The small Central American country is most often in the news for its gang violence. However, El Salvador made headlines on 7th September 2021 when President Nayib Bukele decided to adopt Bitcoin as a second official currency, on a par with the US dollar. A progressive move for some, a folly for others.
In November, with his trust worth $150m and the price of Bitcoin soaring, El Salvador seems to have largely won its bet. With his new virtual wealth, the young Nayib Bukele announced that he would open twenty schools and an animal hospital, creating more than 300 jobs. He even plans to build Bitcoin City, a futuristic place funded by Bitcoin and powered by volcanic energy. But beware: El Salvador has made it clear that it will not sell any of its Bitcoins. These projects will be funded by potential profits only: if the Bitcoin price collapses, the entire economy may be on hold.
By the end of January, less than six months after its adoption in El Salvador, Bitcoin had lost half its value and the International Monetary Fund had asked the country to reconsider its risky choice. The board’s directors wrote that they have « urged the authorities to narrow the scope of the Bitcoin law by removing Bitcoin’s legal tender status« . The IMF expressed its concern about the risks of using Bitcoin for the country’s financial security and consumer protection.
The country shows no intention of reversing its choice: the government has just firmly rejected the IMF’s recommendation. The adoption of Bitcoin allows the country to move away from its dependence on the US dollar, to raise its profile and, potentially, attract investments. Moreover, El Salvador’s growth in 2021 reached 10% and it is expected to remain high. Time will tell if this decision was madness or a stroke of genius.