The bitcoin-boosting president of El Salvador, Nayib Bukele, has bet the house on the first cryptocurrency.
First by making it legal tender and then staking the country’s reputation on the bond market by announcing a bitcoin bond with low interest and a big upside if the volatile cryptocurrency’s value keeps rising.
Now, some three months after the original and much-delayed launch date, the country “has yet to receive a single penny of the $1 billion he’s seeking,” Bloomberg News reported on April 29.
While the country claimed it had received commitments for half of that some months ago, nothing has been mentioned of the figure and a date hasn’t been set due to “market conditions.” In addition, the country’s not-especially-good bond rating has tanked so hard it now requires a 24% interest rate — just a bit better than Ukraine, which is being invaded by a nuclear power.
The bonds are meant to fund the purchase of more bitcoins and build a Bitcoin City but have only succeeded in causing rating firms to slash its debt far below junk and the International Monetary Fund (IMF) to back away from a $1.3 billion loan that would, among other things, pay off an $800 million bond coming due at the beginning of next year.
While Finance Minister Alejandro Zelaya said in a May 3 interview on local TV that there is “zero risk” of a default, concerns that the bitcoin bond will bring down the whole house of cards.
On April 28, Paolo Ardoino, director of technology for the Bitfinex exchange that is slated to issue the tokenized bonds said in interviews that he expects congress to pass the enabling laws that will legalize the Bitcoin Bonds “in the next two or three weeks,” the La Prensa Grafica newspaper reported.
Meanwhile, Congressman René Portillo Cuadra said that the bond issue hasn’t been launched due to El Salvador’s low credit rating and loss of credibility in the markets, local media outlet El Salvador said. They have “no future,” he added, saying the problem is not the Russian invasion or shaky world economy but “more with the fact that if the country continues to disrespect human rights, if the country continues to disrespect the Rule of Law, the other countries will not have credibility either in the finances or in the government management.”
A study by a U.S.-based think tank, the National Bureau of Economic Research (NBER), said only 20% of Salvadorans have continued to use the nationally issued and technically flawed digital wallet needed to spend bitcoin. Aside from serious issues around functionality, a preference for cash — El Salvador’s other official currency is the U.S. dollar — distrust of the wallet and the cryptocurrency, and for about one-third of the respondents the lack of a smartphone, were among the top reasons. Of course, only 20% of businesses accept bitcoin, despite a law saying they must accept it, doesn’t help.
Perhaps more embarrassingly, El Salvador dropped from ninth shortly after adopting bitcoin, to 36th on the list of bitcoin- and crypto-friendly countries complied by Irish investment analysis firm Coincub, La Prensa Grafica said. The survey cited “a lot of evidence suggests that the population is unwilling to put aside traditional currencies and take the serious cryptocurrencies,” the news outlet reported.
A Love-Hate Relationship
Meanwhile, the U.S. Congress has been getting its digs in with bills in both the House and Senate requiring the administration to put “a plan in place to protect our financial systems from the risks of this decision, which appears to be a careless gamble rather than a thoughtful embrace of innovation,” Rep. Norma J. Torres, D-Calif., chair of the Central America Caucus said.
That said, Bukele’s plan did gets some love in the Central African Republic, which followed his lead on April 27, adopting bitcoin as an official currency with a week’s planning. However, a cryptocurrency is not especially likely to turn around the economy so poor that just 4% of the population has internet access and just one-third a mobile phone. Of course, the civil war there won’t help, either.