El Salvador has spent $375 million on its cryptocurrency experiment, far exceeding the profits from its current Bitcoin holdings.

Written by: The Economist

Translated by: CryptoLeo, Odaily Planet Daily

During the recent market downturn, El Salvador increased its Bitcoin holdings by 7 and 5 BTC on February 25 and March 4, respectively, following a $1.4 billion loan relief agreement with the IMF. According to the agreement, the IMF imposed regulatory restrictions on El Salvador's national cryptocurrency situation due to concerns about the high risks associated with BTC, but this did not deter El Salvador from its BTC purchasing plans. In fact, the IMF's concerns are not unfounded; since President Nayib Bukele took office, his obsession with cryptocurrency and various "support" measures have not improved El Salvador's economy and have even increased the deficit. Since the implementation of the president's cryptocurrency policies, El Salvador's deficit in cryptocurrency has also been exacerbated.

The Economist wrote an article about El Salvador's cryptocurrency journey, which Odaily has translated as follows:

Since Nayib Bukele took office as president in 2019, El Salvador has been on the brink of default for most of the time. High debt and interest payments have been exacerbated by a massive fiscal deficit, becoming a long-term warning signal for the country's economy. Low dollar reserves, sluggish investment and GDP growth, coupled with stalled negotiations for a bailout with the International Monetary Fund. Bukele's relentless attacks on the judiciary, opponents, and the media have not provided much incentive for his country.

Bukele is overly obsessed with cryptocurrency. In 2021, El Salvador became the first country to adopt Bitcoin as legal tender alongside the US dollar. President Bukele vowed to bypass traditional capital markets and raise billions through tokenized blockchain bonds. He planned to purchase $500 million worth of Bitcoin, build a "Bitcoin City," and develop geothermal energy to power Bitcoin miners. However, traditional markets did not respond favorably; by the summer of 2022, the average trading price of several Salvadoran bonds fell below 30 cents, prompting the government to begin delaying public sector salaries to ensure sufficient cash, as investors braced for the worst.

Unexpectedly, on February 26, the IMF's board approved a $1.4 billion bailout loan, which was reached after years of delays and will be disbursed over 40 months. To secure this funding, El Salvador made routine commitments regarding fiscal discipline—reducing its cryptocurrency projects. After a law was amended in January this year, taxpayers no longer pay in Bitcoin, and private sector acceptance of Bitcoin payments is entirely voluntary.

During the process of applying for a debt agreement with the IMF, El Salvador demonstrated a firm commitment to repaying its debts. Part of the reason is that Bukele hopes to surprise Wall Street skeptics, as the country's bond prices have rebounded to face value levels, and officials have used scarce dollars to repurchase bonds at significant discounts, saving a large portion of future principal payments. The fiscal deficit rose to 10% of GDP in 2020 but has now returned to pre-pandemic levels of 2-3%, roughly in line with other countries. Efforts to combat tax evasion, a surge in remittances, and a slight economic recovery have increased government revenue; the gradual removal of energy subsidies and pandemic-era programs has slowed spending.

The loan reduces the risk of a debt default crisis, but the situation would be better if El Salvador could secure an additional $2.1 billion loan from other multilateral lending institutions as hoped. Despite reducing the deficit, the country may not be able to hold out for long. With high debt and slow economic growth, it is unsustainable for El Salvador to continue raising funds at a rate of 12% as it did in early 2024. In a dollarized economy like El Salvador's, the costs of sovereign debt default are greater due to the absence of a last-resort lender to prevent bank runs or the spread of financial crises. Local bank deposits are partially supported by government debt, so a default could "snowball" into a banking crisis, potentially leading to de-dollarization.

As for El Salvador's concessions on Bitcoin adoption, it may be a case of "a blessing in disguise," more fortunate than a concession. Bukele touted that cryptocurrency could provide financial services to two-thirds of adults without bank accounts and reduce remittance costs, which account for nearly a quarter of the country's GDP. However, the main barriers to crypto financial inclusion are the scale of its economy and low digital literacy, while high remittance costs stem from Salvadorans' preference for cash transactions, which are inherently expensive, compounded by criminal activities that further inflate costs. Additionally, the Salvadoran government hastily launched the Chivo digital wallet, allowing payments in both dollars and Bitcoin. However, the reality after the wallet's launch has not been ideal, with rampant bugs and identity theft—aimed at stealing the $30 Bitcoin reward for registering the wallet.

When Bitcoin was still El Salvador's legal tender, the IMF was cautious about providing loans to the country. The volatility of Bitcoin prices poses risks to financial and fiscal stability. Bitcoin could be used for money laundering and other criminal activities. The IMF stated that El Salvador would limit "Bitcoin transactions and purchases." According to on-chain data, the country has actually been purchasing Bitcoin since the agreement was reached, but to comply with the loan agreement, it may have to reduce or withdraw these purchases. El Salvador currently holds 6,100 Bitcoins, worth over $500 million, with an unrealized profit of around $200 million, which is also a point of pride for Bukele.

The profits seem substantial, but the costs incurred by cryptocurrency for El Salvador outweigh the benefits. Bukele's crypto promotion is popular, but the scale of crypto investment and crypto tourism is very small, and the benefits brought by financial inclusion and more efficient payment methods are also negligible. In summary, cryptocurrency has never truly gained popularity in El Salvador. In 2022, when the hype peaked, a CID-Gallup survey found that only one-fifth of companies accepted Bitcoin, and only 5% of tax payments were made in cryptocurrency. Recent data may be even lower, as Salvadorans still strongly prefer cash and payment cards.

Moreover, rating agency Moody's stated that El Salvador has spent a total of $375 million on its cryptocurrency experiment—including the launch of Chivo, subsidizing transaction fees, Bitcoin ATMs, etc.—which far exceeds the profits from its current Bitcoin holdings, and these profits may still decrease as Bitcoin prices fall. Bukele's cryptocurrency experiment delayed El Salvador's loan agreement with the IMF, keeping the country's risk premium high, and his nation is on the brink of debt default.

However, Bukele enjoys extremely high approval ratings, usually exceeding 90%. He calls himself "the most popular dictator in the world," but this is not due to his advocacy for cryptocurrency, but rather because of his harsh crackdown on criminal activities, during which due process and the rights of suspects have been overlooked. His obsession with cryptocurrency has not alleviated El Salvador's economic plight. Although Bitcoin may still be a reserve asset on the national balance sheet, its days as El Salvador's legal tender are over. Bukele is merely a cryptocurrency utopian whose crazy ideas have shattered against reality.

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