Salvadorans switch from bitcoin to dollars to avoid the fall of the cryptocurrency

In his clothing store in San Salvador (The Savior), José Fredy Landaverde accepts transactions in bitcoin as required by law in his country, but as soon as he receives them he converts them into dollars to avoid the fall of this cryptocurrency.

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In the Chivo electronic wallet, which the Nayib Bukele government created for the country to operate in bitcoin, there is a function that allows this operation. They are obliged to receive the bitcoins, but not to keep them.

“When the client pays us with bitcoin, we convert it to dollars immediately”, This 44-year-old merchant confessed to AFP. But he said that when bitcoin rallies, he will do the reverse trade.

El Salvador became in September 2021 the first country to accept bitcoin as legal tender at par with the dollar. Then a bitcoin was around 44,000 dollars.

Then it soared over 66,000 and Bukele took advantage of the profit to build a public veterinary. He also announced the construction of a Bitcoin City that would operate with thermal energy from the Conchagua volcano.

However, a recent collapse of the cryptocurrency luna dragged down bitcoin and raised questions about its effect in El Salvador, a country whose public debt is around 90% of its GDP.

And that in a context of stagnation of the negotiation with the IMF for a loan of 1,300 million dollars that allows it to clean up its coffers.

The issuance of bonds in bitcoin equivalent to 1,000 million dollars to build Bitcoin City is still pending.

At the beginning of May, the rating agency Moody’s reduced El Salvador’s credit rating by two notches and warned of difficulties in paying debt starting in 2023 in the order of 800 million dollars.

A sign on a post announces the acceptance of the bitcoin cryptocurrency as payment, in San Salvador, on May 24, 2022. (Photo: MARVIN RECINOS / AFP) (MARVIN RECINOS /)

Turbulence

Some businesses in downtown San Salvador have removed “bitcoin accepted” signs, and employees confirm a downward trend in transactions.

Juan Carlos Canales, a clothing seller, says he stopped using bitcoin because “few customers” opt for that form of payment.

“It is not very often that people use it, we do have the option enabled for people who are in favor [de utilizarla]”, declared Jonathan Valdez, a coffee worker from San Salvador.

“What happened in the last few weeks is that a cryptocurrency [luna] it fell from a value of almost 120 dollars to fractions of cents and that brought a lot of turbulence in the crypto market”, Argentinian Maximiliano Hinz, director for Latin America of the cryptocurrency exchange platform Binance, explained from Panama.

But “It is normal that when there is a downward correction, then there is a rebound. When bitcoin hit $28,000, there was a historic spike in bitcoin purchases.”exploded

On May 10, Bukele announced that The Savior bought 500 bitcoins, taking advantage of the low price. With this acquisition, the country accumulates 2,301 of assets. Each bitcoin is currently around $30,000.

At the beginning of the plan, Landaverde made about 10 daily transactions with this cryptocurrency. But today that dropped to an average of four.

However, in this country where only 23% of the population has a bank account, the trader believes that bitcoin “is going to work again”.

People use the Salvadoran government’s Chivo wallet to carry out their bitcoin transactions in San Salvador, on January 26, 2022. (Photo: MARVIN RECINOS / AFP) (MARVIN RECINOS /)

Alternatives to possible default

According to the former president of the Central Reserve Bank Carlos Acevedo, the fall of bitcoin “is moving away” the possibility of issuing debt in that cryptocurrency.

Although he considered that the main problem in El Salvador is not the fall of bitcoin but historical issues such as “low growth and insecurity.”

Since 2001, El Salvador’s dollarized economy has grown in a range of 2 to 3%. In 2021, according to the IMF, it grew by 10.3%, and the Central Bank’s projection for 2022 is 3.2%.

Despite the predictions, “El Salvador is not going to default,” he said. Acevedo estimated that Bukele could “lower the liquidity reserves of the financial system so that the banks can buy more public debt” or even “nationalize” pension funds.

You can also seek loans with the Andean Development Corporation where you just joined, or use net international reserve assets.

Acevedo commented that the “collapse” of the price occurs in a context in which its use is not massive in the country and that “has been an advantage.”

Hinz, the director of Binance, considered on his side that “it would not be uncommon to see” more countries using cryptocurrencies as legal tender”, an issue where “El Salvador is a pioneer”, as the Central African Republic recently did.

Source: Elcomercio