El Salvador’s Bitcoin Experiment: A Tale of Ambition and Uncertainty
In August of this year, El Salvador announced an ambitious plan to train its 80,000 public servants in Bitcoin, with considerations to pay their salaries in cryptocurrency. The 160-hour training program will cover Bitcoin fundamentals, legal issues, and public policy impacts, aiming to accelerate the adoption of Bitcoin in daily life.
Bitcoin City Under Construction
El Salvador, a small Central American country, made headlines in 2021 as the first nation to adopt Bitcoin as legal tender. President Nayib Bukele announced plans to build a “Bitcoin City” near the beach of Conchagua, at the foot of a volcano.
This city was envisioned to be a modern urban hub with residential, commercial, and recreational infrastructure, where Bitcoin could be used for all transactions from food to real estate.
The initiative sparked skepticism, with critics labeling it as either a grand failure or a colossal scam. As a cryptocurrency enthusiast, I’ve seen Ethereum’s value rise by 125% since my purchase in November 2022. However, I have yet to use Bitcoin or similar cryptocurrencies in the real world.
Bitcoin’s value is based on “consensus,” a belief shared by a group that it represents the future. Without this consensus, Bitcoin’s value is questioned, as illustrated by the difficulty of using Bitcoin for everyday purchases.
Bitcoin Payment Experiment
El Salvador’s “Bitcoin experiment” aimed to transform a population of 6 million, spread across over 20,000 square kilometers, into Bitcoin users. The government promoted Bitcoin usage similarly to early mobile payment adoption, creating a payment app called Chivo. The app offered $30 worth of Bitcoin to new users, with no transaction fees between Bitcoin and USD, supported by 200 ATMs and even Bitcoin acceptance for loan payments.
Education was also a focus, with Bitcoin lessons integrated into public school curricula. The first year saw over 20,000 individuals and 30 businesses using Bitcoin, handling around 1,000 transactions daily. Despite the initial enthusiasm, problems soon surfaced. Issues included hacking of digital wallets, slow transaction speeds, and faulty ATMs, leading to public protests.
Most Salvadorans lack traditional bank accounts, and a significant portion live below the poverty line. With limited experience in digital finance and a heavy reliance on cash transactions, the population struggled with Bitcoin’s volatility—prices could fluctuate dramatically from day to day.
According to BBC, a year after the launch, only 20% of locals continued using the Chivo app, and nearly 92% of merchants found Bitcoin irrelevant. By 2023, 88% of Salvadorans had stopped using Bitcoin, with only 1% of remittances being sent via Bitcoin.
A turnaround? Or a haven for speculators?
The Bitcoin legalization attracted curiosity and boosted tourism by 30%, though it also led to complaints about rising costs due to an influx of foreign visitors. The global cryptocurrency user base grew by 34% in 2023, with most new users in Asia, followed by North America, Africa, and South America.
The “Bitcoin City” is strategically located between the towns of La Union and Conchagua, near Conchagua Beach. The government plans to build a power plant to support the city and Bitcoin mining. Bukele envisions it as a tax haven for Bitcoin investors, with only a 10% capital gains tax and no income, property, or sales taxes.
To fund the city, the government issued “Bitcoin bonds,” with proceeds split between city construction and Bitcoin purchases. However, Bitcoin’s price dropped sharply after the announcement, causing delays in the project. Despite this, Bukele remains committed, buying a Bitcoin daily since November 2022.
In August of this year, El Salvador received a $1.6 billion investment from Turkey’s Yilport Holdings, a major international port and container terminal operator. This investment will help upgrade two Salvadoran ports, including one in the “Bitcoin City,” providing a glimmer of hope for the project.
Bukele’s original goal was to enhance remittance efficiency, reduce reliance on the USD, and strengthen financial infrastructure. While Bitcoin has yet to revolutionize El Salvador’s financial system, it has brought tourism and investment benefits, albeit with significant risks.
Like legal red-light districts in the Netherlands or Las Vegas’s reliance on gambling, Bitcoin might become a distinctive feature of El Salvador. However, its complete decentralization and libertarian ideals also introduce substantial economic uncertainty.