One after adopting bitcoin as legal currency, El Salvador is on the brink of economic disaster.
Just a year ago, El Salvador’s adoption of bitcoin sounded like a revolutionary world first. Now considered an official currency in the country, in the same way as the US dollar, the decision aimed to mark the beginning of a new financial era. Too bad, the result is not really what expected.
An economic disaster
The choice to make bitcoin a legal currency may have been a precursor, but it is costing the country of Nayib Bukele very dearly. As a reminder, the Salvadoran president had adopted in June 2021 a law voted by Parliament, aimed at formalizing the non-fiduciary currency whose course would be freely set according to the market. The objective was to attract foreign investors – in particular by offering more advantageous taxation – but also to emancipate themselves from the influence of the United States, and reduce the country’s dependence on the US dollar.
However, the country had a promising start: a few months after the adoption of cryptocurrency, the value of bitcoin experienced a spike in growth. The local population has been rather receptive, and many businesses have taken to the digital currency. This was without counting on the collapse of cryptocurrencies that occurred afterwards. Bitcoin has lost half its value in just one year. A big shortfall for individuals, but also investors, who quickly returned to more conventional investments.
Result of this collapse: El Salvador lost a lot of money. The public debt has exploded, and the country can no longer find a creditor ready to pay off its debts. The economic situation of the country decided the IMF and the World Bank to block economic aid of 1.3 billion dollars. Deprived of its exit door, the country could find itself in default of payment as of January.