Today, Sept. 15, marks El Salvador’s Independence Day. On this date in 1821, the Provincial Council of Guatemala proclaimed the independence of the entire region from the Spanish Empire in a document known as the Act of Independence of Central America. It’s a date worth celebrating – even compared to other empires, the Spanish were particularly cruel.
But the American Empire in the 20th century can’t be far behind in that ranking, especially when it comes to its actions in Central America. And this month marks the one-year anniversary of a much more recent independence struggle: El Salvador’s effort to decouple its economy from the U.S. dollar by recognizing bitcoin (BTC) as legal tender and encouraging nationwide adoption of the cryptocurrency.
That’s the only reason the Salvadoran Bitcoin Law made some sense: In part thanks to the very instability bred by American interventions in the 1980s, El Salvador abandoned its own currency, the peso, and “dollarized” through a process starting in 1993 and finalizing in 2000. That meant El Salvador’s economy could run on a relatively reliable instrument – but also that leaders had no control over national monetary policy and were vulnerable if the dollar inflated.
On that front, at least, Salvadoran President Nayib Bukele today looks outright prescient. When he first began pursuing his Bitcoin Law, dollar inflation in the U.S. was barely ticking up, and widely regarded as temporary and inconsequential. A year later, that inflation is looking like a more intractable outcome of America’s coronavirus response, with worrying implications for international dollar users. That certainly validates the general impulse to de-dollarize by any means necessary.
Unfortunately, one year on, Bitcoin is nowhere near being able to shield El Salvador from its entanglements with the dollar. BTC has failed as an inflation hedge, at least for now, and the market reversal of the last nine months means that most of the bitcoin purchased by El Salvador is underwater. Bukele’s decision to use national funds to make large speculative bets on BTC now looks particularly misguided.
Some of these problems are to be expected given the sweeping and radical nature of the program. “Any sovereign nation that disrupts at a level as foundational as its monetary system will not do so without encountering unforeseen complications, initial gridlocks and the need for an adjustment period,” says Ian Gaines, communications director of the Bitcoin Policy Institute, which advocates for BTC adoption. Expecting such a program to reach its full potential in one year, he says, “is optimistic, to say the least.”
Things have been a mixed bag so far, in other words. But insiders argue the real payoff is down the road. So, in a reshuffled nod to director Sergio Leone (cue the Ennio Morricone music), here are the Bad, the Good and the Ugly of El Salvador’s first Bitcoin Year.
In hindsight, the greatest failure of El Salvador’s Bitcoin rollout was the botched technical, logistical and communications aspects of the initial, apparently rushed rollout. There were widespread reports of identity theft, with many Salvadorans claiming their $30 signup bonus had been drained before they accessed the system. The specific requirements of the Bitcoin Law were also poorly communicated, particularly when it came to the requirements for merchants. Outside of El Salvador, even some bitcoiners came to see elements of the Bitcoin Law as an authoritarian imposition.
Bitcoin ATM operator Athena Bitcoin handled at least some parts of the early rollout of Chivo and its backend systems. Beginning in December, though, El Salvador transferred control to the seemingly much more seasoned vendor AlphaPoint, which has done similar work in 35 countries. But the hacks had already done a lot of damage to the broader effort.
“When you have bumps out of the gate – and it’s not uncommon for such an ambitious project – it deteriorates trust and desire to use an application,” says Igor Telyatnikov, AlphaPoint’s co-founder and CEO. “There were plenty [of Salvadorans] that used Chivo, had an issue and stopped using it as a result. … So there is a bit of rebuilding trust with the community.”
The bitcoin rollout also involved substantial financial commitments by the small country, at a time when it seems it couldn’t really afford them. Media outlets have calculated the total tab at around $425 million, with most of that going to the initial $30 BTC signup incentives, escrow pools for bitcoin-dollar conversion and a series of investments directly into bitcoin. A little arithmetic suggests the infrastructure costs were roughly $100 million.
