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Will This Be the First Country Bankrupted by Crypto?


Protest against Bitcoin as a means of payment in El Salvador - Credit: Camilo Freedman/DPA/Picture Alliance/Getty Images

Protest against Bitcoin as a means of payment in El Salvador – Credit: Camilo Freedman/DPA/Picture Alliance/Getty Images

Six days before El Salvador’s Bitcoin Law went into effect, Mario Gómez was dragged from his car, handcuffed, and detained. There was no arrest warrant for the software developer, who had taken to his personal Twitter account to inform the Salvadoran public about the crypto-currency that was soon going to become the official tender in the Central American country, while questioning the government’s motives for adopting it. “There was no solid reason for making this arrest,” Gómez tells Rolling Stone. “It makes one suspect that the motivations have been rather political.”.

In September 2021, El Salvador enacted the Bitcoin Law, and became the first country in the world to adopt a cryptocurrency as national currency. While the main currency of El Salvador continued to be the U.S. dollar — and people are free to use it — critics warned that putting national funds into such a decentralized, unstable currency could be devidstating to the country, still reeling from a civil war decades ago. Now, one year later, the authoritarian government is continuing to crack down on citizens speaking out against bitcoin. They say they have seen their democracy dismantled, human rights suspended, and their economic futures threatend while their government bends over backwards to court wealthy crypto investors.

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Today, despite efforts to mitigate financial disaster — including bitcoin-backed “volcano bonds,” and a plan for a tax-free crypto mining hub called “Bitcoin City” — the value of bitcoin has plummeted, and the country is on the brink of defaulting on its debt. The International Monetary Fund has repeatedly warned El Salvador to drop Bitcoin if it wants to save it’s economy. “The IMF and World Bank, they’re all like, ‘This is too risky,’” says Jorge Cuellar, who teaches Latin American, Latino & Caribbean Studies at Dartmouth College. “We shouldn’t get involved in this.” But the crypto-bro president who dreamed up the law and put it in place isn’t backing down.

President Nayib Bukele at the Latin Bitcoin Conference in November 2021, two months after he made Bitcoin an official currency of El Salvador.  - Credit: Marvin Recinos/AFP/Getty Images

President Nayib Bukele at the Latin Bitcoin Conference in November 2021, two months after he made Bitcoin an official currency of El Salvador. – Credit: Marvin Recinos/AFP/Getty Images

Marvin Recinos/AFP/Getty Images

Before the law even went into effect, there were problems. Instead of informing the Salvadoran public about his plan, President Nayib Bukele — the country’s charasmatic millenial leader, who’s tweeted about buying up Bitcoin while naked or on the toilet  — made the announcement at a May 2021 Bitcoin conference in Miami, stating that he’d be sending a Bitcoin bill to congress. Mariana Belloso, an independent journalist who’s also been targeted by Bukele’s government, was shocked when she heard the announcement. “Nobody knew anything,” she says, recalling her stock-broker brother in New York calling to confirm the news. “[He asked,] ‘Is it true that El Salvador is going to have Bitcoin?’ I told him ‘No, you’re crazy.’”

As Belloso tuned into the event’s live stream, she says, “I called some sources that I have within the government, and they told me that they did not know anything.” Without any sort of public debate, the Bitcoin Law was sent to Congress, where President Bukele’s Nuevas Ideas party enjoys a majority. The law passed just five days after the announcement. It went into full effect three months later, on Sept. 7, 2021.

According to Belloso, as the Bitcoin Law was being approved, President Bukele was in Twitter Spaces bragging to his constituents of choice: Bitcoin enthusiasts living abroad. Notably, they only spoke in English. “They talked about El Salvador, wanting to mine Bitcoin with geothermal energy. The [Salvadoran] population had zero access to this,” says Belloso.

Before Bukele, El Salvador’s politics were dominated by two parties rooted in the Cold War: One was the conservative ARENA party, which has its origins in U.S.-backed death squads, and the leftist FMLN party founded by Marxist guerrillas. They both emerged as opposing sides in the country’s bloody civil war, which lasted from 1980 to 1992 and killed over 75,000 people. A polorizing and traumatic event in the country’s recent history, critics say Bukele exploited it under the guise of bringing unity. “He took advantage of this dissatisfaction with the wear and tear that had been created somewhat ironically by the parties themselves” to present himself as a new third option, explains Gomez. Running as a 40-year-old former publicist, Bukele rose to power through his large Twitter presence. He campaigned on promising to fight corruption and vowed to bring El Salvador into the future, all while sporting skinny jeans and baseball caps. Key to Bukele’s success was to “present himself as a familiar figure. As someone with whom people can connect, empathize,” says Gomez.

