On Saturday, June 5, President Nayib Bukele of El Salvador announced that he would ask his country’s legislature to declare bitcoin “legal tender” in the country. This statement was part of a pre-recorded presentation to Miami, Florida’s Bitcoin 2021 conference.
The announcement was, unsurprisingly, very well received in Miami. Later, the bitcoin press was almost breathless in its excitement about it – first country EVER to declare bitcoin legal tender – although just about all of the writers admitted that they had no idea what something being declared legal tender entails. The president provided no explanatory details.
On Monday, though, the (inevitable) Great Rollback of Expectations began. “The [U.S.] dollar will continue to be the legal tender in El Salvador. Operations can be done with bitcoin – obviously related to its value in dollars,” said Miguel Kattán, Secretary of Commerce and Investment, in remarks reported by local press.
Kattán went on to explain that the new legislation would make bitcoin an opt-in currency, without necessarily disturbing the role of the U.S. dollar, the more popular of the current two legal tenders available to Salvadorans since 2001. The other currency is the “colon.”
Reporters go off the deep end
Before the Great Rollback, the twitterverse had gone wild on Saturday and Sunday. I understand that President Bukele celebrated the occasion by posting a new picture of himself on Twitter, showing him with the bitcoiners’ now-trademark glowing red laser eyes. Yes, Bukele did that – we didn’t modify the photo. While you are looking at the photo, please note his powerful looking military guard.
If you have had any exposure to crypto-journalism, you can imagine the febrile reception that met the president’s announcement. Avik Roy, writing in Forbes about “the most important crypto story of the year” said, “If President Bukele’s Bitcoin proposal becomes law, El Salvador could become one of the most significant monetary centers in the world.”
Over at CoinDesk, one of the usually more reliable sources for cryptocurrency news, Daniel Kuhn wrote that making bitcoin legal tender in El Salvador would constitute a “monumental step for the Central American nation.” Adam Levine heaved a huge sigh of relief in his opinion piece because the Central American country will now have a chance to free itself of the vagaries of U.S. economic policy and embrace the stability offered by bitcoin. I check CoinDesk routinely for the U.S. dollar price of bitcoin and I could see it was largely in the red over the past few days. Of course, the colon price of bitcoin might have been holding steady over the period, but Levine has better data sources than I.
In their defense, it should be noted that journalists did have to struggle against an onslaught of hyperbole and voodoo economics from President Bukele. “If just 1% of the total bitcoin supply moved to El Salvador that would grow the nation’s economic output by nearly 25%,” according to Bukele. Why 1% of bitcoin would be incented to move was not explained. And if the bitcoin just sits in “hodlers’ ” (holders’) wallets, how does it create economic output at all, let alone grow it by nearly 25%?
The country has about 6.5 million people with a gross domestic product per capita of about $4,200. U.S. GDP per capita is about $65,000.
Access to banking services is out of reach for most people with 70% of the people “unbanked,” essentially living fully with transactions in U.S. dollars in the form of cash. According to the Central Intelligence Agency’s Fact Book, “At least 20% of El Salvador’s population lives abroad. The remittances they send home account for close to 20% of GDP.” Demand for remittances could drive bitcoin adoption for Salvadorans.
Remittances have a reputation for being costly to execute, a bitterly ironic feature of working abroad and sending money home to support families. The costs stem from working between two financial systems – different banks, different laws, different conventions even when you are paying and receiving in the same currency. Western Union says that it costs $8 to send $1,000 to El Salvador.
Cryptocurrencies, including bitcoin, avoid those complications because there is no geography involved in cryptocurrency transactions – payments across a room cost as much as ones halfway across the world. But there still are transaction costs in paying with bitcoin. Bitcoin fees are variable, unpredictable, and, reputedly, pretty high, $25 – $30.
