A bet that didn’t work out. El Salvador is headed for bankruptcy after the introduction of Bitcoin

El Salvador was the first ever country in the world where a cryptocurrency is considered an official currency. Residents can use a special Chivo digital wallet that they log into through their smartphones using their national ID.

In order to really entice people to use bitcoin, the country gave away roughly $30 (CZK 745) of this cryptocurrency to all users of the app upon first activation. Let us remind you that it was at a time when the minimum wage in the country was 365 dollars, i.e. roughly nine thousand crowns.

It is not surprising that there was great interest in cryptocurrencies at first in the country – half of the population installed a digital wallet. However, it soon became clear that some payments are not being made correctly and that the government is not even able to ensure security – the bag literally burst open with all kinds of scams targeting residents’ wallets. Malfunctioning ATMs were also a problem, with people unable to exchange bitcoins for dollars.

Thousands of people marched in El Salvador to protest against Bitcoin and the president

Internet and PC

That is also why large demonstrations were repeatedly held in the country, where people did not hesitate to demolish everything they could get their hands on – they vented their frustration on shop windows and ATMs.

The El País Financiero server already pointed out in May this year that after the entry fee was collected, most users stopped using the Chivo wallet completely. The editors cited data from the Central Bank of El Salvador, according to which 61% of people who have installed a wallet do not use cryptocurrencies.

Photo: Jose Cabezas, Reuters

Demonstrators protest against Bitcoin in San Salvador.

“World’s Coolest Dictator”

At the same time, the entry costs of introducing Bitcoin as legal tender were enormous. The local government had to set aside roughly 3.5 billion crowns in conversion so that the cryptocurrency could actually be used. At the same time, the main promoter of Bitcoin in the country was the president of El Salvador, Nayib Bukele, who described himself on Twitter as “the coolest dictator in the world”.

“Like all innovations, Bitcoin in El Salvador will have a learning curve. Every path to the future is like this, and not everything is achieved in a day or a month,” Bukele said on Twitter shortly after the introduction of the new currency in the country.

Photo: Jose Cabezas, Reuters

Nayib Bukele

In the first months, he was the one who praised bitcoin to the sky on his Twitter account, and even several times a week. In recent months, however, he has practically not commented on it at all.

The large drop in the exchange rate certainly has its share in this. At the time when Salvador introduced bitcoin, one virtual coin was worth CZK 1,072,750. This year, at the turn of spring and summer, however, it dropped to less than half a million, the most famous cryptocurrency in the world is currently trading at CZK 467,040.

Last September, Salvador held 400 bitcoins. During the year, however, he gradually bought more, and according to the estimates of the Coinquora server, he now holds more than 2,000 of them. However, due to the drop in the exchange rate, such a package of virtual coins does not have a dramatically higher value.

The road to bankruptcy

Members of the Executive Board of the International Monetary Fund (IMF) have repeatedly warned El Salvador against using Bitcoin. They called on the authorities to “narrow the scope of the Bitcoin Act by removing Bitcoin’s status as legal tender”.

“Bitcoin is characterized by high price volatility. Its use as legal tender therefore poses significant risks to consumer protection, financial integrity and financial stability,” the IMF said in a statement.

The fund recommendation is therefore clear. “Due to all the risks mentioned, bitcoin should not be used as legal tender,” the IMF recommended. Otherwise, they say, there is a risk that instability and inflation will be triggered in this poor Latin American country.

This was also pointed out by the Fortune server in June this year, according to which the country is headed for bankruptcy. With a 48% probability, the current state of finances will not allow the country to repay its national debt in 2023. These are bonds worth 800 million dollars (19.9 billion crowns), which mature in January next year.

Bitcoins and other virtual currencies

There are many virtual currencies. One of the oldest and currently most popular are the so-called bitcoins. They were created as early as 2009, but have enjoyed greater popularity in recent years. This currency was created so that it cannot be influenced by any government or central bank.

Cybercoins are “minted” by a network of computers with specialized software programmed to release new coins at a steady but ever-decreasing rate. The number of coins in circulation should eventually reach 21 million, which should be around 2140.

The article is in Czech

Tags: bet didnt work Salvador headed bankruptcy introduction Bitcoin

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