July 16, 2022
  • July 16, 2022

How El Salvador is testing Bitcoin’s promise of financial freedom

By on October 7, 2021 0

SAN MIGUEL, El Salvador – Bitcoin supporters dream of a financial system largely free from government interference. But the first time cryptocurrency became a national currency, it was forced on a reluctant population by an increasingly authoritarian ruler using a secret state-run system.

The startling announcement last month that El Salvador had adopted bitcoin, the world’s largest cryptocurrency, as legal tender took its population by surprise, and left the nation poor and conservative in Central America an unlikely indicator of global technological transformation.

The outcome of the unexplored experiment could help determine whether the cryptocurrency offers the freedom of regulation its proponents envision – or whether it becomes another tool of control and enrichment for autocrats and businesses.

“We are now at a cryptocurrency turning point,” said Lane Rettig, entrepreneur and former senior programmer at the Ethereum Foundation, an organization that supports the technologies behind Ethereum, the world’s second largest cryptocurrency. “The same technology of freedom could be part of a new technological dystopia. “

The threat of government and corporate subversion of cryptocurrency’s libertarian roots echoes, in part, the evolution of digital technologies like the internet and social media, Mr. Rettig said. Built on the democratic principle of liberating information and connecting people, these innovations have proven vulnerable to censorship, manipulation by propagandists and control by for-profit companies, he said. declared.

And now, after years of largely ignoring cryptocurrencies, governments around the world are scrambling to respond to the burgeoning $ 2,000 billion industry as it begins to disrupt banking and business. to infiltrate everyday life.

In June, the populist President of El Salvador, Nayib Bukele, 40, announced that he would make bitcoin – a highly volatile financial token operated by a decentralized community of tech entrepreneurs – the national currency, as well. than the current legal tender. , the US dollar.

“It will create jobs and help provide financial inclusion for those outside the formal economy,” Bukele said in a video address. He also said it would turn the country into a hub of innovation and tourism.

The idea was born out of a social experiment launched in 2019 in the Salvadoran surf town of El Zonte, where local activists used a donation of bitcoin to create a community network of cryptocurrency payments. The project, Bitcoin Beach, overcame residents’ mistrust by making currency part of everyday life, using bitcoin to reward students for homework, and to provide support to families during a pandemic.

“Our strategy for creating an ecosystem where bitcoin works is based on two things: time and trust,” said Luis Morales, an organizer for Bitcoin Beach.

These two elements are clearly missing from Mr Bukele’s strategy.

According to a poll conducted by the Chamber of Commerce of El Salvador, businessmen, international organizations and 93% of Salvadorans have opposed the adoption of bitcoin.

Nonetheless, using Mr Bukele’s control over the country’s congress and courts, on September 7 the government forced all sellers to legally accept bitcoin – a move that sparked El’s largest street protest. Salvador for years and has shaken the tremendous popular support of Mr. Bukele.

“We all understand that cryptocurrency is the future, but you can’t promote it by forcing everyone to use it,” said Jorge Hasbún, chief of the chamber of commerce.

To promote the use of currency, the government created a mobile phone application – Chivo Wallet – which allows citizens, including those without a bank account, to send and receive debt denominated in bitcoins, convert them into dollars and withdraw them from special ATMs. also gave $ 30 in bitcoin to every Salvadoran who adopts the wallet.

But the app was plagued by technical failures, and many ATMs ran out of cash as people rushed to convert bitcoin holdings into more stable dollar bills.

The government also said it set aside $ 150 million, equivalent to 12% of El Salvador’s public investment budget last year, to ensure free convertibility of bitcoin into dollars. Officials did not provide any explanation on how they would prevent the use of bitcoin for money laundering, or what would happen if the conversion fund ran out of cash.

Despite the lack of public funds, Mr Bukele announced in a series of Twitter posts that his government had purchased roughly $ 30 million worth of bitcoin last month. When the price of the cryptocurrency temporarily plunged thereafter, it announced further purchases, the purpose of which is unexplained.