If, as the secretary of commerce and investment says, the U.S. dollar remains the working currency of the land, bitcoin is going to have trouble competing for the remittance business on the basis of costs alone as Salvadorans buy bitcoin in the U.S and sell bitcoin in El Salvador (just to get their hands on some dollars). And do not forget the wide array of infrastructural costs that might be associated with bitcoin transactions – computers and/or cell phones, connectivity, wallets, etc.
Reasons for concern
Bukele was elected president of El Salvador with 52% of the popular vote in 2019 and his popularity helped propel his party to winning more than two-thirds of the seats in the legislature in elections earlier this year.
This legislature has already fired the nation’s attorney general as well as all five members of the constitutional section of the country’s Supreme Court. Before the new, fully amenable legislature was seated, Bukele had sent the National Guard into the legislature during a vote. and frequently ignored decisions by the Supreme Court. Remember the National Guard in the Twitter picture?
Last week, the new attorney general announced that the country had ended its work with the Organization of American States on the International Commission against Impunity in El Salvador. Establishing the commission had been a plank in Bukele’s campaign platform in 2019 aimed at rooting out corruption and burnishing Bukele’s image as a reformer. More recently, though, the OAS found the government to be impeding the commission’s work, especially with laws like the new one that granted government officials immunity from prosecution for misappropriating COVID-19 relief funds.
According to the Washington Post, the Biden Administration is increasingly concerned about recent actions by the Salvadoran government. U.S. Secretary of State Kamala Harris tweeted on May 2, “We have deep concerns about El Salvador’s democracy . . .”
What this general corruption has to do with bitcoin might be that already in December last year, Bukele’s head of the Financial System Superintendence forbade banks from severing commercial ties with alleged financial criminals, contravening the official law against money laundering.
Bukele came to office against a backdrop of local money laundering scandals, promising reform. In fact, the wife of a former president was sentenced to jail for money laundering just days ago and that former president is on trial now in El Salvador.
But money laundering may be too widespread among the Salvadoran elites for Bukele to continue vigorous prosecution against it. Bukele himself is reputed to have been heavily involved in illicit transactions as recently as 2013. A September 2020 report by American consultants identified close ties between members of Bukele’s administration and known money laundering businesses.
At any rate, bitcoin’s pseudonymity as well as its ability to flourish outside of regulated banking institutions could be a boon to money launderers in a country apt to look the other way.
On the other hand . . .
Bukele’s move to make bitcoin legal tender could work out just fine.
The president’s presentation in Miami was introduced by Jack Mallers, who said he had been working with Bukele on the new bitcoin legislation. Mallers is the founder of Zap, a Chicago startup that has a bitcoin payment service based on the Lightning Network.
Lightning is a layer 2 network built on top of the core bitcoin protocol. It offers very fast and very cheap bitcoin transactions. Zap rolled out a beta version of its service called Strike in the U.S. last year.
More importantly, Mallers is no Johnny-come-lately to El Salvador. At the end of March, he launched Strike in two towns whose citizens are participating in a project called Bitcoin Beach. Bitcoin Beach itself was established earlier by an anonymous bitcoin whale to see how the bitcoin network could be used in real life.
Remittances over Strike or another layer 2 network sound like they should be much cheaper and speedier than pure on-chain bitcoin payments, saving Salvadorans quite a bit and helping them increase their incomes. If Strike proves useful, the bitcoin experiment could provide much needed access to financial services for many more people in the country. (Let’s ignore concerns about cybersecurity, or just plain old security, in an untested payments system like Strike in a technologically underdeveloped environment like El Salvador.)
Questions remain, though, about why Bukele wants to make bitcoin a legal tender. Perhaps legal issues arose during Bitcoin Beach. Maybe the president wants to skewer the local banks and money transmitting services. Or maybe it is necessary under Salvadoran law to enable cryptocurrency payments between regulated institutions like banks. Or maybe it is just a “millennial autocrat’s” publicity stunt, as several observers have commented.
And maybe it will all work out fine.