Bitcoin City - El Salvador: The first country to adopt Bitcoin
El Salvador and its president Nayib Bukele are the two well-known names that have been on covers or in titles recently. They adopted Bitcoin as a legal tender, which created an uprising controversy across the world. Let’s discover what El Salvador is, who Nayib Bukele is, and the Bitcoin adoption in the country.
El Salvador and The young Bitcoin-enthusiast President
What is El Salvador?
The Republic of El Salvador (or simply El Salvador) is a country situated on the Pacific coast of Central America. Since 2021, in the crypto space, the country has been emerging as a phenomenon that its president keeps tweeting about Bitcoin and his endeavor to adopt it to the country.
Who is Nayib Bukele?
Nayib Bukele (40) is the 43rd president of El Salvador who is a big crypto fan, and he has been investing in Bitcoin. He has been serving as the millennial president of El Salvador since June 1st, 2019, in his 5-year term.
El Salvador: Big dream to become a Bitcoin city
Bitcoin as a legal tender
Bitcoin was officially adopted as legal tender in El Salvador in September 2021 after finishing legislation in June of the same year. In fact, people in El Salvador can use the U.S. dollar as the official fiat currency and Bitcoin for cash payments.
To accept Bitcoin as payment, every business unit has to install compatible devices. By doing this on a large scale, El Salvador is one of the countries that have a strong crypto adoption rate among the people.
The first Bitcoin purchase in El Salvador was 200 BTC on Sep 6th, 2021. Another 200 BTC was bought on the same day. Since then, El Salvador and its president, Nayib Bukele, have been buying more Bitcoin. At the time of writing, 9 purchases to buy 2301 BTC were made by the first Bitcoin country, El Salvador. We will break this down in the next sections.
Bitcoin City
A model of a crypto-inspired city was announced by El Salvador’s president in May 2022. Despite the gold color of the model, the city will be built up like other cities around the world. The concept will be crypto-centric, with a big Bitcoin logo in the city center.
El Salvador plans to build a tax-free Bitcoin City. According to the report from El Salvador, there will be only a 10% VAT (Value-added Tax) for the casual operation of the city. The energy source of the city and the mining network comes from the Conchagua Volcano.
Bitcoin City can be partially tax-free, which is an advantage in attracting global investors. Some developed countries applied harsh policies to Bitcoin and crypto investors. For example, a 20% tax on crypto gains proposal in Korea is delayed until 2025, making investors look for other “crypto heavens” as alternatives.
No tax is applied on Bitcoin profits of foreigners. This means if you are a foreign investor and make a huge sum of profits on Bitcoin, you will be exempt from taxes. This is like an incentive for foreigners to come to the country to invest their capital.
Volcano Bond
In March 2022, President Nayib Bukele plans to raise $1B by selling Bitcoin-backed bonds known as “volcano bonds” with an annual coupon of 6.5% (or simply 6.5% annual interest). By using geothermal energy from a volcano, El Salvador also planned to sustainably power its new Bitcoin City. Therefore, bond buyers would be able to get benefit from the business model cited by El Salvador and its president.
$500M of the bond will be used for building the infrastructure of the Bitcoin city and Bitcoin mining plants. The country will use the rest of the money from selling “Vocalno bond” to accumulate more Bitcoin.
The bonds will be issued by a state-owned energy company named La Geo in El Salvador. To make them tradable on crypto exchanges, the company plans to tokenize the bonds on Liquid Network by Blockstream and launch them on Bitfinex.
However, at the time of writing, the Bitcoin-backed bond is not going as planned and is delayed over time. The reason might be that legislations are yet to be approved, and there were some actions of U.S. regulators on Bitfinex. In addition, the launch was supposed to happen in March 2022, but it was delayed due to market volatility.
Chivo Wallet
Chivo wallet is the official wallet of the El Salvador government. Here are some worth-mentioned benefits of using the Chivo wallet.
- A $30 incentive in BTC.
- Shoppable in stores across El Salvador.
- Remittances around the world.
- Withdrawable into dollars at Goat points/ ATMs/ US-based ATMs.
- UI/UX is friendly to users. They can use Bitcoin and dollars with the Chivo wallet.
For Salvadorans, the process of downloading the app is quite simple. Chivo is now available for iOS, Android, and Huawei platforms. Then users have to verify their identity to receive a $30 gift from the app.
In the beginning, the $30 incentive attracted lots of people in El Salvador. As time goes on, it seems like people only come for the rewards. In recent research conducted by the U.S. National Bureau of Economic Research, 6 out of 10 surveyed people (1,800 households across El Salvador) do not use Chivo after getting the $30 incentive.
Bitcoin buying spree of El Salvador
El Salvador and its president has been going on a Bitcoin buying spree for almost a year (from September 2021). In late 2021, Bitcoin had its peak at around $68,000 for a whole unit. From the top, Bitcoin has decreased by 70% to the $20,000 price mark in June 2022. This makes not only El Salvador’s Bitcoin investment underwater but also other altcoins.
Let’s discover what Bitcoin purchases have been made by El Salvador’s president since the beginning. There is a total of 2301 Bitcoin owed by the country. The average purchase price of those Bitcoin is around $45,900, which can be changed in the future if any purchases are made.
At the time of writing, the Bitcoin price is approaching $20,000, making the investment to plunged by half. However, president Nayib Bukele stated that it would be no losses until the investment are sold.