Almost a month after the introduction of bitcoin, it is still unclear where the dollar funds and bitcoins are held by the government, or reflected in Chivo wallets, or what they are worth.

Although all Bitcoin transactions are coded to ensure transparency, Mr. Bukele has treated Bitcoin policy as a state secret. He has classified all information relating to Chivo Wallet, which was created with taxpayer funds, but is run as a private business by undisclosed people.

“He is playing Russian roulette with public money,” said Ruth López, Salvadoran lawyer for the non-profit organization Cristosal, which sued the government over the funding irregularities of the Chivo wallet.

Mr Bukele, his economics and finance ministers, the secretary of commerce, the attorney general, the head of the congressional economic committee, the financial regulator, the central bank and the state bank funding the bitcoin fund all have declined to comment.

In the streets, the impact of the policy has been mixed.

Mr Bukele says that three million Salvadorans, more than half of all adults, have installed Chivo Wallet, but in reality the use of bitcoin remains limited. Most fear the extreme volatility of cryptocurrency prices, say they lack technological skills, or are suspicious of government intentions.

But cryptocurrency has enabled at least some Salvadorans without a bank account to access digital payments, invest their savings or increase their income, and its use is gradually accelerating among young people.

In the provincial town of San Miguel, the Argueta Pérez family said sales of street clothes on their market stalls increased after they put up signs saying they accepted bitcoin.

Nearby, Laura Trejo, 29, a student, queued in front of a Chivo ATM to withdraw funds sent by her uncle, without paying a commission. Beside her, José Ercidio, 50, a vegetable seller, was waiting his turn. He said Chivo Wallet allowed customers to send him small amounts, thus increasing sales.

“It is a benefit for the poor and the humble,” he said.

Last month Mr Bukele, in an apparent joke targeting critics, changed his Twitter profile to read: “the coolest dictator in the world.” But, as he quickly consolidates his power and suppresses his opponents, there are growing fears in El Salvador that Mr. Bukele’s adoption of bitcoin is more driven by his quest for control – and his desire to avoid the pressure. international – only through its desire for financial inclusion. .

As Mr. Bukele tightened his control over the nation, relations with the Biden administration deteriorated, making Mr. Bukele increasingly concerned about Washington’s inordinate influence over the nation’s economy, two said. Salvadoran officials familiar with the thought of the president. They spoke on condition of anonymity to avoid retaliation.

For example, remittances sent by immigrants, mainly from the United States, represent a quarter of the country’s gross domestic product. By building a cryptocurrency-based shadow financial system, Bukele could bypass the U.S. banking system and keep remittances in the Chivo public wallet in the event of future economic pressure from Washington, the two officials said.

Other countries already facing sanctions, including Venezuela and North Korea, have reportedly used the cryptocurrency to avoid surveillance.

“For the government, bitcoin is about having a plan B,” said Ricardo Castaneda, a Salvadoran public policy expert.

The adoption of bitcoin has also deepened Mr. Bukele’s stalemate with international lenders. Its talks with the International Monetary Fund over a crucial $ 1 billion loan have stalled, as the lender grows concerned about the deterioration of the rule of law and the threat of bitcoin to the financial stability.

The lack of funding from the IMF in turn blocked other traditional sources of funding, complicating Mr. Bukele’s populist spending programs. El Salvador bonds fell sharply following the adoption of bitcoin, with Wall Street worrying about Mr. Bukele’s ability to pay off existing debts.

The government is currently exploring ways to issue bitcoin-linked sovereign bonds and create new bitcoins using geothermal energy. The two measures could create an alternative source of funding that bypasses traditional lenders demanding accounts, experts said.

“What Bukele is doing is not bitcoin, but a centralized, state-run banking system,” said Mario Gómez, a Salvadoran data expert who was arrested by police and detained for six hours on last month on unspecified charges of financial crimes after organizing social media. seminars on cryptocurrency risks. “This is the antithesis of the principles of bitcoin champions.”

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