The bitcoin investments from El Salvador’s balance sheet may constitute the most obvious misstep of the rollout – if they’re even real. Bukele and his government haven’t revealed either the on-chain or off-chain location of their supposed bitcoin buys, so we’re still largely relying on Bukele’s tweets. One calculation is that Salvadoran bitcoin investments have incurred about $50 million in unrealized losses.
Read more: El Salvador Postpones Bitcoin Bond: Report
Those investments could rebound, but El Salvador may not be able to wait very long, thanks to a national cash crunch. It has a pair of $800 million bonds due in 2023 and 2025, and observers are seriously unsure whether the nation will be able to pay those back.
That gets to the final, somewhat ambiguous Bad outcome of El Salvador’s larger bitcoin agenda. As I wrote at the time, its push to transition to bitcoin was a matter of international power politics and nose-thumbing at international finance entities like the International Monetary Fund and World Bank.
It’s little surprise, then, that El Salvador’s negotiations with the IMF for a $1.3 billion emergency loan have been troubled. The IMF seems to have walked away from the negotiating table, while making noises about its distrust of bitcoin, and Salvadoran officials have been downplaying the importance of the loan. That could be very, very bad for the country’s finances given its short-term debt obligations.
On the other hand, challenging the IMF was inherent to the bitcoin agenda. The real problem is that El Salvador’s planned end-run around the IMF has also seemingly failed. The “Bitcoin Bond” would have raised $1 billion, but has been delayed multiple times and now seems indefinitely stalled. The same likely goes for a planned “Bitcoin City” the bond would have helped fund – easily the most absurd element of the Salvadoran plan.
While negativity has dominated coverage of bitcoin in El Salvador, there are bright spots. The use of bitcoin to send remittances from abroad has been validated more than many think. While the initial Chivo wallet rollout was rough, things are getting better. And the advantages for investment, education and tourism in El Salvador remain, at the very least, promising.
It was reported in May of this year that 1.9% of remittances to El Salvador, or $96.3 million, were sent via cryptocurrency in the eight months following the Bitcoin Law. That sounds like not much. And indeed, the number has been trotted out as a ding in the pieces attacking the program. But such criticism reflects a misunderstanding of adoption curves and human behavior – and more fundamentally, a misunderstanding of percentages and their stakes.
You see, Salvadorans at home and abroad reportedly spend about $400 million per year on the fees for remittances – that’s not the total amount sent, just the fees. Even a small reduction in that big tab is nothing to sneeze at. According to the World Bank, remittance fees to El Salvador averaged 2.85% in 2020 (which is already quite low in global terms). Bitcoin fees, while variable and subject to bull market spikes, are generally less than half as much, and currently stand at an average of 1.28%.
If you combine half-price fees with 1.9% of $400 million, you can see that Salvadorans saved a bit under $4 million in remittance fees by transitioning to bitcoin, just in those first eight months. That’s the equivalent of adding 1,100 average annual incomes to the small country. That does ignore the added costs of turning bitcoin into dollars, but that’s kind of the point of the attempt to transition the economy as a whole to bitcoin compatibility – Salvadorans who receive bitcoin increasingly don’t have to convert it.
If Salvadoran adoption of bitcoin for remittances accelerates at even just another 2% per year, the roughly $100 million spent on Bitcoin network infrastructure could effectively pay for itself in less than a decade.
Of course, for that to happen, people have to actually use the system. AlphaPoint’s takeover of the Chivo wallet and payments system could help that happen. According to CEO Telyatnikov, they’ve been working hard to make sure even less-digitally literate Salvadorans can use the app safely and reliably.
“It’s definitely a challenge,” Telyatnikov says. “There’s quite a bit of effort that goes into working with groups of people that are using the app in front of the team. There’s a product team that works with individuals, works with merchants, observes how they use the app, and makes recommendations.” Google and Apple data shows fairly frequent updates to the app since AlphaPoint’s takeover.