In the future, the president will keep buying more Bitcoins using DCA (Dollar Cost Averaging) method. The fund for these purchases will be collected from taxpayers. By doing this, the El Salvador government has been receiving many controversial feedbacks from the people.
Impacts of Bitcoin Adoption on El Salvador
Pros
Before going into the drawbacks of Bitcoin adoption in El Salvador, let’s discover what are positive impacts Bitcoin has made on this Center-American country.
First mover: In every revolution, there are winners and losers. By becoming the first country that legally accepts Bitcoin, El Salvador takes risks with great upside potential. However, there are some pros and cons as follows:
Global Remittances: Bitcoin is a decentralized network that allows its users to transfer Bitcoin around the world without any intermediary. Chivo wallet supports this advantage of Bitcoin as well. Salvadorans mainly use the Chivo wallet for transactions.
El Salvador gets eyeballs: The country's president has shocked the world since he is into Bitcoin and strongly believes in the future of crypto. El Salvador’s female minister of tourism stated that the tourism industry increased by more than 30%, thanks to Bitcoin’s adoption.
Educating its people about blockchain technology: El Salvador has a population of around 6.4 million people, ranking 112 globally. If more than a half of the population uses crypto wallets, this will make the country have the most Bitcoin-adopting rate.
Crypto adoption: Bitcoin is just the beginning. Altcoins are expected to get more attention in the future since the majority of Salvadorians are involved with cryptocurrency.
Cons
Public money to buy Bitcoin: Where did the money come from for El Salvador to buy Bitcoin? Public money. However, the country has not made any public announcements to answer this question. Besides pouring money into Bitcoin, the president can use it to fund other things that matter.
Risky if Bitcoin fails: There is still a small chance that Bitcoin will come to zero and never come back to the break-even price. El Salvador will lose its Bitcoin investments, and Bitcoin adoption will have negative impacts on the country.
International Monetary Fund (IMF) warned El Salvador about the financial risks of Bitcoin as a legal tender. In addition, IMF also limits the adoption of Bitcoin in some other countries. Those negative drumbeats can slow down Bitcoin adoption.
Potential Crysis and Inflation: El Salvador is now using two types of currency at the same time, which are dollars and Bitcoin. This might create an imbalance between the usage of fiat money and Bitcoin. Therefore, monetary policy should be carefully taken into account since it might create negative impacts.
Scenarios of the Bitcoin City of El Salvador
What if Bitcoin adoption in El Salvador fails
In the worst-case scenario, El Salvador will fail with the Bitcoin adoption. Salvadorians will not accept Bitcoin as payment despite countless launched incentive programs. The world, or more specifically, IMF, has warned El Salvador that accepting Bitcoin as a legal tender can result in a financial crisis.
As mentioned, what if El Salvador’s economy and businesses depend entirely on the Bitcoin network and the Bitcoin price comes to zero, it would destroy the economy. In fact, Bitcoin adoption is still in the early stage in El Salvador. People get educated about Bitcoin and blockchain technology.
What if Nayib Bukele made it?
On the other hand, what would happen if Salvadorans used Bitcoin in their daily usage. The Bitcoin City would come into existence. El Salvador would be a go-to destination for global crypto investors, attracting billions of dollars.
Bitcoin adoption in El Salvador is like a sandbox model at scale. The vision of Bitcoin becoming a global currency can only be realized if the adoption is successful at a national level. El Salvador sets a successful example, and other countries might weigh the advantages over the disadvantages of adopting Bitcoin as a legal tender.
Even though El Salvador has been accepting Bitcoin for a year, many other governments are laying eyes on it. Let’s explore the Bitcoin domino in the following section.
Bitcoin Adoption Domino
El Salvador is the first country to adopt Bitcoin on a national scale, which is a whole new level compared to prior adoptions of Bitcoin only on a small scale. After seeing the potential, some countries are urging to follow president Nayib Bukele’s path.
Accepting Bitcoin or other cryptocurrencies as a legal tender is undoubtedly a big challenge for every government. Since the advent of Bitcoin, there has been a beneficial conflict between cryptocurrencies and fiat currencies. The war is heated every time Bitcoin gets adopted as a legal tender.
There are other players that moved forward or took the adoption under consideration. Let’s discover them.
- The Central African Republic (CAR) came into the race as the second country to adopt Bitcoin as a legal tender, along with the Central African CFA franc. Like El Salvador, CAR also received warnings of financial risks from the IMF.
- Madeira, Portugal’s autonomous region, has plans to embrace Bitcoin as a legal tender.
- Prospera on Roatán Island, Honduras’ special economic zone, also follows El Salvador’s bet on a limited scale.
- A female Mexican Senator wants to make Bitcoin adopted in her country. However, the result seems to turn out to be still a long way to go.
Whether we can see mass adoption of Bitcoin as a legal tender around the world, this revolution can connect global trade without dependence on any fiat money. In general, the road to the mass adoption of Bitcoin is still long.
Conclusion
El Salvador and its president Nayib Bukele has fueled the mass adoption of Bitcoin at the national level. On the other hand, the Bitcoin price has been going down since November 2021, putting pressure on El Salvador. They must have been receiving tons of critics. So what actions will the government take to defy this unfavorable narrative in the future?