Nayib Bukele, the President of El Salvador, is young, dynamic and impulsive. In one video Played at the Bitcoin Miami conference in Florida on June 5, Bukele announced a major change in economic policy: El Salvador would adopt bitcoin as its official currency, alongside the US dollar, the country’s currency since 2001.

It risks being a disaster for the country, but it is typical of Bukele’s erratic style of government. This is also typical of Bitcoin fantasies; a project totally unsuited to daily life in El Salvador, set up in large part to improve the image of the cryptocurrency itself.

Nayib Bukele, the President of El Salvador, is young, dynamic and impulsive. In one video Played at the Bitcoin Miami conference in Florida on June 5, Bukele announced a major change in economic policy: El Salvador would adopt bitcoin as its official currency, alongside the US dollar, the country’s currency since 2001.

It risks being a disaster for the country, but it is typical of Bukele’s erratic style of government. This is also typical of Bitcoin fantasies; a project totally unsuited to daily life in El Salvador, set up in large part to improve the image of the cryptocurrency itself.

Bitcoin is the first cryptocurrency, originally created to be a form of money outside of government control. Bitcoin has absolutely failed to be useful as a currency except for ransomware payments, so the promotional line is now a ‘store of value’. It’s quite a claim for speculative commodity given to spectacular asset bubbles, which can be priced up and down 50 percent in a matter of months.

the Bitcoin Law adopted 62-19, with three abstentions, just after midnight local time in early June. No one had seen the law except the President and possibly the Minister of Economy, Maria Luisa Hayem, before it was proposed at 8 pm on June 8; Parliament debated it for a few hours, and it was rushed through with Bukele’s massive parliamentary majority.

Bitcoin will be legal tender for all debts, including taxes. Merchants must accept bitcoin for goods and services, unless they are technically unable to do so (In practice, this is a big enough loophole to smuggle a truck through; bitcoin is functionally useless as a payment system.) Accounts will always be held in US dollars; bitcoin is just a substitute for the dollar. The executive branch will build the infrastructure for bitcoin payments; in fact, section 15 of the law states that any provision of a previous law that would regulate bitcoin is repealed – a blanket enabling statute, as long as bitcoin is involved. The law will come into force on September 7, 90 days after its passage.

A quarter of Salvadoran citizens live in the United States and send money home; remittances were over $ 5.6 billion in 2019, in terms of total export earnings from El Salvador. After the fees, those dollars go to the recipients. This is the money the government and its bitcoin partners are looking for.

The bitcoin program is run in partnership with Strike, a unit of the US payment company Zap, which claims to send remittances using bitcoin. Strike CEO Jack Mallers described in january how Strike will send remittances to El Salvador: it will take the US dollars from the sender, buy bitcoins, send them to El Salvador and convert them to ties– a dollar replacement crypto token allegedly backed one by one by real dollars, albeit apparently no one in finance can find proof which should exist to support this. At the end of all of this, the recipient would get a so-called questionable crypto dollar in their Strike app, rather than the actual dollar bills they would normally withdraw. If you wanted to remove your dollar ties, Mallers argued that you can buy bitcoin with the ties and then cash the bitcoin at any bitcoin ATM! At the time, there were two bitcoin ATMs in the country, a few miles apart in the coastal seaside villages of El Sunzal and El Zonte; no other has been installed yet.

El Salvador operates with physical money; 70% of the adult population does not even have a bank account. It will take more than a phone application: the executive has 90 days to put in place a huge amount of necessary infrastructure. Only 45% of Salvadorans have access to the Internet, and about 10 percent in rural areas; Bukele offers a new satellite Internet network, in partnership with a bitcoin company. The government plans to distribute a version of the Strike app, to both consumers and merchants; but is currently on strike does not work well on older smartphones, or with restricted data caps. Then there are new ATMs to import and install.

Bukele didn’t tell anyone in El Salvador about the bitcoin plan before the public announcement. There was no official message. The local press published translations of the Reuters and CNBC stories, interspersed with tweets from Bukele. Elsalvador.com (El Diario de Hoy) asked for opinions local economists, who couldn’t figure out the project, or how it might be a good idea.

At the root of this is Bukele’s own financial dilemma. The president is popular, with an approval rating of over 90 percent. He funds this popularity by increasing spending without raising taxes. But El Salvador itself cannot print US dollars to fill the gap; therefore Bukele is looking for other sources of income.

The United States is not happy with the authoritarianism of Bukele and his corrupt cronies, and redirected its funding from foreign aid to civil society groups. The market valued Salvadoran government bonds at a huge discount, of the order of 7 to 9%. Bukele met with the International Monetary Fund the day after the Bitcoin law was passed, in negotiations to borrow $ 1 billion. In one press conference beforehand, the IMF politely indicated that it was more than a little dubious about the project.

Bukele appears to be preparing the country to inject bitcoin into the economy, mark them as “dollars” to cover its deficit, and recoup real dollars to pay off foreign debts. For Salvadorans, the plan looks like a stealthy de-dollarization attempt.

Bukele explained some details of the Bitcoin law to an audience group call with English-speaking bitcoin enthusiasts just before the bill is passed. A $ 150 million trust will be created at Bandesal, the national development bank, to compensate traders for fluctuations in the price of bitcoin between accepting a payment and depositing it in the bank. For comparison, the central bank’s total US dollar reserve is $ 2.5 billion.

The trust dollars will gradually be replaced by bitcoins, supposedly coins accepted by traders; the trust will end up holding $ 150 million in bitcoin, not dollars.

All debts will be repayable in bitcoins. This includes government borrowing, such as retirement funds, replacing public dollars with bitcoin. Public employees can also be paid in bitcoins.

It is simply not possible to run Know-Your-Customer checks on bitcoin transactions for FATF accepted international standards, and also treat bitcoin like cash. The very first thing that will happen is that the trust will be drained by the contaminated bitcoin holders who will get rid of it as quickly as possible; the trust will become a gateway to launder $ 150 million worth of dirty bitcoin.

El Salvador has a good anti-money laundering (AML) record, despite the country’s problems with organized crime, but El Salvador’s AML status is directly threatened by the adoption of bitcoin without controls in place. square. This in turn risks Current income of El Salvador from remittances.

Politicians such as the national security adviser Alejandro Muyshondt promote the Strike app with a $ 1 credit for each referral from a Salvadoran — or $ 5 for each referral from the United States—promising “No charge” for remittances. This allows the government to get its hands on the remittance dollars, which it previously could not, assuming it could withdraw the dollars from Strike.

The tricky part of the Bitcoin system is convincing the Salvadoran public to accept it, given that they often trust US dollars more than government. Many already see the Bitcoin law as an attempt to expropriate their dollars – it would be trivial to exert more coercion by increasing dollar withdrawal fees, or restricting the amount that could be withdrawn. Professional economists have also called on the government to withdraw the law for further consideration.

Argentina tried a similar trick after its financial crisis at the turn of the century. The Argentine peso had been trading at par with the dollar since 1991. But by early 2001, the economy was stagnant and the government was seen as having insurmountable deficit problems. The public feared that the ankle would break; those who could took out all the dollars they could. Argentina introduced the “corralito”, effectively freezing all bank accounts and allowing only 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 be successful as president and to be seen as having successfully lifted El Salvador out of its economic woes. But it has long been given to governance by the seat of his pants. The question is whether he can get away with a bitcoin-fueled monetary policy before an angry population starts setting the buildings on fire.





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