Bukele's Bitcoin gambit one year later

September 7 marks one year since Bitcoin became legal tender in El Salvador alongside the US dollar.  Today we look back at the first year of president Nayib Bukele’s crypto gambit.  It has been a year in  which the crypto-currency made few inroads into the daily transactions of the Salvadoran economy, the collapse of the price of Bitcoin left the government holding coins worth much less than when Bukele bought them, and a much-hyped "Bitcoin Volcano bond" to fund "Bitcoin City" is still nowhere to be seen.     

Bukele originally announced his plans to make Bitcoin the country’s currency at a Miami Bitcoin conference in June 2021, to the surprise of his nation and many others.  Within days, and with little debate or analysis by the Legislative Assembly, a 3 page law was passed to fulfill his announcement.  The law made Bitcoin legal tender and required every merchant in the economy to accept Bitcoin in payment if the merchant had the technical capacity to do so.   

Bitcoin as a currency for the masses.

Central to the plan was a smartphone application — a digital wallet called Chivo.  Users could hold their Bitcoin funds in the Chivo application and exchange Bitcoin for dollars and back within the app.  When users wanted to make a purchase or pay an obligation in El Salvador, they would simply launch the app and send the funds to the merchant in a few simple steps.  At least that was the promise.

To promote the use of Chivo and Bitcoin, the government provided a signup bonus in Chivo of $30 worth of Bitcoin to each Salvadoran citizen enrolling as a new user. The roll-out of Chivo, however, was plagued with problems.  Transactions were slow or failed.  Balances disappeared.  Most serious were the claims of hundreds of users that their identities had been stolen and someone else had downloaded the $30 worth of Bitcoin bonus.  A year in, most of the technical problems appear to be fixed, but skepticism about Chivo as a replacement for cash dollars has not disappeared.

The Bitcoin law has never been popular with the Salvadoran public.  (It’s really the only thing which Bukele has done which has not had strong support from the public).  In polls in early 2022, more than 70% of those polled responded that they had little or no confidence in Bitcoin.  

Chivo adoption and use in transactions in the economy in the past year has been minimal at best.  Although the government says that 4 million Salvadorans signed up as Chivo users, few continued to use Bitcoin after the initial wave of transactions to use the $30 bonus and after a period of trying out this new app.

An academic working paper from the National Bureau of Economic Research titled Are Cryptocurrencies Currencies? Bitcoin as Legal Tender in El Salvador studied the first months of El Salvador's adoption of Bitcoin as legal tender and the public's use of the Chivo wallet app. Using economic data and polling from CID-Gallup during February 2022, the paper reveals that Bitcoin had made little progress as a currency within El Salvador despite the big push by the government at the time of its launch:

While most citizens in El Salvador have a cell phone with internet, less than 60% of them downloaded Chivo Wallet, and 20% [of those surveyed] continued to use the app after spending their $30 sign-up bonus. Further, 5% of citizens have paid taxes with bitcoin, and despite its legal tender status, only 20% of businesses —mostly large ones—accept bitcoin and 11.4% report having positive sales in bitcoin. In the first quarter of 2022, we find almost no new adopters and the share of remittances in bitcoin is at its lowest point since Chivo Wallet’s launch.

There is no current sign that the government is making any attempt to insist that small and medium size businesses accept Bitcoin.  The requirement in the Bitcoin law that all merchants accept Bitcoin has had no teeth.

One of the major drivers for the use of Bitcoin and the Chivo wallet was supposed to be a reduction in the cost of family remittances through money transfers sent from abroad. El Salvador's Central Reserve Bank indicates that only 2% of remittances are currently being sent via digital wallets.  The $400 million in savings on transaction fees projected by Bukele never materialized.

The government offers no transparency about the costs or financing of the Chivo system.  The government does not disclose the costs of operating the system.  The government does not share the address of the wallet holding Bitcoins of users in the system.  The government does not reveal reserves backing up its obligations or the current financial condition of “CHIVO S. A. DE C. V.” - the quasi-public entity which is responsible for the Chivo wallet.  There are so many unanswered questions.

One key sign that Chivo has failed to live up to its initial hype is that Bukele has stopped talking about Chivo in his tweets. Other than a few tweets promoting the ChivoPets animal hospital (built with nonexistent profits on Bitcoin investment), Bukele has not posted on social media about Chivo in Spanish during 2022. The country's leading cheerleader is not promoting with his social media bullhorn the signature initiative of his law making Bitcoin legal tender.  

One year later, for the vast majority of Salvadorans, the country remains a US dollar cash economy.   

Bitcoin for government finances

On September 7, 2021 as Salvadorans began trying to download the Chivo app, Bukele began announcing by tweet government purchases of Bitcoin.  To be sure, we don’t actually know what entity made such purchases, since the government has provided no transaction details, but Bukele has suggested that the purchases are made by the trust fund reserves intended to support the Chivo transaction system.

Bukele’s Bitcoin gambit has been hit hard by the current meltdown in the crypto-currency markets.  Between September 6, 2021 and July 1, 2022 Bukele would announce by tweet purchases of 2381 BTC, at a total cost of approximately USD $103.2 million.   Today those BTC holdings are worth approximately $47.2 million, for total unrealized losses of $56 million.   

(Bitcoin afficionados and members of Bukele's Nuevas Ideas party focus on the word "unrealized" and say there are actually no losses until you sell at a loss.  That may be true in some sense, but as a practical matter, if you need to make some use of that investment, right now El Salvador has $56 million less to use.   Also, IF the purchases are being made using the trust fund backing Chivo, to maintain the $150 million value of that fund, the government should be adding its own money to offset the investment losses even if no sale has been made).

