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Tuesday, May 21, 2024

El Salvador’s Bitcoin Gamble Is Off to a Rocky Start

As El Salvador enters its bitcoin era, its sky will sparkle with the lights of a platoon of drones. “We are throwing an event,” says American cryptocurrency evangelist Brock Pierce. “They did a big one at Burning Man in the past. They did one during the Super Bowl. So we brought down the best drone crew in the world, and we’re going to be putting on quite a show in the sky.”


A former child actor, and current tech investor and notorious Burner, Pierce led a delegation of crypto entrepreneurs in June to the Central American country, following president Nayib Bukele’s announcement that El Salvador would adopt bitcoin as its legal tender, in addition to the US dollar, starting on September 7, 2021. Since then, Pierce has been in touch with government officials in El Salvador—“I just got off the phone with the president’s brother,” he says—and with businesspeople looking to establish a presence in the country to cater to its novel crypto needs. He is now back in El Salvador to attend the big day. “The rate at which they’ve been able to implement this is rather astounding,” he says. “Like all things, I’m assuming it’s going to be less than perfect at first. But perfection is the enemy of progress.” 

The speed at which the Bukele government has brought about this experiment, kick-starting the country’s bitcoinization just 90 days after the parliament passed the law sanctioning the shift, is indeed eye-popping. To the point that one wonders whether the country, and its population, would have benefitted from a longer lead-up. Or, at least, from more transparency.

Crucial details regarding how the adoption of bitcoin will play out in practice are still unclear or have only been disclosed in recent days. A government regulation issued on August 27 established that Salvadoran banks will have to offer the exchange of bitcoin for dollars and vice versa—when carried out through a government-backed wallet—without charging commissions; the regulation also requires that all companies providing bitcoin-related services register with a government body, and adopt anti-money-laundering measures. (It is not clear what the penalties would be for failing to do so.)

“This was done a week and a half before September 7,” says Mario Aguiluz, chief sales officer of IBEX Mercado, a Guatemalan firm that sells bitcoin exchange and payment solutions, which also operates in El Salvador. “You really have to ask whether the government is ready. It’s a mixed bag.”

There is also a dearth of information about the government’s own bitcoin wallet, called Chivo. It’s known that it will work in concert with 200 Chivo ATM machines where users would be able to exchange their bitcoin for cash, free of commissions (a recent Economist story reports a 5 percent fee being charged when converting dollars into bitcoins, although the publication must have used a third-party wallet), and that each Chivo wallet will come complete with $30 worth of bitcoin as a government freebie. What we do not know is who exactly has developed the wallet or the ATM machines and what technology will underpin it.

According to Chris Hunter, cofounder of bitcoin firm Galoy, such plans are changing “almost hour-by-hour.” Hunter, whose bitcoin payment service in the Salvadoran coastal village of El Zonte reportedly inspired the nationwide project, says that the situation was still “very fluid” as of early September. As recently as last week, he was convinced that Chivo would not be able to use the lightning network, a system that dramatically speeds up bitcoin transactions, which would otherwise take several minutes to be confirmed. “Now, it seems pretty clear to me—if you asked me to make a wager—that it will be enabled as of Tuesday,” Hunter says. El Salvador’s government did not reply to a request for comment.

Whether the government is guilty of improvisation and obfuscation, or if this is just a byproduct of moving fast, is hard to tell. Hunter says that the government “has done probably about as good of a job as anybody could have done given the 90-day timeframe.” Esteban de la Peña Padilla, a founding partner at IBEX Mercado, describes El Salvador “as ready [for the launch] as Latin Americans can be for this.”

But something about the government’s communication of its flagship project has fallen short. It is not only global financial institutions like the International Monetary Fund who have lambasted the project. In fact, all polls find that a considerable majority of Salvadorans do not support the project. One survey by the Central American University found that 70 percent opposed it. Trade unions and civil society organizations have also thundered against the risks associated with bitcoin’s volatility and its potential exploitation for money-laundering purposes. The obligation, enshrined in law, that all economic agents accept payments in bitcoin—despite Bukele’s repeated assurances that bitcoin usage will be optional—is regarded as particularly worrying. And although only a few hundred people have taken to the streets to protest against the move, polls and international news reports paint a picture of a country rife with skepticism.

