El Salvador’s experiment using Bitcoin got off to a rough start as its price dropped on the first day as legal tender, while implementation was hampered by technical failures.
Cryptocurrency tumbled 17% to 43,050 in New York to its lowest level in a month amid news that the government disconnected its Bitcoin wallet to meet demand and pushing popular app stores to sell the government-backed app. Around 5 pm, the drop was 9.41%, quoted at US$ 46,886.
In his Twitter account, President Nayib Bukele reported that the service had to be stopped due to “installation problems” that some users had.
“Any data they try to enter at this point will make an error. The system is disconnected while the capacity of the servers is increased. It’s a relatively simple problem, but it can’t be fixed with the system connected,” he explained. “Better slowly and with good lyrics,” he added.
By late morning, the problems appeared to have been overcome, and President Nayib Bukele reported again via Twitter that the app was again available for download. According to him, the country added 150 coins to raise his property to 550, worth around US$26 million.
El Salvador’s plan represents the biggest test for Bitcoin in its 12-year history. Cryptocurrency enthusiasts and detractors are monitoring the experiment to see if significant numbers of people want to transact Bitcoin when it circulates with the US dollar, and if it does any good for the violent and impoverished nation of Central America.
If the experience is successful, other countries can follow El Salvador’s example. Its adoption will get an initial boost from the government’s Bitcoin Chivo wallet, which comes preloaded with $30 in currency for users who register with a Salvadoran national ID number.
Businesses will be required to accept Bitcoin in exchange for goods and services and the government will accept it for tax payments. The plan is the brainchild of the 40-year-old president of El Salvador, who says it will attract more people to the financial system and make remittances cheaper.
“This is a brave new world,” said Garrick Hileman, head of research at Blockchain.com, based in London and Miami. “We’re in uncharted waters with this launch, but I’m happy to see this experiment happen overall and I think we’ll learn a lot from it.”
Bukele’s administration has installed 200 Bitcoin ATMs across the country, which can be used to exchange cryptocurrency for US dollars. The Ministry of Finance created a $150 million fund in the Development Bank of the Republic of El Salvador (Bandesal) to support the transactions.
Twitter users on Tuesday reported that they can pay for services like breakfast at McDonald’s with Bitcoin. Still, the dollar will remain the national currency for public accounting purposes and merchants who are technologically incapable of receiving electronic money will be exempt from the law, the government said.
El Salvador’s dollarized economy relies heavily on remittances sent home by migrants abroad, mostly in the US, which totaled $6 billion last year and account for about a fifth of gross domestic product.
Bukele says Bitcoin can help Salvadorans save $400 million a year in fees paid for these transactions.
Although Bukele himself has approval ratings of more than 80 percent, a poll last week by the Universidad Centroamericana in El Salvador Jose Simeon Canas showed that this Bitcoin law is largely unpopular.
Two-thirds of respondents said it should be revoked, while more than 70% said they preferred to use US dollars.
The International Monetary Fund warned of the risks of using Bitcoin, which lost nearly half its value from April to May, and the World Bank turned down a request by the government of El Salvador to help the government adopt it, citing environmental disadvantages and of transparency.
Bitcoin news also helped trigger a sale of El Salvador dollar bonds, though they reduced losses.
“Cryptography is sexy but untested and complicated, especially for a country like El Salvador,” said managing director of Stifel Nicolaus & Co. Nathalie Marshik. “It is extremely risky and there is the question of whether the Bandesal fund is big enough? Regulations look like the law, drawn up very quickly. It’s a big question mark. ”
While the Bahamas launched its own central bank-backed digital currency this year, Sand Dollar, and Venezuela has its own electronic money called Petro, they are very different from a decentralized cryptocurrency like Bitcoin, whose users value their independence from governments and central banks.
Other governments in the region will be watching closely. Last month, Cuba decided to legalize the cryptocurrency that is already being used on the island, while lawmakers in other countries, such as Panama and Uruguay, proposed similar legislation.
Salvadoran bonds performed the worst in emerging markets on Tuesday, according to data collected by Bloomberg, after the country’s high court ruled last week that the president could run for a second term.
The US criticized the decision and said it harms bilateral relations between the two nations. Debt maturing in 2041 fell to 5%, a four-month high, to trade at $0.86.