El Salvador’s Bitcoin Gamble, One Year Later

more than two thousand bitcoins so far. So what's the problem, Well, many of those purchases were at or near market highs. It was September twenty one, after all. Those price declines since mean that at least on people, El Salvador has lost more than half the value of its purchases so far, and surveys of both consumers and businesses show that most

people in the country just aren't using bitcoin. Nonetheless, President Bokeley and government officials are adamant that the nation's strategy has expanded financial services to a larger segment of the population and encourage tourism. So what's the real story of bitcoin? In El Salvador. I'm joined now by Bloomberg reporter Mike McDonald for more. Are those birds they are? So? I have? Um,

I have. There's like a flack of parakeets that live outside my apartment and they're they're like, yeah, tough, Okay. One of the most interesting countries in Central America, if you're a person who is even passingly interested in bitcoin, has got to be El Salvador. What's been going on in El Salvador over the past twelve months. Yeah, so a year ago El Salvador adopted bitcoin as legal tender

alongside the dollar. El Salvador as a dollarized economy it has been for twenty years, and last year they announced and they started accepting bitcoin as official currency. So it's a currency that you can use just like you would a dollar, just like you would any other currency to pay for goods and services and buy goods and services in the country. So businesses, by law are required to accept it unless technologically unable to. But it became legal

tender in Al Salvador about a year ago. You know, when the country adopted it, It was September one and else and bitcoin was really near record highs. It was around six that was trading around sixty thousand dollars per token at that time, so there was this sort of euphoria across the country. Everybody was downloading the government's bitcoin wallet, which the government launched a year ago. They were getting

into bitcoin, They were trading bitcoin on their phones. The government wallet really makes it easy to switch between dollars and bitcoins. So you saw all these new sort of street day traders in El Salvador that we're that we're trading between bitcoin and the US dollar on their phone. They were rushing to the a t m s to convert their bitcoins two dollars and take out cash at

these bitcoin a t m s around the country. At the beginning, there was sort of this euphoria about bitcoin in the country and everybody was really excited to see what would happen. I mean, at the time, it was really the biggest test for bitcoin as a currency in the world. This was the first country to ever do this, so everybody was really watching to see how the rollout went and really how this digital token could be used

as as an official currency. What was the argument that El Salvador was making for why they were doing this. There were a couple. Since it's dollarized economy, they don't really control their own currency. They really rely on the FED for monetary policy. I mean, they really don't have any sort of central banking control of their own currency. One argue it was they shifted to bitcoins that they could shift away from relying on the Federal Reserve and

US dollar monetary policy. Another argument was, you know, Al Salvador is a country that has that receives a large amount of remittances every year. There are a lot of All Salvadorians in the United States that work and live and send back tons of money every year. It's something like twenty percent of GDP in El Salvador. And they usually use Western Union or MoneyGram or one of these traditional money transfer services to send those remittances back to

All Salvador. And those services charge fees for sending those remittances. And you know, depending on what sort of service you choose, the money can take three, maybe five business days to get there. So one argument was, you know, by adopting bitcoin, this would make it easier for Salvadorians living in Los Angeles or Texas or New York or wherever. It would make it cheaper and faster to sort of send the money from one person's wallet in in the United States

to another person's wallet in Al Salvador. So, you know, one of the other main arguments was that this would save time and money on remittances, which is really a pillar for the economy and its hold. And let's talk about reminstances specifically, because you know, twenty of GDP is not a small amount of money going back. Having used services like money Ground Western Union to send money to the Caribbean where I'm from, It's not only that it

can be slow, it can also be really expensive. And so if I remember correctly, like one of the arguments was, well, this isn't only gonna be faster, it's also going to be cheaper and more efficient. The thing is bitcoin volatility is you know feature bug. However you think about it,

there can be wild swings in the currency. How was the plan to sort of manage the fact that by the time you start the transaction, by the time that transaction gets the the person, the price might have changed by fifteen You know, most of the souf it orders that are living in work in the United States are

probably not starting off with bitcoin. They probably have dollars that they've made at their jobs in the US, and they have to go to an next change and buy the bitcoin and then get a wallet and then transfer the money to the wallet and then transfer it to

their family members in El Salvador. And you know, from what we've seen over the past twelve months, people really aren't spending bitcoin in Al Salvador, so then their family member or their friend in Al Salvador would probably convert it to the US dollars, and there's a lot of price fluctuation that can happen in that time frame. There are also a lot of fees associated with that whole long process, so it's not even always that much cheaper.

I mean, the you know, the fees for bitcoin kind of vary for sending it, based on you know, usage and a bunch of other factors, so you know, sometimes it is cheaper, sometimes it's not. But you know, it hasn't really translated into a large amount of remittances being

sent via bitcoin either. The Central Bank Inel Salvador said a couple of months ago that it's only about two percent a little less than two percent of remittances that have come via digital wallets, so most people still are using the traditional services like money Graham and Western Union, and these are companies too. They have also come up with their own digital wallets, so to speak, to try and compete with you know, bitcoin and stable coins and

some of these other cryptocurrencies. You know, they're trying to make it cheaper and faster with their own versions of digital wallets to make it easier for customers on both ends. So, you know, we haven't really seen a sort of mass movement from traditional money services to bitcoin for transferring remittances from the U S t S. Salador. You've reported over the course of the past twelve months on the fact that, you know, Bokeley is historically popular leader in the country.