But it didn’t take long for him to earn the title of Latin America’s first millennial dictator. He was tight with Trump — “we both use Twitter a lot, so we get along,” Bukele opined — and began acting in ways the former U.S. president could only dream of. In February 2020, he stormed parliament alongside armed soldiers and police officers to pressure legislators to approve a $109 million loan for increased military and law enforcement equipment. The episode received swift and widespread international condemnation and Bukele vowed not to do it again. But he pokes fun at the authoritarian allegations against him, like when he briefly changed his Twitter bio to “world’s coolest dictator.” He’s also viciously gone after his critics in the U.S. government. Congresswoman Norma Torres (D-CA) told the L.A. Times that she sleeps with a gun following threats from Bukele’s followers after she called him a “narcissistic dictator” on Twitter.

Though most citizens of the country can’t afford to gamble on crypto, the government requires all businesses to accept it.  - Credit: Alex Peña/Getty Images

Though most citizens of the country can’t afford to gamble on crypto, the government requires all businesses to accept it. – Credit: Alex Peña/Getty Images

Alex Peña/Getty Images

El Salvador’s relationship with its national currency mirrors its elusive relationship with its own sovereignty. For much of the last 100 years, El Salvador’s main currency was the colón, named after the Spanish pronunciation for Christopher Columbus, commemorating the country’s colonial past. In 2001, with the economy still reeling from the U.S.-sponsored civil war, El Salvador’s right-wing government adopted the U.S. dollar. Many people felt that dollarization, much like Bitcoin today, was also a process that was without consultation. According to Gomez, “it’s revived that perspective that people had [then], that they’re imposing a change by force.”

Central to this chaotic crypto rollout was the incredibly buggy Chivo Wallet, the official government-endorsed bitcoin wallet — named after a Salvadoran vernacular for cool — along with Chivo ATMs. As a promotion, the government promised $30 to everyone who downloaded and registered with the app, in a country where working full time at minimum wage will bring in only around $300 a month. From its launch the app was riddled with problems and became a magnet for fraud — there were nearly a thousand cases of identity theft in the wallets during its first three months.

On September 15, 2021, a day that marked exactly 200 years of El Salvador’s independence from Spain, thousands of Salvadorans took to the streets to protest the law’s roll out. Many peopled carried signs reading “Bukele dictator” with the Bitcoin symbol crosedout, and some Chivo ATMs were reportedly vandalized. The protest’s main slogan and hashtag was “No to Bitcoin” (#NoAlBitcoin). Salvadoran software developer and entrepreneur Oscar Salguero emphasizes that he, like most Salvadorans, “have nothing against the technology or the blockchain or whatever, but we are against the law.” A self-described crypto enthusiast himself, he participated in the march. “I actually had a sign with a no to the Bitcoin Law,” he says. Seven out of 10 Salvadorans oppose the Bitcoin Law, according to a 2021 opinion poll conducted by the University of Central America (UCA). In the months since, these anti-government marches have become recurring events, bringing out feminist organizations, labor unions, water defenders and student groups. Salguero expresses that the Bitcoin Law is out of touch and that “benefits for the people that earn the minimum wage is nil.”

 

Concept of “Bitcoin City,” which critics say is an impractical use of limited resources.  - Credit: Nayib Bukele/Twitter

Concept of “Bitcoin City,” which critics say is an impractical use of limited resources. – Credit: Nayib Bukele/Twitter

Nayib Bukele/Twitter

In November, President Bukele announced a new a project called “Bitcoin City,” to be based at the Conchagua Volcano in the country’s eastern department of La Union. “Most towns and big cities in Salvador have actually been developed around volcanoes because of the fertility of those soils,” explains Cuéllar, the Dartmouth professor. “Volcanoes are very much a kind of life-giving symbol to being Salvadoran.” A volcano is a natural, prime target for the country’s crypto-gentrification plans. In May, Bukele revealed new 3D renders and a diorama for Bitcoin City. He hopes these visuals entice investors into funding its construction.

When Bukele announced plans for Bitcoin City, he was also evoking the legend of the fabled “Bitcoin Citadel.” In 2013, reddit user Luka Magnotta published a post claiming that he was a time traveler from the future. In this future there are no central banks, Bitcoin maximalists and early adopters live like kings in walled cities. Everyone else toils in the margins of a collapsed society. What was intended to be a cautionary tale for crypto’s future has become an idealized vision for some crypto enthusiasts. For El Salvador though, a small powerful elite juxtaposed against a mass of disenfranchised people struggling to survive is the story of the country at any point in its history.

