Nayib Bukele, the president of El Salvador, is young, dynamic, and impulsive. In a video played at the Bitcoin Miami conference in Florida on June 5, Bukele announced a major economic policy change: El Salvador would be adopting bitcoin as an official currency, running in parallel with the U.S. dollar, the country’s currency since 2001.
This is likely to be a disaster for the country—but it’s typical of Bukele’s erratic style of government. It’s also typical of Bitcoin fantasies; a project completely unsuited to daily life in El Salvador, set up largely to boost the image of the cryptocurrency itself.
Bitcoin is the first cryptocurrency, originally created to be a form of money outside government control. Bitcoin has utterly failed to be useful as currency—except for ransomware payments—so the promotional line is now that it’s a “store of value.” That is quite a claim for a speculative commodity given to spectacular asset bubbles, whose price can go up and down 50 percent within a couple of months.
The Bitcoin Law passed 62–19, with three abstentions, just after midnight local time, early June 9. Nobody had seen the law except the president and perhaps the minister of the economy, Maria Luisa Hayem, before it was proposed at 8pm on June 8; Parliament discussed it for a few hours, and it was rammed through with Bukele’s massive parliamentary majority.
Bitcoin will be legal tender for all debts, including tax. Merchants must accept bitcoin for goods and services, unless they are technologically unable to. (In practice, that’s a loophole large enough to drive a truck through; bitcoin is functionally useless as a payments system.) Accounts will still be kept in U.S. dollars; bitcoin is just a dollar substitute. The executive branch will build the infrastructure for bitcoin payments; in fact, Article 15 of the law says that any provision of a previous law that would regulate bitcoin is repealed—an all-encompassing enabling act, as long as bitcoin is involved. The law will take effect on Sept. 7, 90 days after being passed.
A quarter of Salvadoran citizens live in the United States, and send money home; remittances were over $5.6 billion in 2019, on the level of El Salvador’s total export income. After fees, these dollars go to the recipients. That’s the money that the government—and its bitcoin partners—are after.
The bitcoin scheme is being run in partnership with Strike, a unit of U.S. payments company Zap, that claims to do remittances using bitcoin. Strike CEO Jack Mallers outlined in January how Strike will do remittances to El Salvador: He will take U.S. dollars from the sender, buy bitcoins, transmit those to El Salvador, and convert them to tethers—a dollar-substitute crypto token supposedly backed one-to-one by actual dollars, though seemingly nobody in finance can find the evidence that should exist to back this. At the end of all this, the recipient would get a dubious alleged crypto dollar in their Strike app, rather than the genuine dollar notes they would normally withdraw. If you wanted to withdraw your tethers as dollars, Mallers posited that you could buy bitcoin with the tethers, then cash the bitcoin out at any bitcoin ATM! At the time, there were two bitcoin ATMs in the country, a few kilometers apart in the coastal resort villages of El Sunzal and El Zonte; no more have been installed as yet.
El Salvador runs on physical cash; 70 percent of the adult population don’t even have a bank account. It’s going to take more than a phone app—the executive branch has 90 days to get a huge amount of necessary infrastructure into place. Only 45 percent of Salvadorans have internet access, and around 10 percent in rural areas; Bukele proposes a new satellite internet network, partnering with a bitcoin company. The government plans to distribute a version of the Strike app, for both consumers and merchants; but Strike presently doesn’t work well on older smartphones, or with restricted data caps. Then there’s new ATMs to import and install.
Bukele didn’t tell anyone in El Salvador of the bitcoin plan before the public announcement. There was no official messaging. The local press ran translations of the Reuters and CNBC stories, peppered with tweets from Bukele. Elsalvador.com (El Diario de Hoy) sought opinions from local economists, who couldn’t make head or tail of the scheme, or how it could possibly be a good idea.
At the root of this is Bukele’s own financial dilemma. The president is popular, with an approval rating over 90 percent. He funds this popularity by increasing spending without increasing taxes. But El Salvador can’t print U.S. dollars itself to make up the deficit; so Bukele is casting about for other income streams.
The US is not happy with Bukele’s authoritarianism and corrupt cronies, and has redirected its foreign aid funding to civil society groups. The market has priced Salvadoran government bonds at a huge discount, on the order of 7–9 percent. Bukele met with the International Monetary Fund the day after passing the Bitcoin Law, as part of negotiations to borrow $1 billion. In a press conference beforehand, the IMF politely indicated that they were more than a little dubious about the scheme.
Bukele appears to be setting the country up to inject bitcoins into the economy, mark them as “dollars” to make up his deficit, and grab the actual dollars to pay foreign debts. For Salvadorans, the plan feels like an attempted de-dollarization by stealth.
Bukele explained some details of the Bitcoin Law on a public group call with English-speaking bitcoin enthusiasts just before the bill was voted through. A $150-million trust will be set up at Bandesal, the national development bank, to compensate merchants for fluctuations in the price of bitcoin between accepting a payment and depositing it in the bank. For comparison, the central bank’s entire U.S. dollar reserve is $2.5 billion.
The dollars in the trust will gradually be replaced with bitcoins, supposedly coins accepted by merchants; the trust will end up holding $150 million in bitcoins, not dollars.
All debts will be repayable in bitcoins. This includes government borrowing, such as from retirement funds—replacing the public’s dollars with bitcoins. Public employees may also be paid in bitcoins.
It’s simply infeasible to run Know-Your-Customer checks on bitcoin transactions to accepted international FATF standards, and also have bitcoin treated like cash. The very first thing that will happen is that the trust will be drained by holders of tainted bitcoins getting rid of them as fast as possible; the trust will become a gateway to launder $150 million of dirty bitcoins.
El Salvador has a good record on anti-money-laundering (AML), despite the country’s problems with organized crime, but El Salvador’s AML status is directly endangered by the adoption of bitcoin without checks in place. This in turn risks El Salvador’s present income from remittances.
Politicians such as National Security Adviser Alejandro Muyshondt are promoting the Strike app with a $1 credit for each referral from a Salvadoran—or $5 from each U.S. referral—promising “no fees” for remittances. This lets the government get its hands on the dollars from the remittances, which they couldn’t previously—assuming they can pry the dollars loose from Strike.
The tricky part of the bitcoin scheme is convincing the Salvadoran public to go along with it, given they often trust U.S. dollars more than they trust the government. Many already see the Bitcoin Law as an attempt to expropriate their dollars—it would be trivial to provide more coercion by raising fees for dollar withdrawals, or restrict the amount that could be withdrawn. Professional economists have also asked the government to withdraw the law for more detailed consideration.
Argentina tried a similar trick after its financial crisis around the turn of the century. The Argentinian peso had traded at par with the dollar since 1991. But by early 2001, the economy was stagnating, and the government was perceived to have insurmountable deficit issues. The public feared the peg would break; those who were able to, withdrew all the dollars they could. Argentina brought in the “corralito,” effectively freezing all bank accounts and only allowing small withdrawals, to stop a run on the banks. The corralito ended a year after mass public riots brought down the government.
Bukele wants to succeed as president, and be seen as successful, in pulling El Salvador out of its economic troubles. But he has long been given to governance by the seat of his pants. The question is whether he can get away with bitcoin-fueled monetary policy before an angry populace starts setting buildings on fire.
