Publish in Perspectives - Thursday, July 7, 2022
El Salvador President Nayib Bukele during an event in November last year where he announced plans to build a Bitcoin City in the country. (Photo: El Salvador President's Office)
Bukele’s bitcoin strategy hit by fall in value, low local demand.
BY LATIN AMERICA ADVISOR
A year ago, El Salvador’s Legislative Assembly, which President Nayib Bukele’s party dominates, approved legislation to make Bitcoin legal tender in the Central American country. In the past nine months, Bukele’s government has reportedly bought some $105 million worth of Bitcoin, an investment that has been more than cut in half as the value of the digital currency has plunged. To what extent have Salvadorans embraced Bitcoin, and has the digital currency increased financial inclusion as Bukele has promised? What has the digital currency’s drop in value meant for Salvadorans’ affinity for it and for Bukele’s popularity? How big of an effect has El Salvador’s adoption of Bitcoin had on remittances to the Central American country?
James Bosworth, author of the Latin America Risk Report: Salvadorans haven’t embraced Bitcoin; few use any cryptocurrency wallet. Many businesses report that customers rarely, if ever, use crypto wallets for payments. Fewer than three percent of remittances come via cryptocurrency transfers, and the numbers have remained steady after an initial surge last September. Part of the challenge is that Bukele has abused his authority in terms of how the cryptocurrency project has been managed and mismanaged. The government’s Chivo wallet experiment was full of technology glitches, doesn’t correctly connect to the broader Bitcoin Lightning network and raised suspicion among rights activists for both corruption in the initial contracting processes and the data that the app collected. Bukele’s own purchasing of Bitcoin has been done with almost no oversight. A president announcing on Twitter that he will ‘buy the dip’ is pure populism, demonstrating the lack of a transparent and institutional process that is sustainable across administrations. Even if Bitcoin had surged in price, all of these problems would exist. But the recent drops in price and questions about the financial stability of the companies advising Bukele raise additional challenges for the country. For the cryptocurrency community, this is unfortunate. El Salvador’s experiment with Bitcoin had potential for innovation and financial inclusion. Instead, Bukele has embraced and embodied the worst of the grifters and con artists who inhabit that sector.
Jorge Cuellar, assistant professor of Latin American, Latino and Caribbean studies at Dartmouth College: Bitcoin has had a negligible effect in changing the economic habits of Salvadorans. ‘We Accept Bitcoin’ signs are disappearing from storefronts, people don’t talk about it and buzz has almost entirely died down. Salvadorans appear less interested in Bitcoin-focused pursuits as existential matters have taken center stage, such as the anti-gang military and police blitz whose brute imprecision has led to serious human rights violations across El Salvador. Today, where arbitrary detentions are common, Bitcoin is a mere afterthought. It continues to be, just like when it started, a largely foreigner-oriented spectacle that has delivered little, if any, improvements. For instance, remittances sent in Bitcoin account for less than 2 percent of all remittances sent over the past nine months. This is no less than a failure, especially considering that this was all a state-sponsored endeavor: investments were made in software development for the Chivo wallet, for establishing a public trust fund and for mass media campaigns. Interestingly, Bukele’s popularity has remained unaffected as his antigang operations have again endeared him to Salvadorans, despite their tacit rejection of Bitcoin. The present downturn in crypto markets has also provided Salvadorans real-time proof of Bitcoin’s wild volatility. Bukele, however, will continue to deny any losses by calling them merely theoretical, as simply unrealized. Salvadorans are becoming ever more aware of the failures of Bukele’s crypto-development model. Even now, a year after its implementation as legal tender, the Salvadoran public has little concrete information about the transaction history of the government’s cryptowallet. No one seems to know anything beyond Bukele’ tweets in which he says he’s buying the dip or when state functionaries claim strategic selloffs in media appearances. Despite wallet management being a state secret, Salvadorans see and feel Bukele’s rising authoritarianism as he dismantles the country’s tenuous democracy, remakes the state to suit his needs and prepares the ground for long-term rule.
Michael Paarlberg, assistant professor of political science at Virginia Commonwealth University and associate fellow at the Institute for Policy Studies: El Salvador’s Bitcoin experiment was doomed from the start, but not by public opinion, which the Legislative Assembly ignored when it rammed through the Bitcoin adoption law with nearly no debate. But the Salvadoran people understood what Bukele and his allied legislators did not: Bitcoin is not a currency. A true currency must fulfill three functions: it must be a stable store of value, an understood unit of account and an accepted medium of exchange. Bitcoin is none of those. It is a speculative asset masquerading as a currency, essentially a highly volatile unregulated security. The government might have sold it to the public as a high-risk public investment with the hope that its value would rise, based on hype that it would someday fulfill those functions. But it was sold instead as a means of remittances, personal banking and monetary independence. The fact that none of these promises materialized did not matter for Bukele. His pressing problem is public debt, now close to 100 percent of GDP following years of financial mismanagement. The government needs foreign loans to operate, but El Salvador’s bonds have fallen to junk status. The real bet was that the crypto community would replace the IMF as El Salvador’s lender of last resort. But Bukele’s Bitcoin-backed ‘volcano bonds’ had no takers. If crypto investors, who have a higher tolerance than most for speculative mania, did not bite, this signals deep doubts about the country’s future fiscal solvency.
Ricardo Valencia, assistant professor of communications at California State University, Fullerton: Bukele bought $105 million worth of Bitcoin, but the entire Bitcoin adoption scheme could have cost the country at least $300 million. This public money has gone to waste as the adoption of Bitcoin is low, and the government electronic wallet Chivo is technically dead. The Bitcoin adoption has not brought financial inclusion; on the contrary, it has created a culture in which crypto scams are prevalent. The Salvadoran people never fell for Bukele’s dream of substituting the dollar with Bitcoin. If there is something that makes Bukele popular, it is his public safety policy that combines mass detentions and secret negotiations with gangs. Remittances using Bitcoin are low—around 1.5 percent—and it does not seem there will be an ascendant trend in the coming months. Adopting a cryptocurrency in El Salvador has strengthened three significant problems: the centralization of the political power, accumulating unsustainable public debt without citizen oversight and public control and the consolidation of state surveillance using electronic technologies. This has generated a paradox for Bitcoin and crypto enthusiasts who have always argued that cryptocurrency would bring transparency and freedom from the control of states and central banks. Bitcoin’s purchases are state secrets. Cryptocurrency has been another way for Bukele to consolidate power and weaken democracy. In response to the love affair between Bitcoin and Bukele’s autocratic turn, El Salvador last September had the first anti-Bitcoin protest in the world.
[Editor’s note: The Advisor requested a commentary for this issue from El Salvador’s ambassador to the United States but received no response.]