Finance minister Alejandro Zelaya shrugs off the losses as only 0.5% of the government's budget.

After starting the country out on a path of investment in Bitcoin, the next big announcement from Bukele in November 2021 was his plan to issue a $1 billion “Volcano Bond”, the proceeds from which would be used to purchase Bitcoin and to build a futuristic metropolis in the east of the country named, unsurprisingly, Bitcoin City.

Ten months later, there is no sign of the Volcano bond.  Bukele’s government has yet to even introduce legislation which would provide a legal framework for offering the bonds, despite Bukele stating in February that it would be coming.  The various delays in the offering have been blamed by the president and his finance minister at various times on market conditions, the lack of implementing legislation, the need to do national pension reform first, the war in the Ukraine, etc).

The most recent report on the possible timing of the Bitcoin bond came from Paolo Ardoino, chief technology officer of Bitfinex and Tether, who now says that the bond may come to market at the end of the year.   Ardoino says that the current war on gangs during the State of Exception has consumed the government's attention and required the postponement of the bond issuance.  Bitfinex will reportedly provide the financial technology infrastructure for trading the Bitcoin bond, so Ardoino has a vested interest in saying things are still on track.        

The Volcano Bond was never going to improve the government's balance sheet by itself, since the billion dollar proceeds are supposed to go to buy more Bitcoin and to build Bitcoin City.  But the Bitcoin gambit has complicated significantly the country’s ability to refinance its foreign debt.  A negotiation with the International Monetary Fund for a $1.3 billion loan went off the rails when the IMF insisted that El Salvador should reverse course on using Bitcoin as legal tender, something which Bukele and his finance minister have so far refused to do.  The market perception of the country's risk profile as a result of Bukele's Bitcoin moves has also been one factor in a steep decline in the value of its eurobonds, resulting in the government promising to purchase bonds at this discounted market price to show its confidence in its ability to repay.

To sum up the impact on the country's finances as a result of the first year of the Bitcoin experiment: the government has spent hundreds of millions on the Chivo rollout, lost another $56 million on Bitcoin investing, failed to obtain more financing through the Volcano bond offering, and contributed to increased concern in the financial markets about the sustainability of the country and its ability to repay its traditional debt.

Bitcoin to energize the economy

Bukele's strength has always been in getting himself to be the center of the conversation. In that sense, his Bitcoin initiative has been singularly successful.  Led by the Bitcoin community where Bukele is viewed as a rock star, the world has been talking about what it means for a small Central American country to declare Bitcoin as legal currency and to attach its fortunes to the crypto-currency revolution.   The number of articles about El Salvador pulled up in a Google search skyrocketed with the Bitcoin move (although now the detention of 50,000 persons through the State of Exception has generated its own spate of publicity for El Salvador's president).

There has been a steady stream of Bitcoin entrepreneurs making their way to El Salvador where they are greeted by the government with open arms and helicopter tours. The government has also been announcing various Bitcoin related investment projects.  Those include real estate development along the coast, a crypto-casino, and a solar farm to power Bitcoin mining.     

Perhaps the biggest attraction to these crypto-nomad entrepreneurs is the promise by Bukele of little regulation of their ventures and even fewer taxes. "Come set up shop in El Salvador, and I promise not to tax you, and to make you a Salvadoran citizen for a modest investment," he is saying.

The government also attributes a significant growth in tourism to Bitcoin, although it is hard to separate the effects of interest in hearing about the country's bitcoin adoption, from the impact of the country's tourism and surfing promotion and the lack of entrance requirements related to COVID.  

At this point, in the midst of the bear market in Bitcoin, there are few concrete results for the economy.  Projects are supposedly in the pipeline, but are speculative until people are hired or ground is broken.  

Yet despite this record of predictions which are far from coming true, the crowd of Bitcoin enthusiasts who believe in Bukele's vision, continue to head towards the empty corner of El Salvador where Bitcoin City might be built:

 If built, Bitcoin City would qualify as the perfect utopia for crypto adopters, who are big on creating crypto-friendly jurisdictions with flexible regulation, little government oversight, and minimal taxes....[W]ealthy investors from Europe and El Salvador have already started making offers to locals in areas surrounding Conchagua. 

 Report: Crypto millionaires flock to El Salvador to invest in the Bitcoin City project -- CryptoSlate

* * *

In the first months of the Bitcoin law and the Chivo roll-out, Bukele was front and center publicly pushing the adoption of El Salvador's new currency to his fellow Salvadorans.  Now he appears to have abandoned actively encouraging his fellow citizens to make the transition from cash to the Chivo wallet.  Bukele is too much attuned to public opinion polls to risk tying his image internally to this singularly unpopular measure. Instead he has turned his focus outside of the country to his fellow Bitcoin believers and the investment community.  As a measure of this turn, Bukele confines his recent tweeting about Bitcoin to English and has only tweeted in Spanish once about Bitcoin at any point during 2022 other than to the February unveiling of the ChivoPets hospital.  When Bukele gave his televised state of the country address on June 1, he never mentioned Bitcoin or Chivo.

Here was Bukele's last tweet in Spanish about Bitcoin, advising people not to be worried about the meltdown in the crypto-currency market, their investments will come roaring back some day:   

In many ways, this tweet sums up Bukele and Bitcoin in El Salvador one year in.  Bukele is a "HODLer" -- Holding On for Dear Life.  For the true Bitcoin believer, you buy Bitcoin and never sell because its ultimate rise is inevitable they say.  Bukele appears unlikely to change course, despite all the reversals which his Bitcoin experiment has seen during the course of its first year.  Few Salvadorans appear interested in holding on and following him on the same ride.

Other commentary on one year of Bitcoin in El Salvador