El Salvador, which adopted the bitcoin as the official currency in September 2021, is biting its fingers.
It was a world first, El Salvador last year adopted bitcoin as its official currency alongside the US dollar. Ambitious, this decision is costing this Central American country very dearly.
Why did El Salvador adopt bitcoin?
In June 2021, Salvadoran President Nayib Bukele announced on Twitter the adoption of a law, passed by parliament, aimed at making bitcoin an official currency, the price of which would be freely determined by the market. The government of this poor country hoped that such a measure would attract foreign investors and allow a larger part of the population to integrate into the real economy. Finally, such a choice should allow the country to reduce its dependence on the US dollar.
And the beginnings were promising: three months after the effective adoption of the cryptocurrency, it saw its value increase by 50%. A breath of fresh air for the government, which has invested hundreds of millions of dollars to buy it. Especially since, if more than half of Salvadorans do not have a bank account, the population has massively downloaded an application allowing them to pay in bitcoin. Encouraged but not forced, businesses also quickly took the fold and were numerous to offer payment in bitcoin.
A decision that is costing El Salvador dearly
But if the bitcoin exchange rate initially hinted at a bright future, this hope quickly faded. Because the cryptocurrency crash inevitably affected BTC, which lost half of its value in one year. A net loss of public money for El Salvador, which however does not overflow. As for the investors initially seduced by the idea and who have also lost a lot, they will probably not be taken back anytime soon.
This collapse of the exchange rate puts the entire economy of El Salvador in danger: its public debt has exploded, and the country could have all the trouble in the world to find creditors ready to trust it. The economic situation and the president’s continued confidence in bitcoin have also decided the IMF and the World Bank to block economic aid of 1.3 billion dollars, aggravating the situation of the country, which could find itself in default of payment in January.
Another figure shows the failure of the adoption of crypto as an official currency: while 4 of the 6.5 million Salvadorans have downloaded the application, only 2% of transactions inside the country are carried out in bitcoin.
Sources: RFI, BFM TV
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