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El Salvador’s Bitcoin Experiment Is Failing One Year Later

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El Salvador's Bitcoin Experiment Is Failing One Year Later

The site of the planned world’s first cryptocurrency city, a circular metropolis fueled by a volcano, is still covered in the deep jungle one year after El Salvador made bitcoin legal cash.
A central plaza that is shaped like the bitcoin symbol from above is part of “Bitcoin City,” which president Nayib Bukele had promised would be a tax haven for cryptocurrency investors and miners, complete with an airport, and residential and commercial areas.

In front of hundreds of bitcoin aficionados in November 2021, he declared, clothed entirely in white and with a reversed baseball cap, “Invest here and make all the money you want.”

Reuters, however, could not locate any heavy equipment, laborers, or raw materials during a recent visit to the region in the east of the Central American nation, which sits under the shadow of the Conchagua volcano.

As bitcoin has fallen in value, it has instead come to represent foolishness to many.

Oscar Picardo, head of the Institute of Science, Technology, and Innovation at the for-profit Francisco Gavidia University, says, “This experiment has been highly dangerous, too risky for a poor nation.”

“It has been observed that (bitcoin) is a very speculative, extremely volatile financial asset,” he continued.

The decline in the value of bitcoin and other cryptocurrencies has alienated investors, which is a significant contributor to the issue.

On September 7, 2021, El Salvador, one of the poorest nations in Latin America, declared bitcoin legal money at a price of about $47,000.

Its value has decreased by more than half since last year and sold at about $19,770 on Tuesday.

Although it declined to comment for this article, the Bukele administration has justified its decision to double down on bitcoin, including the purchase of 2,381 bitcoins, by stating that it is a long-term strategy.

It claims that embracing bitcoin has boosted investment, enhanced tourism, decreased bank fees to zero, and promoted financial inclusion. But the price decline has heightened El Salvador’s financial risk, hindering its quest for funds from paying 1.6 billion dollars of sovereign bonds due in 2023 and 2025.

To avoid complicating an agreement with the lender, the International Monetary Fund has urged El Salvador to revoke bitcoin’s position as legal cash.
According to experts, bitcoin use has also been slow to take off.
The presidency or the minister of finance did not disclose the usage of bitcoin through the government’s Chivo bitcoin digital wallet.

However, according to a poll conducted by the National Bureau of Economic Research (NBER), a U.S.-based NGO, just 20% of Salvadorans who downloaded the Chivo app kept using it after using the $30 in free credit the government provided to encourage its usage.
According to the data, most Chivo downloads took place in 2021, particularly in September, and almost no downloads have taken place so far in 2022.
In theory, developing nations like El Salvador are ideal for cryptocurrency adoption due to their continued reliance on cash and a largely unbanked population.

However, the April report claims that because users “do not understand it, they do not trust it, it is not accepted by businesses, it is very volatile, and it involves high fees,” “bitcoin is not being widely used as a medium of exchange.”

Only 20% of businesses take cryptocurrencies in El Salvador, despite the country’s law requiring all businesses to do so, according to a poll that questioned 1,800 Salvadoran residents.

One company that does this is the modest watch shop owned by Jesus Caceres in the city’s center. Although three banners say “We take bitcoin,” the 47-year-old watchmaker has only ever used the digital currency twice to make deals.

Since then, no one has approached me, and he continued, “one for $3, one for $5, it was $8 total.”

The Chivo government wallet or other private ones can be used to transfer money home without incurring commission fees for Salvadorans working abroad. Remittances, or money sent home from abroad, account for 26% of the nation’s GDP, one of the highest percentages in the world.

However, according to figures from the central bank, fewer than 2% of remittances received by the nation between September 2021 and June 2022 were sent via digital bitcoin wallets.

Similar to how bitcoin is used, the government is coy about “Bitcoin City.”

But given that the “Bitcoin Bond,” whose issue Bukele said would fund the city’s development, has been delayed in the wake of the bitcoin crisis, the city’s future appears to be becoming more dubious.

The bulk of the country’s 6.5 million citizens, according to the people who live in the area where the metropolis is planned, between the Conchagua volcano and the Gulf of Fonseca on the Pacific coast, will not be given preference.

 Jose Flores, a 48-year-old fisherman and farmer who has spent more than three decades in Conchagua, lamented that “it doesn’t aid us poor people at all.”

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