President Bukele and El Salvador’s Bitcoin Gamble
On the 200th anniversary of El Salvador’s independence from Spain, thousands gathered in San Salvador, not in cultural celebration, but in staunch opposition to President Nayib Bukele’s radical Bitcoin experiment — one that elevates the popular digital currency to the same legal tender status as the U.S. Dollar.
The 40-year old "millennial president" paints himself as a cryptocurrency trailblazer capable of innovating El Salvador's economic structure and rehabilitating its international image. On June 5, in a recorded message for Miami's 2021 Bitcoin conference, Bukele officially introduced his plan to push a Bitcoin tender bill through the national Congress. With roaring applause from crypto-enthusiasts, he declared that this new bill would “generate jobs and help provide financial inclusion to thousands outside the formal economy.”
Photo Courtesy: DW
By June 8, Bukele's Nuevas Ideas party passed the bill through Congress with ease, making Bitcoin destined to become legal tender by September 7. This three-month window allowed the government to not only create a smooth, nationwide Bitcoin rollout plan but also retroactively sell the idea to a majority of the country's population. However, a July 2021 poll indicated that three-quarters of surveyed Salvadorans remained skeptical of Bitcoin, around two-thirds refused to be paid in it, and less than half knew anything about cryptocurrency.
When the bill officially took effect on September 7, the initial rollout plan was mired in technical issues. Part of the Bukele administration's plan was to launch an official crypto-wallet called Chivo to manage a user’s balance in dollars and bitcoin. The government incentivized opening this Chivo account with a free $30 signup bonus, a benefit that was negated hours after the app’s midnight launch. By 3 am, the influx of users overwhelmed and crashed the Chivo server. By 10 am, Salvadorans experienced a taste of cryptocurrencies’ volatility when the price of bitcoin plummeted by $10,000, effectively shrinking their $30 signup bonus to $25. Transaction failures plagued the service days after. Despite a rocky launch, Bukele still boasted Chivo’s expansive base of 2 million users, about a third of El Salvador’s total population.
Beyond technical issues, the very nature of the Bitcoin law has been a point of conflict among even the crypto-community. Article Seven of El Salvador’s Bitcoin statute establishes that “every economic agent must accept bitcoin as payment when offered to him by whoever acquires a good or service.” This controversial article essentially made Bitcoin a “compulsory” tender, forcing any business with access to the internet and a smartphone to accept payments in the cryptocurrency. The result is a digitized currency intended to be decentralized and voluntary now being forced upon businesses by an administration infamous for exerting power. Thus, Article Seven makes many question if the entire Bitcoin experiment is just another one of Bukele’s autocratic power grabs.
Fears over El Salvador's economic dependency on a volatile currency and its link to authoritarian rule culminated in the September 15 protest on the anniversary of the nation's independence. Upwards of eight thousand demonstrators leveled two years of grievances against Bukele's personal conduct and "undemocratic" practices embodied by his latest Bitcoin policy from the streets of San Salvador. Some protesters even vandalized and destroyed the latest Bitcoin ATMs placed throughout the country as part of the government's rollout plan. A subsequent protest on October 17 amplified these frustrations.
Photo Courtesy: Jose Cabezas/Reuters
President Bukele has attacked these protests on Twitter, claiming that they “vandalize in all [of] their demonstrations” while vilifying the mainstream media’s coverage of the protests. Online, he trolls protesters through posting photoshopped memes or changing his Twitter bio to “Emperor of El Salvador. Bukele’s online antagonism also works as an attempt to assert his image as an in-touch, millennial persona to better appeal to the young wave of crypto-enthusiasts.
On a global scale, Bukele hopes to draw in crypto tourists and the larger entrepreneurial community to El Salvador through the power of Bitcoin. Adamant tweet threads from the president portray El Salvador as a promising home and tax haven for the young investor community, with benefits like the permanent residence for crypto entrepreneurs and the lack of certain capital gains or property taxes.
In terms of national benefit, Bukele claims that El Salvador’s GDP would increase by 25% if “only 1% of the Bitcoin market invested in the country." More substantively, President Bukele insists that Bitcoin effectively reduces fees Salvadorans pay to send and receive remittances. Remittances from relatives in foreign countries comprise 22% of El Salvador's total GDP, making it an essential component of the economy. Having remittances paid as bitcoin transactions would allow Salvadorans to circumvent high-cost fees from traditional banks. Ideally, a marginal increase in the spending power of everyday Salvadorans would stimulate the country's domestic market and economy.
At large, Bukele’s Bitcoin gambit is a desperate effort to rehabilitate the international image of a small country historically maligned by its economic and social troubles. When Bukele won the 2019 election, he inherited a devastating crime rate and systemic gang violence. Though criticized as “inhumane,” the president’s gang policies have lowered the nation’s crime rate and cemented his reputation as an unorthodox problem solver. Bukele relies heavily on this reputation to bolster support for his Bitcoin policy plan as a means of reforming El Salvador’s meddling economy.
The country's current economic state heightens the stakes of getting this ambitious project right. In May 2021, the government requested a $1.5 billion aid package from the International Monetary Fund to help cover its massive budgetary holes. Negotiations on this package have slowed since El Salvador adopted Bitcoin, and a subsequent aid request was denied a month later. With its credit rating downgraded over fears of Bitcoin’s volatility and a national debt equal to 90% of its GDP, El Salvador can not afford to lose its Bitcoin gamble.
Though as it stands right now, the volatility of the Bitcoin market will tell whether El Salvador's new Bitcoin economy will either elevate its image as a hub of entrepreneurial innovation or decimate its economy and the reputation of its president.