The impoverished country's vaunted adoption of bitcoin as legal tender on Tuesday was marred by street protests, technical glitches and an extreme drop in the value of the controversial digital currency.
What went wrong?
"Chivo Wallet," a storage app created by the government, wasn't immediately available on major app stores. By the end of the day, it had appeared on Apple and Huawei platforms.
Hundreds of people marched against bitcoin in various protests across the capital city, the Financial Times reported.
The price of bitcoin started the day around $53,000 before plunging by as much as 19%, according to data from Coinbase. The digital currency has since recovered some losses to trade near $46,270.
President Nayib Bukele, a right-wing populist who is the driving force behind the bitcoin initiative, took the dramatic price drop in his stride. "Buying the dip," he quipped on Twitter. He also joined online crypto supporters in praising major companies such as McDonald's (MCD) for accepting bitcoin as payment.
Supporters have argued that adopting bitcoin as legal tender will help Salvadorans avoid costly fees on remittances from abroad, which totaled nearly $6 billion last year — around a quarter of GDP.
Bukele may succeed in ironing out the initial technical glitches, but the biggest risks from bitcoin will persist long into the future. El Salvador does not have a currency of its own, instead relying on the US dollar. Adding another currency to the mix that's prone to wild changes in value will further complicate the government's budget and tax planning.
It's also a nightmare for households and businesses, who now have to devote time and resources to deciding whether to hold their funds in dollars or bitcoin. With crypto prices prone to wild swings, the stakes are high.
Another risk: Adopting bitcoin as legal tender may also encourage crime to flourish, according to the International Monetary Fund, which agreed to provide $389 million in emergency funding to El Salvador in April 2020.
"Without robust anti-money laundering and combating the financing of terrorism measures, cryptoassets can be used to launder ill-gotten money, fund terrorism, and evade taxes. This could pose risks to a country's financial system, fiscal balance, and relationships with foreign countries and correspondent banks," the IMF said in July.
Big picture: Credit rating agencies are not impressed. In late July, Moody's Investors Service pushed El Salvador's debt deeper into junk territory, citing "a deterioration in the quality of policymaking" including the government's decision to adopt bitcoin as legal tender.
Moody's said the country remains susceptible to financing shocks that could jeopardize the government's ability to repay creditors starting in January 2023. That means El Salvador is likely to need another bailout from the IMF.
Other countries should follow El Salvador with extreme caution. The IMF urged governments to use new digital forms of money only when they can preserve financial stability, efficiency and equality.
"Attempting to make cryptoassets a national currency is an inadvisable shortcut," the IMF warned.
CNN
