One year after its recognition as a legal tender in El Salvador, Bitcoin (BTC) penetration among Salvadorans reportedly remains low.
Data from the U.S.-based National Bureau of Economic Research (NBER) showed that 80 percent of people downloading the Chivo app—a crypto wallet issued by the Salvadoran government—stooped using it after spending $30 free credit given by the government. NBER also revealed that most of its downloads occurred during its launch month in September 2021.
The government has encouraged citizens working abroad to use Chivo and other crypto wallets as a mode for sending money to families back home without a transaction fee. Despite that, remittance data from the central bank between September 2021 and June 2022 showed that crypto transactions only accounted for 2 percent of the total recorded transactions.
Businesses in El Salvador are also required to accept crypto from consumers, but a recent survey showed that only 20 percent of them abided by the regulation. A small business owner in the capital, Jesus Caceres, said he accepted BTC as payment but only had served two transactions using the cryptocurrency.
NBER said citizens’ poor sentiment toward BTC is the main contributing factor to its low penetration. According to an NBER survey, people in El Salvador perceived BTC as “volatile” and demanding “high fees.”
Oscar Picardo, the director of the Institute of Science, Technology and Innovation at the private Francisco Gavidia University, said that legalizing BTC was a “very risky” move for a "poor country" like El Salvador. He confirmed that people saw BTC as a highly speculative asset with a value that would vary from time to time, especially due to the recent BTC market crash.
The value of BTC was close to $47,000 when the Salvadoran government announced it as a legal tender. It dropped below $20,000, reaching $19,770 on Tuesday.
The government, however, asserted that its BTC policy had attracted investors, enhanced tourism, eliminated bank commissions and improved financial inclusion among citizens. Recently, the government also acquired 2,381 units of BTC, saying it was a part of its long-term plan.
Financial reports suggested that BTC’s bear market increased the country’s financial risk. It will be harder for El Salvador to gain the $1.6 billion needed to pay off sovereign bonds due in 2023 and 2025. The International Monetary Fund requested El Salvador to reverse its BTC policy over concerns that might complicate the country’s deal with the financial institution.
Stunted development of Bitcoin City
In an attempt to promote Bitcoin use in the country, Salvadoran President Nayib Bukele announced the development of the smart "Bitcoin City" in November 2021. The city was planned to fully operate on BTC.
“Invest here and make all the money you want," Bukele said while announcing the plan.
The city was planned to reside between the Gulf of Fonseca and the Conchagua volcano. Bukele said the city would be “a tax haven” for crypto investors.
However, people who live in the area did not welcome the project. Jose Flore, a fisherman and farmer from Conchagua, said the project did not benefit people with low social economic status.
The status of the project remains uncertain due to the crypto market crash. Reuters reported that the development project had shown no progress in its recent visit, with no sign of construction in the area.