Why Bitcoiners shouldn’t fall for El Salvador's populism
El Salvador’s president Nayib Bukele made history by introducing Bitcoin as legal tender in addition to the US Dollar. But we shouldn’t celebrate too early.
A big fat “told you so” was noticeable among Bitcoin fans when El Salvador’s Bitcoin legal tender law went into effect on September 6 2021. The community celebrated even louder when Bukele’s government announced that they had also bought 400 bitcoins.
At first glance, it all sounds like a success: A country where 70% of the 8 million people don’t have access to financial services suddenly roles out what is supposed to be the “money of the internet”.
And by doing that, it gives everyone who signs up with their national ID in the state-developed Chivo wallet $30 worth of bitcoin. So what’s wrong with a free bank account for everyone, plus free money?
Well, it’s a bit complicated.
From a technical perspective, the launch itself was a bit bumpy: bitcoin’s price went down 25% (and has risen to new ATHs since then, of course), the Chivo wallet had some bugs and went down for a while, Chivo ATMs were set on fire and critics were even arrested.
All of this caused a bank run of sorts, which mainly symbolized that the people wanted to get rid of their free bitcoin and change them to USD bills as fast as possible (Buekele tweeted later that people are now also buying BTC).
Unsurprisingly, commentators like the anti-blockchain, anti-Bitcoin, anti-anything-related-to-this-space critic David Gerard wrote the “bitcoin law is a farce” in an article that focuses on all the early hiccups. Fair enough.
But let’s look at it from a higher level and why we should be skeptical.
Bukele is a charismatic populist - and unpredictable
Nayib Bukele is a polarising character. The 40-year old populist and former mayor of the capital San Salvador is positioning himself as a get-shit-done innovator (something that sounds quite familiar for me as an Austrian). Despite a clear authoritarian governing style, he is considered one of the most popular world leaders with an approval rating of around 90%. He claims to have no ideology and only new ideas; former supporters say he’s an “enigma”, and it’s unclear even for people close to him which kind of country he wants. His vision is to rule El Salvador for 40 years, which should be scary enough already. You can read more about Bukele and El Salvador in this excellent article.
In the meantime, Bitcoiners keep celebrating every Bukele announcement, like the construction of an animal hospital (yes, you read right) and schools financed with Bitcoin gains. It’s unclear who really controls the private keys to El Salvador’s bitcoins or how it is secured.
Many famous Bitcoin influencers interviewed Bukele, and he has adopted some of the jargon used by the community on Twitter. He’s curating an image of a young, anti-establishment tech-savvy guy.
Bitcoin remittances are a win-win for the government
For the Salvadoran government, Bitcoin makes a lot of sense: 2.5 million Salvadoran live abroad, and in 2020 transferred almost $6 billion (23% of the local GDP) back to relatives living in El Salvador. Those remittance payments are usually done via companies like WesternUnion, which take fees that stay with them, so in the US.
When relatives who live abroad send BTC to their families in El Salvador, it means that the government keeps the BTC their citizens sell them when they cash out in USD at one of the new Chivo ATMs.
So instead of not participating in any way of the enormous role remittances play in the local economy, the government is able to act as a middle-man of sorts and accumulate BTC.
Chivo wallet is centralised and prone to attacks
In the meantime, Bukele celebrated the launch as a success, stating that over 2 million people use Chivo wallet not even three weeks after launch. Saying that Bitcoin has done more for the financial inclusion for his people than any bank could have ever done.
While the KYC process for Chivo was and is not the best, the centrally stored identities even got stolen already. The government is subsidising transaction fees on Chivo, but everyone can use alternative Bitcoin lightning-enabled wallets (which is a good thing).
3 million Salvadorans registered Chivo, but the future remains unclear
Early October Bukele announced that more Salvadorans have Bitcoin wallets than bank accounts. But not everyone seems to be a fan of the new “Bitcoin Law” (yes, that’s the official name).
Bukele has only shared the Chivo dashboard once (see his Tweet above), but the really interesting metric would be to see the trajectory of the daily active users (usuarios nuevos por día) now two months after the launch.
My personal theory is that Salvadorans signed up for Chivo, converted their free $30 in BTC to USD cash and probably forgot about the app. But let’s see.
To sum it up, I think it’s too early to come to any conclusion. The real adoption rate in El Salvador for everyday payments is questionable. It seems more like a personal image campaign for Bukele while cutting off companies like Western Union from benefitting from high remittance fees. The Salvadoran government is trying hard to incentivise the domestic use of Bitcoin further. For example, they subsidise fuel bought with bitcoin by $0.20 per gallon. Critics see yet another populist move by Bukele because the subsidy is tax money of everyone living in El Salvador.
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