By Steve H. Hanke and Caleb Hofmann
El Salvador’s president, Nayib Bukele, may be Bitcoin’s most visible publicist. Since Bukele assumed the presidency on June 1, 2019, his first-mover, grandiose plans for Bitcoin in El Salvador have generated buzz — and a litany of failures.
In 2001, long before Bukele arrived on the scene, El Salvador phased out its domestic currency, the colón, and introduced a dollarized competitive-currency regime, one in which the dollar was legal tender, but any other currency could be used. Since then, the country has rediscovered economic stability.
Along with Ecuador and Panama, which also use the U.S. dollar, annual inflation in El Salvador has averaged just a hair over 2 percent since 2001 — the lowest in Latin America over that period. Economic growth has outpaced the Latin American average, and exports have risen steadily and at a faster rate than most countries in the region. Currency instability and inflation — plagues on the houses of all too many emerging-market countries, including Argentina, Lebanon, Syria, Venezuela, and Zimbabwe, to name a few — have been irrelevant in El Salvador. Indeed, from a currency perspective, there’s no difference between El Salvador and New York, Texas, or California. Dollarization has worked like a charm.
Enter Bukele. On September 7, 2021, he put his Bitcoin mania into practice. He implemented what was, and remains, a highly unpopular “Bitcoin law.” It was billed as a law that would make Bitcoin “legal tender” throughout El Salvador. To implement Bukele’s Bitcoin law, the Salvadoran government designed and launched an app, the “Chivo Wallet.” It was intended to facilitate transactions in Bitcoin. Salvadorans were encouraged to download the app. Indeed, doing so was accompanied with a $30 gift — a significant sum, nearly half of El Salvador’s weekly GDP per capita. Bukele claimed that the law would lower the cost of remittances to El Salvador and would improve the country’s financial inclusivity.
One of us, Hanke, published a series of articles for National Review and elsewhere exposing Bukele’s claims as perfidious. The first, and perhaps most crucial, misrepresentation (we are being kind) was Bukele’s branding of the Bitcoin law as a “legal tender” law. In reality, the Bitcoin law was a “forced tender” law. Article 7 of the law stipulates that “every economic agent must accept bitcoin as payment when offered by whoever acquires a good or service.” With that, freedom of currency choice, which had accompanied El Salvador’s dollarization of 2001, went out the window.
Since there’s a weak rule of law in El Salvador, the “forced tender” provision of the Bitcoin law has no teeth. As a result, most Salvadoran businesses — 80 percent — refuse to accept Bitcoin as a medium of exchange.
Bukele’s second misrepresentation was that the Bitcoin law, and the accompanying Chivo Wallet, would result in a steep reduction in the cost of transmitting remittances to Salvadorans. As Hanke pointed out in a September 2021 National Review article, Bukele’s claim was bunkum. Indeed, according to the World Bank, the cost of traditional wire transfers in El Salvador is the lowest in all of Latin America and the sixth-lowest in the world. Not surprisingly, a National Bureau of Economic Research working paper found that in February 2022, a miniscule 1.6 percent of remittances sent to El Salvador were received via Bitcoin.
Since Bitcoin is a highly speculative asset, it should have no place in a sovereign state’s portfolio. Prior to Bukele’s first Bitcoin trade on September 6, 2021, Hanke warned in an August 2021 National Review article that any investment by El Salvador in Bitcoin might result in trading losses and would certainly result in a credit downgrade. Since his first speculative foray into the Bitcoin market in September, Bukele has appropriated over $100 million in Treasury funds to purchase 2,381 Bitcoins. Those Bitcoins are now worth about $48 million. Bukele’s crypto speculation has forced El Salvador to accept a higher risk profile.
As night follows day, this higher risk profile has invited credit downgrades. In the last six months, Moody’s, S&P, and Fitch have all downgraded El Salvador’s sovereign-debt rating, pushing it into speculative territory — junk, and rightfully so. Not surprisingly, since the Bitcoin law was implemented in September 2021, the price of the Salvadoran dollar-denominated sovereign bond due in 2025 has plunged by 48 percent. Today, Bloomberg Economics lists El Salvador as the most likely country in Latin America to default on its debt.
The verdict is in on Bukele’s Bitcoin experiment. It was based on false promises from beginning to end. A total failure.
Steve H. Hanke is a professor of applied economics at the Johns Hopkins University in Baltimore. He is a senior fellow and the director of the Troubled Currencies Project at the Cato Institute in Washington, D.C. Caleb Hofmann is the chief of staff at the Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise.