How El Salvador Tests Bitcoin’s Promise of Financial Freedom

SAN MIGUEL, El Salvador — Bitcoin’s advocates envision a financial system that is largely free from government interference. But when cryptocurrency first became a national currency, it was imposed on a reluctant population by an increasingly authoritarian monarch using a secret state-run system.

The startling announcement last month that El Salvador had embraced the world’s largest cryptocurrency, bitcoin, as it surprised its legal tender population and made the poor, conservative Central American nation an unexpected harbinger of a global technological transformation.

results unmapped experiment It can help determine whether the cryptocurrency provides the freedom of regulation that its proponents envision, or whether it is another means of control and enrichment for autocrats and corporations.

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

Mr Rettig said that the libertarian roots of cryptocurrency and the threat of government and corporate destruction partially reflect the evolution of digital technologies such as the internet and social media. Building on the democratic premise of liberating information and connecting people, these innovations have proven vulnerable to censorship, manipulation by propagandists and the control of profit-driven corporations, he said.

And now, after years of largely ignoring cryptocurrencies, governments around the world scrambling to answer for $2 trillion industry as it began to disrupt banking and seep into everyday lives.

In June, Nayib Bukele, the populist 40-year-old president of El Salvador, announced that he would make bitcoin, a highly volatile financial token operated by a decentralized community of tech entrepreneurs, a national currency on par with current legal tender. , US dollars.

“This will create jobs and help drive financial inclusion for those outside the formal economy,” Bukele said in a video talk. He also said he would transform the country into an innovation and tourism hub.

The idea originated from a social experiment that started in the Salvadoran surf town of El Zonte in 2019, in which public activists used a bitcoin donation to create a community cryptocurrency payments network. The Bitcoin Beach project has overcome residents’ distrust by integrating the currency into their daily lives, using bitcoin to reward students for homework and provide pandemic relief to families.

“Our strategy to create an ecosystem where Bitcoin will work is based on two elements: time and trust,” said Luis Morales, organizer of Bitcoin Beach.

Both elements are blatantly missing from Mr. Bukele’s strategy.

According to a survey by the El Salvador chamber of commerce, businessmen, international organizations and 93 percent of the Salvadoran public opposed the adoption of bitcoin.

However, on September 7, using Mr. Bukele’s control over the country’s congresses and courts, the government forced all sellers to legally accept bitcoin – triggering El Salvador’s biggest street demonstration in years and fueling Mr. Bukele’s enormous public support. a decreasing move.

“We all understand that cryptocurrency is the future, but you cannot encourage it by forcing everyone to use it,” said Jorge Hasbún, head of the chamber of commerce.

To encourage the use of the currency, the government created Chivo Wallet, a mobile phone app that allows citizens, including many without bank accounts, to send and receive requests in bitcoin, convert them to dollars, and withdraw them from private ATMs. He also gave $30 in bitcoin to every Salvadoran who adopted the wallet.

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

The government also said it set aside $150 million last year, the equivalent of 12 percent of El Salvador’s public investment budget, to ensure that bitcoin can be converted into dollars for free. Authorities offered no explanation as to 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 scarcity of public funds, Mr. Bukele announced in a series of Twitter posts that his government had purchased nearly $30 million worth of bitcoin last month. When the price of the cryptocurrency subsequently fell temporarily, it announced new purchases, the purpose of which was not disclosed.

About a month after bitcoin was launched, it remains unclear where or what the value of bitcoin and dollar funds held by the government or reflected in Chivo Wallets are.

Although all bitcoin transactions carry a code to ensure transparency, Mr. Bukele has treated bitcoin policy as a state secret. It declassified all information about Chivo Wallet, which was created with taxpayer funds but managed as a private venture by unidentified individuals.

Ruth López, a Salvadoran lawyer for the nonprofit Cristosal, said he was “playing Russian roulette with public money” and sued the government over Chivo Wallet’s funding irregularities.

Mr Bukele, the economy and finance ministers, secretary of commerce, attorney general, chairman of the congressional economic committee, financial regulator, central bank and state bank that finances the bitcoin fund declined to comment.

On the streets, the impact of the policy was mixed.

Mr. Bukele says that three million Salvadorans, or more than half of all adults, have set up a Chivo Wallet, but the actual use of bitcoin remains limited. Many fear the extreme price volatility of the cryptocurrency, saying they lack technological skills or do not trust the government’s intentions.

But cryptocurrency has allowed at least some Salvadorans without a bank account to access digital payments, invest in savings or increase earnings, and its use is growing among young people.

In the provincial city of San Miguel, the Argueta Pérez family said streetwear sales from market stalls surged after they posted signs stating they accepted bitcoin.

Recently, Laura Trejo, a 29-year-old student, stood in line outside a Chivo ATM to withdraw money orders from her uncle with no commission. José Ercidio, 50, a vegetable seller, waited his turn. He said Chivo Wallet increased sales by allowing customers to send him small sums.

“It’s a benefit for the poor and humble people,” he said.

Last month, Mr. Bukele, in an obvious joke targeting critics, changed his Twitter profile to: “The coolest dictator in the world.” However, there are growing concerns in El Salvador that Mr. Bukele’s adoption of bitcoin was motivated by the pursuit of control and avoidance of international pressure, rather than a desire for financial inclusion, as it rapidly consolidated power and cracked down on rivals. .

Two Salvadoran officials familiar with the president’s thinking said relations with the Biden administration deteriorated as Mr. Bukele tightened his grip on the nation, and Mr. Bukele was increasingly concerned about Washington’s undue influence on the country’s economy. They spoke on condition of anonymity to avoid reprisals.

For example, remittances sent by immigrants, primarily from the United States, account for a quarter of the country’s gross domestic product. The two officials said that by establishing a parallel financial system based on cryptocurrency, Mr. Bukele could bypass the American banking system and allow remittances to flow into the state-run Chivo Wallet in case of economic pressure from Washington.

Other countries already facing sanctions, including Venezuela and North Korea, are believed to be using cryptocurrency to evade 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. Negotiations with the International Monetary Fund about a substantial $1 billion loan stalled as the lender became increasingly concerned about the deterioration of the rule of law and bitcoin’s threat to financial stability.

The lack of IMF funding complicated Mr. Bukele’s populist spending programs by blocking other traditional sources of funding. El Salvador’s bonds fell sharply after the adoption of Bitcoin as Wall Street worried about Mr. Bukele’s ability to pay off his current debts.

The government is now exploring ways to issue bitcoin-linked government bonds and create new bitcoins with geothermal power. Both moves could create an alternative source of financing that bypasses traditional lenders who demand accountability, experts said.

“What Bukele is doing is not bitcoin, it’s a centralized, state-run banking system,” said Salvadoran data scientist Mario Gómez, who was detained by police after organizing social media and held for six hours on unspecified financial crime charges. Seminars on cryptocurrency risks. “It is the antithesis of the principles of bitcoin champions.”

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