Workers wait for people interested in the use of Bitcoin, outside an ATM of Chivo wallet, a Bitcoin wallet that the Salvadoran…

El Salvador: The failure of the Bitcoin experiment .. El Salvador is still dependent on the dollar

The uptake of Bitcoin use in El Salvador is still limited

The Wall Street Journal reported that financial transactions in El Salvador are still based on the US dollar, rather than Bitcoin, which has been legalized in the Latin country. 

Since the adoption of bitcoin as a currency, it has been rarely used in everyday transactions, and a recent survey found that about 70 percent did not trust the government's move. 

The small Central American country was the first to legalize cryptocurrency last September, allowing consumers to use it in all their daily banking transactions along with the US dollar. 

El Salvador aims, according to the American newspaper, to make money from the adoption of Bitcoin as an official currency by taking advantage of new markets for borrowing and using the profits of cryptocurrency mining to support expansionary economic policies during the era of its president.  

Salvadoran President Najib Bukele says that bitcoin's wealth can tackle poverty and violence in El Salvador and transfer it to Latin America's Singapore.

In 2019, 40-year-old Najib Bukele won the presidential election by an overwhelming majority. He vowed to eradicate corruption in a country that has suffered from civil war, gang violence, and drug trafficking. 

During his candidacy for the presidency, he broke away from the country's dominant left-wing political movement "FMLN", and formed his own party with his brothers, who went from campaign organizers to unofficial presidential advisors on issues including bitcoin and the pandemic response. 

Since his election, gang violence has fallen sharply, allegedly because he made a secret truce with them, according to US officials.

The International Monetary Fund estimates that El Salvador's economy grew by 10 percent last year thanks to proper management of the epidemic. Opinion polls showed that President Abu Kila's administration launched a large-scale vaccination campaign early on, which helped the young president reach acceptance rates of more than 80 percent. 

It also made him the most popular leader in Latin America at a time when presidents in the region were suffering from a decline in popularity, according to the newspaper. 

Last month, International Monetary Fund officials urged El Salvador and the government of its president, Najib Abu Kila, to change course, stop adopting bitcoin as an official payment method, and reconsider its decision in this regard. 

The International Monetary Fund said in a statement that cryptocurrencies pose "significant risks", while the fund's executive board, which is made up of representatives of member governments including the United States, used sharper language. 

Officials urged El Salvador authorities to narrow the scope of the Bitcoin law and remove cryptocurrency as an official payment method, stressing that there are “significant risks to the use of Bitcoin on financial stability, financial integrity and consumer protection” and the issuance of Bitcoin-backed bonds.  The fund warned of high levels of cryptocurrency exchange rate volatility. 

Bitcoin Bonds

Meanwhile, El Salvador is planning to issue bitcoin bonds on an electronic platform considered restrictive for Americans, limiting their participation. 

Last November, the Salvadoran president announced his country's plans to build the world's first bitcoin city to be funded through bitcoin bonds, raising the bar for the country's bet on the cryptocurrency. 

Samson Mao, chief strategist at blockchain technology provider Blockstream, a company coordinating the Bitcoin bond offering for El Salvador, said the country would have no problem raising money from crypto enthusiasts. 

While US citizens and companies are barred from using Bitflinks, Mao said Americans can invest through intermediaries outside the US or through offshore funds that participate in bonds.  

El Salvador's traditional sovereign bond was the worst performer in emerging markets last year, trading at a steep discount and offering returns of close to 17 percent due to the high risk of default.  Mao said he had already received offers from potential buyers amounting to $500 million.

Salvadoran officials say they are already considering raising up to $5 billion through several bitcoin-backed bond offerings. 

President Bukele and Finance Minister Alejandro Zelaya declined to comment to the Wall Street Journal.

The 10-year bitcoin bond offers investors an interest rate of 6.5 percent with an additional dividend after five years after El Salvador plans to start selling some of its bitcoin investments at a higher price in the future and reap potential profits. 

And developing countries around the world resort to selling government bonds in foreign currencies such as dollars or euros to finance public spending.

In its plan to legalize bitcoin, the government of El Salvador has spent $180 million to launch digital currency ATMs, as well as an e-wallet that gives $30 of bitcoin free to anyone who signs up for it.  

The government said the vast majority of the population had signed up for the e-wallet, which is known as "Chivo", but shopkeepers reported that there were few sales using bitcoin since the cryptocurrency's price fluctuations do not make it permanently used for everyday transactions. 

The Wall Street Journal says most users of the Chivo e-wallet have exchanged free bitcoins into dollars, according to financial sector executives. 

Others claim that their Chivo money disappeared through fraud. Ruth Lopez, a lawyer for the San Salvador-based rights group, Cristosal, said her organization has collected signatures of more than 1,000 Salvadorans who said their identities were stolen through Chivo and defrauded for not receiving the $30.  

Lopez said Cristosal filed a case with the Supreme Court in November seeking an investigation, but received no response.

In addition, Mao said, "The most important thing for me is to look for the positive aspects, which is that there is a president (Najib Abu Kila) trying to lift this country out of poverty.  "I don't need to agree with him 100 percent," he added.

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