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After legalizing Bitcoin as legal tender last September, El Salvador, under self-described “world’s coolest dictator” Nayib Bukele, has become an experiment in Bitcoin’s power to play a role in national economics, perhaps opening new venues for borrowing and using profits from Bitcoin mining to fund new social spending.
Bukele’s government has spent $180 million setting up Bitcoin ATMs around the country and putting $30 in Bitcoin into a digital wallet for anyone who registers to use the digital currency.
Although most adults in the country signed up to receive the free Bitcoin, merchants report few shoppers use it to pay for purchases.
Instead, people have exchanged their Bitcoin for U.S. dollars, which have been El Salvador’s official national currency since 2002.
In the months ahead, El Salvador will issue a billion dollars’ worth of sovereign bonds backed by Bitcoin trading on the Bitfinex exchange, Bukele has announced.
U.S. citizens and businesses are barred from trading on Bitfinex, but could buy and sell the bonds through offshore platforms, Bitfinex founder Samson Mow, a Bukele advisor, told The Wall Street Journal.
The country’s sky-high budget deficits, coupled with inflation and an $800-million bond payment due next January, have made El Salvador a poor candidate among conventional lenders.
Bukele is hoping to skirt the usual funding sources such as the World Bank and International Monetary Fund and trade on Bitcoin’s cachet and the novelty of issuing Bitcoin bonds to draw investors.
On 9 February, Fitch Ratings sharpened its view of El Salvador as a default risk, sinking its rating on the country’s long-term bonds B- to CCC, saying that “weakening of institutions and concentration of power in the presidency have increased policy unpredictability, and the adoption of Bitcoin as legal tender has added uncertainty.”
Bukele also is hoping that profits from a national Bitcoin-mining project will fund expansive social programs to address poverty and turn his country into “the Singapore of Latin America,” according to the WSJ.
The president also has teased that the bonds will help fund creation of a seaside “Bitcoin City,” where geothermal energy from a nearby volcano will provide the energy necessary for Bitcoin mining.
The International Monetary Fund (IMF) has not been impressed, pointing out the Bitcoin’s prices are too volatile to become a key element of a small nation’s economy and that Bukele’s new social spending—on which much of his popularity is based—puts the country’s debt on “an unsustainable path.”
El Salvador is in negotiations with the IMF for a $1.3-billion loan.
Also, El Salvador has long been a hub from drug traffickers and criminal gangs, heightening the risk that Bitcoin as a national currency will open doors to money laundering and other illegal uses.
Bukele is undeterred.
“Bitcoin is…the evolution of humankind and we’re going there,” he told a cheering crowd at a November rally announcing plans for the Bitcoin bond issue.