The country of El Salvador, which adopted bitcoin as legal tender late last year, is in serious danger of defaulting on its debt to international financiers within the next several years due to the ongoing collapse of the cryptocurrency market, as reported by El País (opens in new tab) and Bloomberg (opens in new tab).
El Salvador’s president, Nayib Bukele, is a noted enthusiast of cryptocurrencies, having been scheduled to appear at the Miami Bitcoin Conference (opens in new tab) last month before he abruptly cancelled. The country entered a state of emergency at the end of March over gang violence, and Bukele’s presidency has been accused of authoritarian overreach (opens in new tab), with the man himself even threatening to withhold meals from inmates in the country’s prisons in retaliation for the violence.
While Bukele has a strong personal stake in cryptocurrency and the crypto scene, El Salvador has genuinely struggled with what currency it should use over the past twenty years. The country abandoned its own currency, and thus control over monetary policy, in 2001 in favor of the US dollar, seeking financial stability that the colón failed to provide. Many Salvadorans rely on remittances from relatives abroad to make ends meet, and those payments have to pass through notoriously predatory services to make it home.
Unfortunately, adopting bitcoin did not have a liberatory effect (opens in new tab) on the country’s economy. The virtual wallet app rolled out by the government has proven unreliable, and the volatility that makes crypto such an attractive unregulated security left it a poor day-to-day currency.
Now that the crypto market is crashing, it’s looking less and less likely that El Salvador will be able to make its next bond payment, defaulting on its national debt. This would prove disastrous for the country’s economy and the government’s ability to fulfil basic functions.
#Bitcoin City is coming along beautifully ❤️ pic.twitter.com/A6ay8aAREWMay 9, 2022
For his part, Bukele continues to double down on crypto, having bought 500 bitcoin (opens in new tab) (about $15.5 million at the time, now $14.1 million) on May 9. On the same day, the president tweeted about plans for a “Bitcoin City (opens in new tab)” to be built in the shadow of a volcano, with pictures of him admiring its gold-painted scale model.
The comical absurdity of Bukele showing off these plans for a sci-fi future city as he stares down an economic catastrophe of his own creation belies how hard this default will hit average Salvadorans. As with other areas of the crypto crash, it’s going to be regular people who got suckered in, or were brought along against their will, who will be left holding the bag.
