Was the choice the right one? This question haunts the corridors of power like the houses of the towns and villages of El Salvador. At the center of the questioning, the decision taken a year ago to make bitcoin a legal exchange and reserve currency for the country, a world first.
Promote money transfers
The idea of President Nayib Bukele, at the origin of this monetary innovation, was to modernize the image of the country in order to attract new investors. Bitcoin could also promote money transfers from some 3 million emigrants, mainly in the United States, to their relatives back home, by saving bank charges. A strategic issue, since these transfers weigh more than a quarter of El Salvador’s GDP.
In the first four months, the device for using bitcoin was downloaded 4 million times on mobile phones, for a population of 6.6 million Salvadorans. This success could also be explained by the welcome gift of 30 dollars (the equivalent of 10% of the minimum wage) to all new users.
Money laundering risks
According to Carlos Acevedo, ex-president of the central bank interviewed by AFP, “only 2% of transfers” of the diaspora have however used bitcoin. Other uses could on the contrary have benefited from it, “the anonymity of transactions and their lack of traceability make bitcoin an ideal instrument for money laundering and cybercrime”, writes the economist Dominique Plihon (1). Because, for him, bitcoin is nothing else “than a virtual unit of account stored on a computer medium”, without coin or note, “operating without intermediaries, banks or state”.
People buy and sell goods whose prices are denominated in bitcoin; even salaries can be paid in bitcoin. The transformation of bitcoin into dollars “is done on computer platforms for payment by means of a password”, during the day. However, price volatility does nothing to reassure users.
The year 2021 has been “a good year, but for the past five months bitcoin has only gone down. However, we try to continue to use it,” commented Maria Aguirre, a 52-year-old shopkeeper in El Zonte, a seaside resort, interviewed by AFP. Specifically, in September 2021, bitcoin was worth around $45,000 and $68,000 three months later, only to crash and currently sit below $20,000.
Current cryptocurrency weakness has ex-central bank president saying bitcoin betting is ” missed “, although he concedes that “It’s not yet a failure, because (the market) can recover”. This is indeed the hope of President Bukele, who bought 80 bitcoins for El Salvador at the price of 19,000 dollars, bringing the country’s basket to a total of 2,381 bitcoins acquired over the last twelve months.
The threat of default
We are not very far here from traditional financial speculation, with the difference that it is carried out with public funds with potentially direct effects on the lives of citizens. A rise in the price would allow the country to reconnect with the projects announced a year earlier, halted by the tumble. But the first consequence is to make it more difficult to read the situation of the public finances of the country, always threatened with default.
Even if the risk decreases, “it is unthinkable that El Salvador can return to conventional debt markets as long as the country risk does not decrease”, Judge Carlos Acevedo.