The Nayib Bukele government adopted it as legal currency and announced the creation of 'Bitcoin City'. Cryptocurrency entrepreneurs are optimistic about the project. The Monetary Fund rejects it.

By CATALINA GALLO

Journalist

Since last September, when El Salvador formally became the first country in the world to accept bitcoin as legal tender at par with the dollar, the eyes of the world have been very attentive to what happens with this economic experiment in the small territory. Central American, with fewer inhabitants than Bogotá –about 6.5 million– and highly dependent on the remittances that its citizens in exile send from the United States, mainly.

Behind this decision is President Nayib Bukele, only 40 years old and who since 2019, when he came to power democratically, has been accentuating his image as an authoritarian ruler – which worries Washington a lot – but with a star halo. of rock and at the same time CEO of a fintech company without precedent in the continent. While complaints of human rights violations by his government multiply, Bukele defines himself as "the coolest dictator in the world."

The very popular president's commitment to cryptocurrency led him to force all business premises to offer alternatives so that salvadorans can pay for their transactions with cryptocurrencies and, to begin with, to give each inhabitant a digital wallet with the equivalent of 30 dollars in bitcoin.

Last November, it expanded its commitment by announcing its project to create 'Bitcoin City', where today is Conchagua, a town in the Gulf of Fonseca, in the Pacific, where the volcano of the same name stands, which would give energy to the new city. through a geothermal plant.

There would be a digital mine - which demands a lot of energy - airport, housing and commerce, and its inhabitants would have to pay a single tax: VAT, which is 10%. The development of the digital city, by the way, would be fully financed with bitcoin-backed bonds. The equivalent of about 500 million dollars in Volcán bonds would be used to achieve it.

SOMETHING NEVER SEEN

Four months after the start of Bukele's experiment, connoisseurs of the world of cryptocurrencies are very optimistic about the present and the future. However, those who watch the news from a distance still have many doubts.

Optimists maintain that this decision is already bringing positive things, such as the fact that technology-based companies are looking to the small Central American country to take their investments. According to Alejandro Beltrán, manager for Colombia of Buda.com, a cryptocurrency trading site, the bet is that El Salvador will position itself as one of the epicenters of financial transformation in Latin America. "There are those who see it as the next Singapore of the financial sector," he says. That seems idyllic, but it has already set a trend. So much so, that technology-based companies want to set up their businesses in that country, especially crypto companies.”

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In Rojas' opinion, the Chivo platform is not secure because it does not meet the necessary parameters of blockchain technology and the fact that it is controlled and centralized by the Government does not provide all guarantees.

CORRUPTION AND LAUNDERING

Critics maintain, on the other hand, that this bitcoin project is just a strategy by Bukele to take attention away from the real problems of the country and that Chivo Wallet will lend itself to government corruption and money laundering.

Hinz disagrees with that last point. He maintains that Chivo is a platform that works with the same rules that exist for any bank and that cryptocurrencies have a much higher level of traceability than cash.

“If we are going to talk about corruption, it is easier to pay a bribe with cash. With cryptocurrencies you can make an exact traceability of where they were, if they are linked to drug trafficking or money laundering. It is very difficult to use Chivo for corruption”, he assures.

A LOT OF RISK

Another element that has generated criticism since before the formalization of this monetization alternative is the high level of speculation to which Bukele is subjecting El Salvador with cryptocurrencies. He believes that these "are going to save the world" and his country, although not in the short term. Since November 2021, bitcoin has fallen 40%, and Bloomberg recently estimated that the Salvadoran government lost 14%, equivalent to $11 million, of its cryptocurrency assets.

From the Government, no clearer information has been released than that provided by the president in his trills, in which he has not spoken of losses, but of taking advantage of the fall in bitcoin prices to deepen purchases with public resources. . It is estimated that around $80 million worth of cryptocurrencies have been traded since September.

“It is extraordinarily risky to bet on the increase in the price of bitcoin to finance the state budget. So far this has gone wrong," Christian Ambrosius, a political scientist and expert on Central America at the Free University of Berlin, told DW.

The International Monetary Fund has warned Bukele several times that adopting bitcoin may involve "significant risks" in the macroeconomic and financial fields, and last week strongly asked him to withdraw its status as legal tender. Otherwise he would have no loans.

However, it is still too early to say a definitive word about Bukele's revolutionary project. For now, the banks of El Salvador are working to take on the challenge and there three Colombians – Davivienda, Banco de Bogotá and Bancolombia – have 52% of the market. So what they learn there will be of enormous use to Colombia, where trials are being carried out while awaiting clearer regulation. The country is already listed as one of the most active cryptocurrency markets in the region.