SAN MIGUEL, El Salvador – Bitcoin advocates dream of a financial system largely free of government interference. But the first time cryptocurrency became the national currency, it was imposed on an unwilling population by an increasingly authoritarian ruler using a secret government system.
The surprising announcement last month that El Salvador had adopted bitcoin, the world’s largest cryptocurrency, as legal tender, caught its population by surprise and made the poor conservative Central American country an unlikely conduit for global technological transformation.
The result of an uncharted experiment could help determine whether cryptocurrency provides the regulatory freedom that its proponents envision, or whether it will become another tool of control and enrichment for autocrats and corporations.
“We are now at a turning point in cryptocurrency,” said Lane Rettig, an entrepreneur and former senior programmer for the Ethereum Foundation, the organization that supports the technologies behind Ethereum, the world’s second largest cryptocurrency. “The same technology of freedom can become part of a new technological dystopia.”
According to Mr. Rettig, the threat of government and corporate undermining the libertarian roots of cryptocurrency echoes in part the evolution of digital technologies such as the Internet and social media. Based on the democratic premise of information sharing and people-to-people connections, these innovations have proven vulnerable to censorship, manipulation by propagandists, and control by profit-driven corporations, he said.
And now, after years of ignoring cryptocurrencies, governments around the world are struggling to respond to the fast-growing $ 2 trillion industry that is beginning to disrupt banking and seep into everyday life.
In June, Salvador’s 40-year-old populist president Nayyib Bukele announced that he would make bitcoin – a highly volatile financial token operated by a decentralized community of tech entrepreneurs – the national currency on par with the current legal tender. , U.S. dollar.
“This will create jobs and help ensure access to financial services for those outside the formal economy,” said Mr Bukele in a video message. He also said it would turn the country into a hub for innovation and tourism.
The idea arose from a social experiment launched in 2019 in the surf town of El Zonte in El Salvador, where grassroots activists used bitcoin donations to create a public cryptocurrency payment network. The Bitcoin Beach Project overcame residents’ mistrust by integrating the currency into everyday life, using bitcoins to reward students for homework and to help families in the pandemic.
“Our strategy for creating an ecosystem in which Bitcoin operates is based on two elements: time and trust,” said Luis Morales, organizer of Bitcoin Beach.
Both elements are clearly missing from Mr. Bukele’s strategy.
According to a poll by the El Salvadorian Chamber of Commerce, businessmen, international organizations and 93 percent of El Salvadorians opposed the adoption of bitcoin.
Nonetheless, leveraging Mr Bukele’s control of the country’s congress and courts, the government on September 7 made all merchants legally accept bitcoins – a move that sparked the largest street demonstration in El Salvador in years and eroded overwhelming support for Mr Bukele.
“We all understand that crypto is the future, but you cannot contribute to that by forcing everyone to use it,” said Jorge Hasbun, head of the Chamber of Commerce.
To promote the use of the currency, the government has created a mobile phone app, Chivo Wallet, which allows citizens, including many who do not have bank accounts, to send and receive applications denominated in bitcoins, convert them into dollars and withdraw them from dedicated ATMs. also gave $ 30 in bitcoins to every Salvadoran using the wallet.
But the app is plagued by technical glitches and many ATMs have run out of money as people rushed to convert bitcoin holdings into more stable dollar bills.
The government also said it allocated $ 150 million, the equivalent of 12 percent of El Salvador’s public investment budget last year, to provide free bitcoin-to-dollar conversions. The officials did not explain how they would prevent the use of bitcoins for money laundering or what would happen if the conversion fund ran out of cash.
Despite a shortage of public funds, Mr Bukele announced in a series of tweets that his government bought nearly $ 30 million worth of bitcoins last month. When the price of the cryptocurrency subsequently fell temporarily, he announced new purchases, the purpose of which was not explained.
Almost a month after the introduction of bitcoin, it remains unclear where the dollar funds and bitcoins held by government or reflected in Chivo wallets are located, and how much they cost.
While all bitcoin transactions contain a code to ensure transparency, Mr Bukele views bitcoin politics as a state secret. He classified all information regarding Chivo Wallet, which was created with taxpayer funds, but is operated as a private enterprise by unknown persons.
“He plays Russian roulette with government money,” said Ruth Lopez, a Salvadoran lawyer for the nonprofit Cristosal, which is suing the government over financial violations of Chivo Wallet.
Mr Bukele, his ministers of economy and finance, trade secretary, attorney general, head of the Congressional economic committee, financial regulator, central bank, and state bank funding the bitcoin fund declined to comment.
On the streets, the impact of this policy has been mixed.
Bukele says that three million Salvadorans, or more than half of all adults, have installed Chivo Wallet, but in reality the use of bitcoins remains limited. Most fear the extreme volatility of cryptocurrency prices, say they lack technological skills, or don’t trust the government’s intentions.
But cryptocurrency has allowed at least some Salvadorans without bank accounts to access digital payments, invest savings or increase profits, and its use is slowly gaining traction among young people.
In the provincial town of San Miguel, the Argueta Perez family reported that streetwear sales from their market stalls rose after they put up signs saying they accept Bitcoin.
Nearby, 29-year-old Laura Trejo, a student, lined up outside a Chivo ATM to withdraw money orders sent by her uncle without paying a fee. Next to her, 50-year-old Jose Ercidio, a vegetable seller, was waiting for his turn. He said Chivo Wallet allowed customers to send him small amounts, which boosted sales.
“This is a boon for poor and humble people,” he said.
Last month, Mr. Bukele, clearly joking with critics, changed his Twitter profile to: “The coolest dictator in the world.” But as he quickly consolidates power and cracks down on opponents, there is growing concern in El Salvador that Mr. Bukele’s adoption of bitcoins was more motivated by his desire for control – and a desire to avoid international pressure – than his desire for financial inclusion. … …
As Mr. Bukele tightened his grip on the country, relations with the Biden administration have deteriorated, making Mr. Bukele increasingly worried about Washington’s overwhelming influence on the country’s economy, said two Salvadoran officials familiar with the president’s mindset. They spoke on condition of anonymity to avoid reprisals.
For example, remittances sent by immigrants, mainly from the United States, account for a quarter of the country’s gross domestic product. By building a parallel financial system based on cryptocurrency, Bukele will be able to bypass the American banking system and keep remittances in the state-owned Chivo Wallet in the event of future economic pressure from Washington, the two officials said.
Other countries already subject to sanctions, including Venezuela and North Korea, are believed to have used cryptocurrency to evade surveillance.
“For the government, Bitcoin is Plan B,” said Ricardo Castaneda, a Salvadoran government policy expert.
The adoption of Bitcoin has also exacerbated Mr Bukele’s stalemate with international lenders. His negotiations with the International Monetary Fund for a critical $ 1 billion loan stalled as the lender became increasingly worried about deteriorating rule of law and Bitcoin’s threat to financial stability.
The lack of IMF funding, in turn, has blocked other traditional sources of funding, complicating Mr. Bukele’s populist spending programs. El Salvador’s bonds plummeted after the adoption of Bitcoin as Wall Street worried about Mr. Bukele’s ability to pay off existing debts.
The government is currently exploring ways to issue bitcoin pegged sovereign bonds and create new bitcoins using geothermal energy. Experts believe both steps could create an alternative source of funding that does not require accountability from traditional lenders.
“Bukele doesn’t make bitcoin, but a centralized, state-run banking system,” said Mario Gomez, a Salvadoran data expert who was detained by police and held for six hours last month on unspecified financial crime charges after organizing social media. seminars on cryptocurrency risks. “This is the complete opposite of the principles of bitcoin champions.”