He controls not just sentiment, but like functionally has a lot of influence and exerts a lot of control over other arms of government and of course the central bank. However, the bitcoin thing doesn't pull well for him, right Like kind of around the time that this was rolling out, there were even protests, some of them turned a little bit violent. What explains the disconnect between this history really popular leader on this historically unpopular policy. Yeah, it's really interesting.

You know, it's popular for a lot of reasons, and bitcoin is is kind of the one thorn in his side. I mean, it's the one thing that the opposition parties in Al Salvador have really latched onto because it's sort of the one thing that people are really upset about him with. You know, he's popular. He's cracked out on gangs recently, He's built a couple of new hospitals, he's improved education. He has some of these money transfer services from the government to the you know, very the poorest

households in Al Salvador. So so those are some of the reasons why he's he's so popular with bitcoin. You know, it was a big change, really fast. He announced this in June of one, with the law taking effect in September one. It was really only three months. It's you know, shifting from the US dollar, you know, sort of a physical,

hard feat currency to a digital dollar. In a country where a lot of people outside the capital city don't have smartphones or aren't familiar with the technology, or don't really understand cryptocurrencies. A lot of homes may not even have access to internet. A lot of businesses outside the capital city don't have access to internet, so so making transactions in a digital currency is scary. The very fast pace which this happened too, I think spooked a lot

of people. I think once it rolled out. You know, at the very beginning, the price of bitcoin was was very high. It was in the fifty thousand range in September one, and then it quickly went up to sixty thousand. I think it was about sixty thousand for a while. And for the first couple of months, there was this excitement and people thought, oh, well, my money is just always going to go up. And then ever since then

it's gone down. I mean, now you know we're talking about bitcoin has been at twenty thousand for for months now, and so I think, you know, a lot of that early excitement really fizzled out. People who started using bitcoin last year at fifty thousand and went up to sixty thousand, and now it's down to twenty thousand. I think they, you know, they opened their achieval app, which is the government's digital wallet, and look at their money and like, oh, well,

I'm losing money on this. This is really silly. The volatility has really scared people away. If there is sort of one saving grace, you know, not a lot of people on a Salvador. It's not like people poured their life savings into bitcoin because there wasn't this mass adoption. It really saved the economy as a whole from from this crypto winter and this bear market that we're in, but it's also sort of dampened sentiment for using it

as an actual currency because of the volatility. Well to your points about the absence of enthusiasm, there's a brilliant quote that you have in your story from Laura Android, who's the director of you know, one of the universities there and who did a poll that's sort to find out if people are actually using bitcoin, and the quotes is, if you go to any markets in El Salvador, you're more likely to receive an insult than be able to purchase something in bitcoin, which you know feels feels pretty

telling of of the way things are. There is one area that by any metric, though, does look like there's been some success, and that's sort of foreign investment and tourism. But what are some of the specifics that you've seen that are actually making a difference in the country. Yeah, there have been a lot of bitcoiners that have visited the country over the past year, there's a lot of curiosity to see how this works. El Salvador is on pace this year to actually surpass pre pandemic levels of

tourist visits. I think they might have already done it already and we're only in September now. There is a lot of curiosity. There's been a couple bitcoin events that have been held in El Salvador over the past year. The Latin America Bitcoin Conference was one. They've had a couple other blockchain events as well. They're going to have another one this November. Bitcoin Beach has attracted a lot of people. There's there's Bitcoin Beach is sort of the

pilot program where this all started. You know. There there have been several companies to some and and some pretty prominent crypto companies like bitfin x, which is a crypto exchange, which is preparing to open up an office there. I spoke with some other crypto companies, a couple of different exchanges, and a couple of different banking and lending crypto platforms, and they've seen a large uptick of users in El Salvadore over the past year, so for them, been good

for business. So you know, there is this sort of curiosity to see how things are going in Al Salvador. And and there are members of the crypto community from from legitimate large crypto companies that are are setting up shop in Al Salvador. And and there is this bet on the part of the government where they're kind of like, well, let's see if we can attract this industry here and be sort of a regional hub for this highly technological

industry for Latin America. So that's so there is there's a little bit about a little bit of that, and you are seeing evidence of it. I mean, you can't see it in the numbers. Up next, more from Broomberg Reports and Mike McDonald on El Salvador's economic future as an ardent supporter of crypto. So we've got a let's say, mostly indifferent population, we've got a mostly enthusiastic kind of

foreign investor in tourist space. There is one constituency that I would describe as actively hostile to El Salvador's bitcoin experiments, and that's like the multinational organizations, the I m F, the World banks. It's also like the rating agencies. What's been going on in that front before El Salvador announced that they were going to adopt bitcoin as legal tender. They were negotiating a program with the International Monetary Fund.