To finance this walled cryptocity of the future, the government of El Salvador hopes to entice investors though its $1 billion worth of its bitcoin-backed “volcano bonds.” Five hundred thousand would go to building infrastructure and the other half million would be used to buy more bitcoin.  Foreign investors will even get fast-tracked for citizenship. “El Salvador is in a debt crisis,” says Cuéllar, and volcano bonds are the government’s way of trying “to pay off some of that debt so the country doesn’t default.”  The IMF estimates the country’s public debt could be over 95 percent of it’s GDP by 2026. (More recently, Bukele announced that the country would be buying back dollar-backed bonds set to mature between 2023 and 2025, though experts say it’s too early to know how effective that will be.)

 

Geothermal facilities, like the La Geo Geothermal Power Plant, account for 27 percent of the country’s energy — but the country still imports 25 percent of its electricity to meet demand.  - Credit: Alex Peña/Getty Images

Geothermal facilities, like the La Geo Geothermal Power Plant, account for 27 percent of the country’s energy — but the country still imports 25 percent of its electricity to meet demand. – Credit: Alex Peña/Getty Images

Alex Peña/Getty Images

To date, Bukele claims to have has purchased 2,400 bitcoin tokens at over $100 million. Due to market fluctuations around the governments Bitcoin holdings have lost 60 percent of it’s value. The issuance of the Bitcoin-backed volcano bonds are intended to save the country from defaulting, but have reportedly been delayed due to likely lack of investors. Meanwhile, El Salvador’s national debt is $23 billion, $800 million of which needs to start being paid to the IMF by 2023.

There are also environmental factors to consider in the construction of Bitcoin City. President Bukele has been touting the use of geothermal energy from the country’s volcanoes to harness clean energy for Bitcoin mining. However, geothermal energy only supplies about 27 percent of El Salvador’s energy, and the country still has to import 25 percent of its electricity to meet demand. It’s still a really expensive source of energy, says Cuéllar: “It requires a lot of capital investment to build out that infrastructure. And so the cheap resource is still fossil fuels.” Building another geothermal plant could strain the country’s resources because it requires a lot of groundwater in a country that is already experiencing water shortages. “Salvadorians need water because it’s running dangerously low in a country where in a generation or two, most water will be imported,” Cuéllar says. Over 600,000 Salvadorans lack access to clean water and it’s predicted that El Salvador could run out of water within 80 years. Addressing the population’s dire need for water has taken a back seat to promoting cryptocurrency in the country.

Bitcoin is still an impractical solution for the average person in El Salvador, where using Bitcoin is akin to gambling with your next meal. In order to invest in Bitcoin, “one must have income above what is necessary to survive, which is not what occurs in the majority of the Salvadoran population,” explains economist Carmen Tatiana Marroquín. Folks with little disposable income cannot afford to lose any of it if the price if bitcoin dips, like when it did by 50 percent in January, and then 19 percent again in May. And even when the value of Bitcoin falls, it hasn’t stopped Bukele from gleefully tweeting that he’s “buying the dip,” or buying more Bitcoin when price has dropped. Marroquín believes the Bukele government is gambling with the people’s money, and says that “not only has [Bitcoin] not brought benefits to the population, but it has also reduced the possibility of obtaining other things from the state.”

​​”It seems to me that even when we read the discussions that are being held about Bitcoin in El Salvador abroad, it seems that we do not matter,” says Marroquín. The conversation centers around firstworlders ability to get rich and not the people most directly affected by these changes. “The debate we Salvadorans are having is not Bitcoin versus dollars,” she adds, “it is how our government is involving us in this situation with our eyes closed.”

The roll out of Bitcoin in El Salvador so far is playing out like a car crash in slow motion. El Salvador has also been embroiled in a war on gangs since March 2022 that has arrested at least 50,000 people, prompting more reports of wide-spread human rights violations. For Bukele’s administration, it’s getting harder to beat the authoritarian allegations everyday. At least six people in his cabinet have been sanctioned by the U.S. government for things like money laundering, drug trafficking and undermining democracy. With El Salvador’s funding sources drying up, the Bitcoin implementation almost feels like a diversion for a country heading into deeper into a political and economic crisis. Formerly jailed and now exiled critic Mario Gómez ponders that there could be illicit motivations at play by the Salvadoran government: “Why so much insistence on pushing something that is obviously not to the liking of the majority of the population? And the conclusion one reaches is that there are possibly other interests that we still do not know in detail, but I have no doubt that over time we will find out.”

 

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