The cryptocurrency crisis, worsened by the dramatic collapse of fast-growing crypto exchange FTX in mid-November, has raised questions about the future of these digital currencies. Bitcoin, the largest and most well known among them, has fallen to a two-year low in recent days. But one of the cryptocurrency’s most prominent backers is doubling down.
On Nov. 17, El Salvador’s President Nayib Bukele, who last year made his country the first in the world to adopt Bitcoin as legal tender, responded to the crypto slide with a pledge that the government would purchase one Bitcoin every day going forward. On Nov. 22, Bukele’s administration sent a bill to El Salvador’s Congress that would allow it to sell $1 billion in so-called “volcano bonds”—government debt, denominated in U.S. dollars and paying out 6.5% interest a year to bond holders—in order to buy even more of the cryptocurrency and build a coastal “Bitcoin City.”
It may be difficult to understand why Bukele remains so enthusiastic about a policy that has been, by almost all metrics, a disaster. Bukele’s attempt to get Salvadorans to use the notoriously volatile cryptocurrency has left the country looking like a much riskier place to invest. The policy has stalled El Salvador’s negotiations with the International Monetary Fund (IMF) for a $1.3 billion loan, needed to plug big gaps in its public finances. Bukele’s government has been courting alternative sources of cash, announcing new trade talks with China on Nov. 9. But few economists believe Salvadoran vice president Félix Ulloa’s claim that China is willing to help El Salvador with the all-time-high $21 billion debt burden it owes to foreign lenders. If it can’t find new creditors to help service that debt, El Salvador runs the risk of a default early next year.