The government has really high debt levels and they have a couple really big bond payments coming up that they're going to have to pay to bond holders. So they were negotiating this one point three billion dollar program with the International Monetary Fund essentially alone, and then in exchange for that, they would adopt policies, you know, more fiscally responsible policies to sort of narrow their fiscal deficit and

bring debt levels down. But the i m F has really pushed back against this experiment, and we haven't seen that program actually happen yet. I mean, they've been negotiating this now for maybe two years, and this experiment really has cost the country a program at one point three billion dollar program with the International Monetary Fund. You know, the World Bank has held off on some lending because

of this. I think they even rejected a request from a sob it or to help with the rollout initially. I think they've sort of backed off on that, and I think they did provide some assistance eventually, but there has been this pushback from the I m F. A little bit from the World Bank and from the from bondholders as well. I mean, you've you've seen Moodies published several pieces warning of the dangers of the volatility of bitcoin. The government has been buying bitcoin and they've lost a

lot of money so far on those purchases. I think they have unrealized losses of about sixty million dollars on roughly a hundred million dollars in bitcoin purchases. So it has hurt public finances and that's something that the International Monetary Fund, the World Bank, and these rating diseases, especially Moodies, have really brought to light. Given this what you could sort of fairly describe as a mixed environment for this, you know, great experiments. What's next for buc He has

shifted gears. Ever since March there was a there was a series of killings in March, gang related killings, you know, Saltore in March, and ever since then, the government's focus has been on finding gangsters, resting them and putting him in jail. I think there rest like forty thousand gangsters since March, or alleged gangsters, I should say, because there's some pushback as to whether or not some of these people are innocent or not. You know, the laser eyes

are gone from his Twitter profile. I think he took them down a month or two ago, So there has been a bit of a shift in focus in terms of what the government is focusing on. He still is meeting with with representatives from the cryptocurrency community. He met with the CEO of Bank to the Future, which is a cryptocurrency company, a couple of weeks ago. You know, the CEO of Finance was there, I want to say, in May, June or some sometime in the past few months.

So he is sort of keeping this up, this interest in the cryptocurrency community. But you know, I think the core focus of the government has has really shifted that. You know, there are plans still to issue a blockchain bond, which would be like a bitcoin back bond, that's been delayed. You know, they had initially announced that they were going to issue it in March, were now in September, and there's talk that maybe they'll do it at the end

of the year. But you know, this is a government that that moves their deadlines quite frequently, so you know, it may happen by the end of the year. It may not. They still haven't presented a digital securities law, which is the legislation they need to really underpin this, this blockchain bond issuance. Mike, as a closing question, you know, you're one of the people that has actually you've gone to elslvdoor a bunch of different times. You have tried

to navigate the country just by using bitcoin. What about that system would have to get better for it to really be practical rather than gimmicky. You know, I think speed is a big one. When you land there, it's hard to find places that will actually accept it. You know, it's a minority of businesses that will accept bitcoin. So finding a place that will actually accept your bitcoin in exchange for services or goods or whatever is is a

bit of a challenge. There are some that will that will accept it, and I found that, you know, at those places that do accept that, there's a lot of bugs in the system that transactions from my wallet to their wallet aren't always smooth. You know, they get blocked, or sometimes there's no internet service and you're sort of standing there waiting for internet service to come back. I had a transaction at one of my hotels that took I think overnight to process. I paid for my room.

It was like, I don't know, Wednesday or something like that, and then I had to come back like the following Thursday evening to see if the payment actually went through, And so we were all sort of like waiting to see, you know, with this work, would it not work? There are a lot of problems like that where it's just it's slow. I mean it's it's slow and it's clunky, and it's it's still not faster than at least not for the consumer anyway than me just whipping out of

credit card and swiping it and going about my way. Well, thank you so much for sharing your perspective, Mike, and I always appreciate you being on the show. Yeah, thank you, Stacy, appreciate it. You can find more of Mike McDonald's reporting on the Bloomberg Terminal on Bloomberg dot com and on Twitter. He's at m D McDonald That's m D M C D O N A L D. On the next episode of Bloomberg Crypto, it's Merge Week, and my colleagues David pan Olga Karif, and Dave Litta hosted a Twitter spaces

dedicated to the coming changes to the Etherium blockchain. You'll hear highlights from their conversation. This is Bloomberg Crypto, a dearly podcast from Bloomberg and I Heart Radio. For more shows from I Heart Radio, visit the I Heart Radio app, Apple Podcasts, or wherever you get your podcast. Send us your comments, questions or suggestions for the show to Crypto at bloomberg got net or find us on Twitter. We're at Crypto. The supervising producer of Bloomberg Crypto is Vicky Verglina.

Our senior producer is Janet Babin. Our producer is Sharon Burriro. Associate producer is Ty Butler. Desta wonder At is our engineer. Original music by Leo Sidron. I'm Stacy Maria Shmal. We'll be back tomorrow