Kyle Feinstein, Stanford University
After much anticipation, Bitcoin City has met its end. The futuristic city was first announced at the 2021 Latin American Bitcoin and Blockchain Conference along with a 10 billion USD bond investment. This urban oasis was a symbol of El Salvador’s unprecedented decision to adopt Bitcoin as legal tender in 2021. The metropolis was to be built at the base of the Conchagua volcano and serve as a hub for cryptocurrency mining and foreign investment. Bitcoin City’s strategic location offered a steady source of geothermal energy for bitcoin mining; to enhance its appeal, the city would also not collect income taxes. As a testament to El Salvador’s ambitious efforts to integrate cryptocurrency into the national economy, Bitcoin City had a circular layout, invoking the shape of a coin.
But in April 2023, all of these efforts were abruptly canceled. El Salvador’s initial investment in cryptocurrency was beginning to look unfruitful as Bitcoin’s value steadily fell by over 70% from its November 2021 peak. The resulting unrealized paper loss amounted to 50 million USD, which is approximately 0.5% of El Salvador’s national budget. Coupled with El Salvador’s high deficit and an expected increase in its debt-to-GDP ratio in 2022, it seemed as if the end of Bitcoin City had signaled the failure of the country’s great cryptocurrency experiment. But in this temporary moment of fiscal disarray, El Salvador held on to hope for the promise of a more valuable reward: a grand economic revival for all the world to see.
The seed of Bitcoin City was first planted in June 2021, when President Nayib Bukele unveiled a bill to adopt Bitcoin as legal tender during Bitcoin Conference 2021 in Miami. Bukele asserted that the policy would reduce the cost of remittances and provide accessible banking for Salvadorans. Four days later, the Bitcoin Law passed in a majority vote, with 62 of the 84 congressional seats in favor. To spark circulation of the new currency, the government purchased 2,301 coins for a total of 103.9 million USD from September 2021 to June 2022. Additionally, the government invested 75 million USD into a program to transfer 30 USD worth of Bitcoin into the accounts of Salvadorans who sign up for Chivo, a private enterprise electronic wallet service.
However, El Salvador’s new initiatives were met with significant resistance. The World Bank denied El Salvador’s request to aid in the implementation of the law, citing volatility and environmental concerns. The International Monetary Fund also recommended that El Salvador revoke its law, reportedly because they expected the issuance of bitcoin-linked bonds to be too risky. Perhaps the strongest initial opposition came from the people of El Salvador. On September 7, over 1,000 protestors gathered in El Salvador’s capital, San Salvador, to challenge the adoption of Bitcoin. A poll by Central American University (UCA) revealed that approximately 68% of people surveyed disagree or strongly disagree with adopting Bitcoin as legal tender.
El Salvador’s process of integrating Bitcoin into its national economy has been nothing short of tumultuous. However, there may still be hope for El Salvador’s Bitcoin economy. In actuality, the Bitcoin Law’s initial turbulence was largely due to technical issues associated with its swift implementation, as opposed to a fundamental problem with the legal recognition of cryptocurrency. UCA studies indicate that in August 2021, 90% of Salvadorans did not have a clear understanding of Bitcoin, and 80% claimed to have little or no confidence in its use. Moreover, El Salvador’s internet penetration rate stood at only 50.5% at the beginning of 2022. This reality made it virtually impossible for a majority of Salvadorans to reap the benefits of cryptocurrency, resulting in substantial mistrust towards Bukele’s plans.
If steps are taken to improve financial education and internet access in developing countries, Bitcoin could have a promising future in El Salvador and other nations. With expansive internet access, Bitcoin has the power to unlock new economic opportunities for low-income citizens by making financial investment more accessible. In El Salvador, 70% of the adult population does not have a bank account. Cryptocurrency and Chivo provide low-cost banking services that help enable personal financial growth. Bitcoin also has the potential to reduce the transfer costs of remittances, which constitute 20.6% of the country’s GDP as of 2021.
Furthermore, not all of the economic benefits of Bitcoin for El Salvador can be easily predicted by traditional economic metrics. Successful implementation of Bitcoin could attract significant international attention from investors interested in new technological developments. The Bitcoin Law also provides alternatives to the U.S. dollar, which El Salvador heavily relies on today. Therefore, adopting Bitcoin is an important step towards achieving a greater degree of economic and political sovereignty for El Salvador. This rare opportunity should not be hastily dismissed.
It is undeniable that El Salvador’s decisions were radical, but its success is far from impossible. El Salvador’s rocky history with Bitcoin is not necessarily an indicator of its long-term growth potential. Bitcoin City may be canceled, but Bukele’s greater dreams of a Bitcoin Empire are very much still in play.