- By Joe Tidy
- cyber journalist
Cryptocurrencies continued to tumble this week as billions were wiped off the value of tokens like bitcoin.
The crash affects investors around the world, including the government of El Salvador. The Central American country poured millions into bitcoin and made it legal tender nine months ago, encouraging people to use it for everyday transactions.
From trinkets to tacos to gasoline to even houses, you can buy just about anything in El Salvador with bitcoins. Buying cryptocurrency from street vendors or large chains is a remarkable experience.
To read especially on BBC Africa:
This shows how far bitcoin has come since it was dreamed up on internet forums in 2008.
President Nayib Bukele’s decision to make cryptocurrency legal tender means that in theory it must now be accepted by all businesses, alongside El Salvador’s other currency, the US dollar.
But the latest cryptocurrency crash has raised new questions about the policy, including the use of nearly $100 million in public funds to buy bitcoin, with each purchase celebrated by the president in a tweet.
The country’s 2,300 bitcoins are now worth half of what the government paid to acquire them, but the finance minister brushed off criticism, saying the tax risk is “extremely minimal”.
The place where El Salvador’s bitcoin movement started is El Zonte, a small surf and fishing town on the south coast. It was there, in 2019, that an anonymous donor made the first of many major bitcoin donations to a group of cryptocurrency fans.
No one is admitting to knowing who he or she is, but the deal was that the city could keep the digital coins as long as they weren’t converted into dollars.
The idea was to create the world’s first circular bitcoin economy, where people can be paid in bitcoins – an online peer-to-peer payment system – and make a living from it.
It’s a radical idea. In the rest of the world, bitcoins can be used for online purchases, but except for a small number of trendy cafes or one-off projects, it was not possible to use them on the street.
El Zonte has so far received around $350,000 (220,365,210 FCFA) from his anonymous benefactor, a significant sum for this seedy but beautiful town, now also known as Bitcoin Beach.
Katerina Contreras was one of the first beneficiaries.
Two years ago, during the pandemic, he was offered a lifeguard internship, and it seemed like a good deal. The organizers paid for the trainees’ transport and food in bitcoins.
“Then for six months we worked as lifeguards and were paid in bitcoins,” she says.
Some businesses in the city say they have seen a 30% surge in trade as bitcoin tourists, fueled by crypto YouTuber channels, are drawn to the novelty of spending their digital coins on vacation.
However, bitcoin adoption remains uneven.
My travels have led me to conclude that the further you get from Bitcoin Beach, the less likely you are to be able to buy things in this digital currency.
In Bitcoin Beach, just over half of the businesses I encountered accepted bitcoin, but if you drive 80 minutes north to San Salvador, the capital, the proportion is more like a quarter.
The government says it has no plans to force businesses to accept bitcoin, even though they should under the country’s bitcoin law. So far, it has been content to offer incentives.
Cash is still king here, with more than half of Salvadorans without a bank account, but President Bukele has poured $200 million (125,949,950,000 FCFA) in public money into a bitcoin wallet app subsidized, called Chivo.
Anyone who downloads the app receives $30 (18,888 FCFA) in bitcoins to sign up, which may explain why it has been downloaded four million times, in a country that has 6.5 million.
But many people use the app to transact in dollars, not bitcoins. It is often used in this way, for example by people who work abroad and send money to their families, because there are no commissions or transfer fees.
And there are signs that after the initial wave of interest, people are using Chivo less.
Another incentive to use it came in late February, with the opening of the country’s most advanced animal hospital.
Large queues are common, with people and pets sheltering in queues under gazebos for their appointments. And this, because all animal care, even complex surgical operations, costs only 25 cents (15.7 FCFA) – provided you pay with the Chivo app, and preferably in bitcoins.
Staff say the center is paid for with “Bitcoin profits,” but government officials have not responded to requests for an explanation of how those profits were made.
The International Monetary Fund (IMF) has urged El Salvador to reverse its decision to make bitcoin legal tender, arguing that it is too unstable for this purpose, and local economists like Tatiana Marroquin are increasingly worried.
According to her, the government does not have enough money to help vulnerable people and therefore should not take risks by pouring public funds into cryptocurrency.
She also claims that there is a lack of transparency.
“We do not know exactly when and with what money they bought bitcoins”.
Tourism Minister Morena Valdez, however, insists that Salvadorans have faith in President Bukele, despite bitcoin’s falling value.
“We know that each of the president’s decisions is taken at the right time. People have great confidence in his decisions and in the development of the country’s economy,” she said.
Other countries were thought to be considering following El Salvador’s example, before the latest crash began in May, but the Central African Republic is the only country to have done so. The country’s president, Faustin-Archange Touadéra, announced the measure on Twitter, describing bitcoin as a “universal currency”.
El Salvador now wants to go further.
President Bukele has announced plans to build a new city – Bitcoin City – at the foot of a volcano that will provide geothermal energy and power a giant bitcoin mine.
He hopes to raise the funds by selling $1 billion (629,661,880,000 FCFA) of Volcano bonds, but these were due to go on sale in March and have not yet appeared.
The authorities say they are confident in their ability to raise the funds and pay a looming external debt of $800 million.
But the collapse of cryptocurrencies risks putting pressure on this government which continues to bet big on bitcoin.