Other improvements are just as important, including an expansion of the Chivo customer support team and what Telyatnikov describes as a “1,000% improvement on speed” in merchant transaction processing. AlphaPoint has been particularly focused on improving the system’s integration with the high-speed Lightning Network that runs on top of Bitcoin. Though the bad impression left by the initial rollout won’t be easy to come back from, Telyatnikov thinks the improvements will eventually win back Salvadoran sentiment.
That would improve the chances for two of the Bitcoin Law’s other stated goals – improving bitcoin-driven investment and tourism in El Salvador. The tourism bet seems to have paid off, at least in the short term, with visits up 81% in 2022 compared to pre-pandemic levels, according to United Nations data. With around 5% of Salvadoran GDP generated by international tourism before the Bitcoin Law, a sustained lift of that magnitude could in itself raise El Salvador’s GDP more than 3% – a transformative change.
Though less definitive, there are also some signs that El Salvador’s higher concentration of users exposed to crypto is attracting companies to expand and operate there.
“Because the government has so publicly backed this technology by rolling out comprehensive regulations paired with education initiatives, the people in El Salvador are far ahead of many of their peers around the world,” the fintech startup Structure.fi said in a statement about its decision to expand operations and services in the country.
That could eventually translate into more companies establishing or expanding offices there – though it does raise thorny questions about what could be interpreted as Salvadorans acting as guinea pigs for startups based in more-developed countries.
Longer term, another big promise is educational. Assuming cryptocurrency demand continues to expand worldwide over the coming decade-plus, Salvadorans could be in pole position to benefit from their current exposure to Bitcoin.
“It’s kind of like in the early days of the internet, an entire country giving everyone internet access,” notes AlphaPoint’s Telyatnikov. “It’s an educational advantage – you’ll see a lot of people go down the rabbit hole and educate themselves.”
Many elements of El Salvador’s bitcoin rollout, then, seem to have performed better than mainstream media coverage would indicate. But that coverage has also frequently focused on Nayib Bukele’s autocratic behavior, which has in some ways worsened since the Bitcoin Law came into force. It’s genuinely troubling, even if it is arguably tangential to the question of bitcoin itself.
Some things seen as antidemocratic from America, certainly, are consequences of El Salvador’s uniquely troubled sociopolitical situation. It is still fighting back from both a long civil war and a wave of horrific gang violence – both, it must be emphasized, partly triggered by the actions of the United States. That included indoctrinating Salvadoran youth in American-style gang culture, then sending them back home to sow chaos. Some of Bukele’s strong-arm tactics may be excusable as necessary for dealing with the legacy of colonially imposed corruption and violence.
But there are limits to even that generous interpretation. For me, the bright line came as early as January of this year, when evidence emerged of the Bukele government working to silence journalists through digital surveillance. While I’m obviously biased, I find any government attempting to control the press and the flow of ideas viscerally repulsive (not least when America does it).
I wrote at the time that Nayib Bukele had shown himself unworthy of serving as a global champion for bitcoin adoption. I still believe that’s true – but it’s also somewhat irrelevant. While bizarre figures like the former RT host Max Keiser may be comfortable uncritically cozying up to anyone who says nice things about Bitcoin (RT is funded by Russia), the larger point is that bitcoin itself doesn’t care. The system and its benefits are there for anyone to use.
And despite the challenges it faces as a first mover, El Salvador’s example could still mark the way for other countries. Samson Mow, who worked on the now-stalled Bitcoin Bond as an executive at Blockstream, has since departed that role and spun up a new company called JAN3 to focus entirely on nation-state bitcoin adoption.
“We are engaged with various parties around the world and making steady progress” on other national bitcoin programs, Mow says. “It's rare to find a nation-state that will move as quickly and with as much conviction as El Salvador. I'm confident that we will see more nation-state adoption happening, but it will be a gradual process that takes time.”
In short, it takes more than a year to really understand the consequences of a change as radical as El Salvador’s Bitcoin experiment. What happens over the next year, or five, will likely be much more important to whether history views Nayib Bukele and his laser-eyed conversion as a woeful screwup – or as a visionary coup.
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