by Sarah Kinosian and Nelson Renteria
BERLIN, El Salvador (Reuters) – James and Nicki Malcolm moved from New Zealand to El Salvador, lured by the dream sold by President Nayib Bukele of a country where bitcoin would be legal tender.
In 2021, the leader made El Salvador the first country in the world to recognize bitcoin as a legal currency. Nayib Bukele did not stop there, evoking a few months later a project for “Bitcoin City”, a paradise for crypto-enthusiasts exempt from taxes and powered by geothermal energy from a volcano.
The announcement, of course, took place at a club overlooking the beach, with an avatar of the president on a spaceship adorning the presentation.
Nayib Bukele is popular and expected to win a second term this Sunday, although construction of Bitcoin City has not yet begun. Bitcoin adoption continues nonetheless, with the Malcolm family and about 15 foreigners convincing more than a hundred businesses to accept the digital currency in the mountainous, coffee-producing city of Berlin in the east of the Salvador.
“Acceptance of bitcoin is a huge step for us – it’s what will make bitcoin win,” said Nicki, a former real estate advisor, who is involved in efforts to make Berlin a “mecca” for cryptocurrency.
Nayib Bukele’s efforts to turn El Salvador into a cryptocurrency haven, however, jeopardize the country’s chances of quickly receiving a cash injection from the International Monetary Fund (IMF), even as rating agencies warn that state coffers are empty dangerously.
On social networks, Nayib Bukele welcomes the rebound in the price of bitcoin and praises his infrastructure projects in videos punctuated by dance music.
MARGINAL USE
El Salvador’s economy is nonetheless stagnant, with growth being the lowest among Central American countries. Extreme poverty has doubled since 2019 and almost half of the population is affected by food insecurity.
“The use of bitcoin is marginal,” notes Kevin Valle, 24, a seller on Berlin’s main market. “But the cost of my tomatoes and onions has doubled and people are worried about low employment and low wages.”
In 2022, the country’s public debt reached 25 billion dollars (23 billion euros), a record in 30 years.
At the start of his first term, Nayib Bukele’s government failed to obtain a billion-dollar loan from the IMF, but the president came back, even hiring the former IMF hemisphere director Western last April.
The IMF recommended that El Salvador reverse the authorization of bitcoin as a legal tender currency during recent negotiations.
The Fund did not respond to requests for comment.
The recent rebound in the price of bitcoin has strengthened the determination of the Salvadoran president: the country’s investments in the currency, the exact amount of which is unknown, have become positive again.
Nayibtracker.com, an unofficial site that tracks El Salvador’s bitcoin portfolio based on social media statements by Nayib Bukele, values an initial investment of $119.8 million at $121.6 million, a return of 1.5%.
The US Securities and Exchange Commission (SEC) announced that bitcoin-backed index funds (ETFs) would be allowed in the United States and Vice President Nayib Bukele told Reuters the government would encourage cryptocurrencies even more if it is re-elected.
“COOLEST DICTATOR IN THE WORLD”
The authorization of bitcoin, alongside that of the dollar, as the country’s currency is not responsible for the general state of the economy, say some economists, who instead cite the weakness of foreign direct investments and the excessive spending of the ‘State.
But while government spending may have to decline and the country faces a clear liquidity crisis, critics point out that bitcoin has yet to deliver significant benefits.
Economists like Tatiana Marroquin question the decision to invest an unknown amount of public money on a risky investment, rather than on other expenditure items.
Vice President Felix Ulloa told Reuters that investors’ initial skepticism was “reversing.”
The media machine, carefully controlled, allows Nayib Bukele to project the image of a more modern and more economically responsible Salvador.
But its popularity among Salvadorans is primarily due to the massive and violent repression of gangs. Nayib Bukele claims to work for Salvadorans, changing his biography on X to “Coolest Dictator in the World” in the face of criticism.
At the moment, most Salvadorans have no interest in bitcoin, even though many live hand to mouth and the economy is still very dependent on cash.
According to a survey, 88% of Salvadorans did not use bitcoin in 2023 and only 1% of payments were made in bitcoins.
Nearly two dozen people interviewed by Reuters said they did not care about understanding how cryptocurrency works but were increasingly concerned about the lack of jobs and rising housing costs and food.
Nayib Bukele’s party, associated with an impressive drop in crime, has restored El Salvador’s image and boosted tourism.
In Berlin, merchants say they make a few bitcoin transactions every day, mostly from tourists.
(Reporting by Sarah Kinosian and Nelson Renteria, with contributions from Rodrigo Campos and Diego Ore; French version Corentin Chappron, edited by Bertrand Boucey)
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