Pierce is dismissive of the street protests, which he describes as orchestrated by Bukele’s political opponents, but concedes that the whole country will have to undergo “a process of education.”

“The entire population is not fully up to speed on what [bitcoin] is and how to use it, and how it’s going to benefit them,” he says.

Bukele’s critics depict the whole enterprise as a baffling, costly experiment whose immediate benefits for the citizenry are not apparent. Ricardo Castaneda, an El Salvador–based economist with the Guatemalan research institute ICEFI, highlights how the government has not carried out or published a single technical report assessing the pros and cons of bitcoinization. He says that, in a country where only about a third of the population have access to the internet and some regions even lack electricity, pouring public money into a project to replace hard cash with cryptocurrency is foolhardy. (So far, the government has earmarked over $203 million for the implementation of the law, $30 million of which will fund the Chivo handouts).

“Even someone who doesn’t want to use bitcoin—say a woman who lives in a rural area and has no smartphone—her taxes will end up subsidizing this measure,” Castaneda says. “I liken this initiative to jumping from a plane with no parachute. It is possible you might survive and be celebrated as a hero. More likely, things will not work out.”

The big question looming over this project is why on earth Bukele, a politician who enjoys  stratospheric levels of popular support—usually over 80 percent—decided to embark on such a controversial endeavor. The government’s rationale is that bitcoin would allow for quicker and cheaper remittances from the Salvadoran diaspora, which account for around $6 billion—one-fifth of the country’s gross domestic product every year. Another projected upside of the shift to bitcoin is that it would attract foreign investment, under the form of cryptocurrency entrepreneurs and miners setting up business in the country.

“A lot of senior people from within the [crypto] industry are spending a tremendous amount of time in El Salvador, which clearly would not have happened if it were not for the leadership of the president and the legislation and the adoption that they’re pushing for,” Pierce says. The buzz around the launch has indeed triggered a pilgrimage of cryptocurrency hotshots to the country, and specifically to El Zonte, Hunter says—mentioning industry podcaster Peter McCormack and the Human Rights Foundation’s resident crypto fan Alex Gladstein among those who have shown up. But it’s still early days to tell whether the PR offensive will have a lasting impact. Eric Grill, the CEO of ChainBytes, a company making bitcoin ATM machines that relocated production to El Salvador in June, says that so far the company has struggled to get the electronic components it needs to manufacture its products. Bukele had talked up the country’s volcanoes as a source of geothermal energy for cheap bitcoin mining, but the feasibility of doing so has also been called into question.

Critics such as Castaneda take a very uncharitable view of the policy. One hypothesis to explain the president’s gambit, he says, is that government contracts to set up the new payment infrastructure will end up lining the pockets of Bukele’s cronies. Another way of looking at the bitcoin law is as the last of a string of authoritarian broadsides Bukele has fired off in recent months—culminating in last week’s decision, by El Salvador’s supreme court, that Bukele should be able to run for a second term, contrary to the letter of the country’s constitution. The court itself is packed with Bukele allies, following a vote by the Bukele-aligned parliament to dismiss all its previous members, in May 2021. “It is not inconceivable that, due to this authoritarian lurch, some countries such as the US might impose sanctions on El Salvador,” Castaneda says. “If that happens, bitcoin might help circumvent those sanctions.” 

That might sound excessively ominous, but alarming signs are already emerging. On September 1, Mario Gomez, a computer scientist who had been scathing of El Salvador’s bitcoinization, was briefly arrested on no clear charge. Many interpreted the arrest simply as an act of intimidation against a vocal critic. Tatiana Marroquín, a Salvadoran economist and columnist for the news website Alharaca, says that the episode should give the international pro-bitcoin crowd pause for thought about Bukele’s true nature.

“Something very important we are telling bitcoiners who are enthusiastic about the Bitcoin Law is that they should reflect about what kind of government they are really supporting,” Marroquín says. “This is an authoritarian government that has orchestrated coups, which has negotiated with gangs, which has co-opted the armed forces and the police. It is a very peculiar government.”

This story originally appeared on WIRED UK. 

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