Caribbean & Central America - December 2021

In November El Salvador hosted a series of bitcoin events, building on its adoption of the cryptocurrency as legal tender in September, a move which has sparked protests at home and alarm among international observers.

Bitcoin became legal tender in El Salvador on 7 September, which means businesses are required to accept the cryptocurrency as payment alongside the US dollar. In order to facilitate this, President Nayib Bukele’s government set up a US$150m bitcoin fund as well as an electronic wallet dubbed Chivo. The fund has been used to pay for a US$30 bonus for every Salvadorean citizen who downloads the wallet, in a bid to promote both use of bitcoin and Chivo. In addition, Bukele said 200 Chivo ATMs have been built around the country, allowing users to convert bitcoin into dollars.

On 7 September the cryptocurrency plunged in value by as much as 17%, to US$43,119, before recovering to trade 10% lower that day. This volatility is one of the reasons the move has been criticised. In response to the dip, Bukele announced that the government, which had already bought 400 bitcoins, would purchase a further 150. Bukele later increased the country’s total holding to 1,120 bitcoins, sparking criticism from opposition lawmakers who accused him of exposing the country to the extreme volatility of cryptocurrency. However, Bukele has promised to use profits from the trades to build El Salvador’s first public veterinary hospital, as well as 20 schools. The president also says the move will allow Salvadoreans living abroad to send remittances home without paying the hefty commissions demanded by existing money transfer services.

The Chivo wallet has been adopted by large companies such as US retail coffee giant Starbucks and US fast food chain McDonald’s, while Mexican budget airline Volaris has also said that it will accept payment in bitcoin. However, the wallet has had a troubled start to life. On its first day Chivo crashed and had to be taken offline for a few hours due to network capacity issues, and it has since been struck by reports of identity fraud. In response, Bukele has proposed tougher prison sentences for cryptocurrency-related cybercrimes. In addition, a feature of the wallet which froze the bitcoin-dollar exchange rate for one minute had to be disabled on 25 October after it emerged that traders were using it to make illegal profits by comparing the rate with other exchanges then deciding whether to buy or sell. The practice, known as scalping, is not illegal in and of itself, but doing so with a frozen rate constitutes a kind of fraud, tweeted Chivo.

Crypto experts also questioned whether Chivo is even connected to the blockchain, the system that underpins bitcoin transactions. Transactions are possible between Chivo wallets, but not from Chivo to another kind of crypto wallet, which goes against the philosophy of interoperability that underpins bitcoin. In addition, the app has raised privacy concerns as it asks for access to a user’s microphone and contacts list, which are not features necessary for a wallet to function, Salvadorean economist Ricardo Castaneda told British newspaper The Guardian in an article published 7 September. “Bitcoin might be a distraction but given the decision to push ahead with the plan despite popular opposition and the advice of experts, it could also be an important pillar of Bukele’s political project,” said Castaneda, referring to claims of growing authoritarianism from the president. Castaneda also cited concerns that the time and money invested in the bitcoin project would have been better spent elsewhere, such as in health or education. “Even those Salvadoreans who don’t use bitcoin will pay the price of this experiment,” he said.

A series of protests against the Bukele government also cited concerns over the president’s governing style and the move to make bitcoin legal tender. More than 1,000 people turned out to protest in San Salvador on 7 September, while a survey by LPG Datos for national daily La Prensa Gráfica, published on 1 September, revealed that 65% of 1,506 respondents disapproved of the use of bitcoin as legal currency. Contrary to the disapproval suggested by this survey, Vice President Félix Ulloa told Politico magazine that some 3m Salvadoreans have set up a bitcoin account in an article published 10 November. The country has a population of 6.5m, and only 30% of adults have a bank account, according to Politico. This means Ulloa’s claim should be treated with caution, especially given claims of widespread identity fraud. There is also a possibility that some users may have immediately withdrawn the US$30 bonus and never used the Chivo wallet again.

Despite criticism at home and abroad, the Bukele government shows no signs of rowing back on its bitcoin experiment. The country hosted Bitcoin Week starting 17 November, and economy minister María Luisa Hayem underlined the government’s commitment to the project. “We are very proud to have adopted bitcoin,” said Hayem, who hailed improved access to payments and services in the country. “We are also seeing a lot of interest from investors, not only in technology, but also in the tourism and real estate sectors; this will be a source of employment,” she added. The government is working to attract investors by guaranteeing that there will be no capital gains taxes on bitcoin profits as well as allowing immediate permanent residency for investors, and it hopes to become a global centre for bitcoin mining after China cracked down on the practice.

Ulloa told Politico that one Swiss investor is interested in moving 13-15,000 mining machines to El Salvador, and investors from Asia, South America, and Russia have also been in touch. One reason China has cracked down on mining is the huge amount of energy required, which it says imperils efforts to cut greenhouse gas emissions, but Bukele proposes heading off those concerns by using clean geothermal energy from the country’s volcanoes. On 20 November, Bukele announced plans to build a bitcoin city in the La Unión region in the south-east of the country, which will use energy from the Conchagua volcano to power bitcoin mining.

However, there are concerns that attracting crypto miners and investors may come at the price of a deal with the International Monetary Fund (IMF), which is in talks over a US$1.3bn financial arrangement. Prior to its implementation the IMF said the bitcoin law “raises a number of macroeconomic, financial, and legal issues that require very careful analysis,” but it emphasised that talks over the financial arrangement were ongoing. Salvadorean government officials insist that it won’t be an impediment to a deal with the IMF, and on 22 October the organisation’s Western Hemisphere Department acting director, Nigel Chalk, said the IMF continued to cooperate with El Salvador on bitcoin. Representatives from both sides met for annual meetings on 18 November, but an IMF spokesman said that a support programme was not being discussed at present.

The stakes are high for El Salvador, which needs to cover holes in its national budget. Public debt will reach about 85% of GDP by the end of the year, according to the IMF, up 14 percentage points of GDP since the start of the pandemic. Failed negotiations could be hugely costly, according to the Central American institute of fiscal studies (Icefi), a regional thinktank, which believes the lack of a deal “could generate a crisis of confidence with respect to El Salvador’s sovereign debt”. However, it appears that Bukele is planning to use US$1bn in so-called “bitcoin bonds” to raise funds from outside the traditional financial system, with US$500m spent on more bitcoin and US$500m destined for “building out energy and bitcoin mining infrastructure in the region.” While bitcoin fans hail Bukele as a visionary, others worry he is leading his country down a hugely risky path.