared to building financial infrastructure for the country, Bitcoin has initially yielded ancillary benefits concerning investment, or perhaps hype Bitcoin is gradually becoming a symbol and defining characteristic of El Salvador, enhancing the country's attractiveness for investment. The Bitcoin mining pool OCEAN has established its new global headquarters in El Salvador, emphasizing the country's potential as a hub for pioneering Bitcoin operations. In August of this year, the Turkish firm Yilport invested a substantial $1.6 billion to upgrade two ports in El Salvador, including one designated for "Bitcoin City."

Beyond the objectives set by the Bukele administration, the assessment of the country's Bitcoin policy requires consideration of the potential economic risks associated with these policies. The completely decentralized nature of cryptocurrencies could introduce significant uncertainties into the national economy. In 2001, following the collapse of El Salvador's monetary system, the country's central bank ceased issuing its sovereign currency, the "colon," shifting to the U.S. dollar as legal tender. Now, amid the "de-dollarization" trend, the country has failed to reform its financial system or restructure its economic framework, instead relying once again on a fresh currency to address its issues. 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, with no income tax, property tax, or purchase tax.

This country, lacking an effective financial regulatory system, while attracting investment through Bitcoin, risks attracting a large influx of speculators who, utilizing Bitcoin's anonymity, could transform El Salvador into a "safe haven" for their illicit activities. The resulting gray economy and illegal operations would be challenging to monitor. Moreover, a completely decentralized, non-state currency lacks any connection to real economic activity, rendering the central government incapable of controlling the money supply based on economic circumstances. This could diminish the Salvadoran government's control over the economy and potentially disrupt the existing monetary and financial order.

The International Monetary Fund (IMF) recently urged El Salvador to scale back its Bitcoin policies and comprehensively reform its regulatory framework surrounding digital assets. In fact, numerous Latin American countries have actively embraced cryptocurrencies in recent years. For example, the Central Bank of Brazil is implementing cryptocurrency regulation in stages; Argentina has authorized Bitcoin and the stablecoin USDC as registered company capital; and Uruguay passed a cryptocurrency law, recognizing cryptocurrencies as virtual assets in the country. These endeavors reflect a self-rescue effort by many Latin American countries battling economic distress to address challenges like high inflation, political instability, and a lack of traditional banking services.

However, cryptocurrencies currently face a weak regulatory environment globally. These countries at the forefront of cryptocurrency adoption, while being the first to take the plunge, also need to establish robust regulatory safeguards. Otherwise, the Bitcoin erupting from volcanoes might not lead to wealth but unleash new problems as unpredictable as volcanic eruptions.