El Salvador’s president, Nayib Bukele, has announced, via video at the Bitcoin Miami conference yesterday evening, that El Salvador will be adopting Bitcoin as “legal tender”! [Reuters]
El Salvador has used the US dollar as its currency since 2001. What’s happening here appears to be: El Salvador says “take that!” to the US by bringing in a proprietary payment network, which claims to be denominated in BTC rather than US dollars.
I wrote a couple of days ago about how this sort of thing worked out for the Marshall Islands. I expect that various institutions will shortly be phoning El Salvador, and asking if they really want to be cut off from the world financial system absolutely and utterly. Given that $2 out of every $10 coming into El Salvador comes from remittances [WSJ], I’d hope they don’t.
Here’s the video: [YouTube]
Bukele tweeted: [Twitter]
#Bitcoin has a market cap of $680 billion dollars. If 1% of it is invested in El Salvador, that would increase our GDP by 25%. On the other side, #Bitcoin will have 10 million potential new users and the fastest growing way to transfer 6 billion dollars a year in remittances.
This is gibberish — none of the numbers he quotes mean those things. The “market cap” of a cryptocurrency is an entirely imaginary marketing number — it’s alleged money that doesn’t exist. The remittance step fails as soon as you have to calculate conversion costs to or from cryptocurrency.
70% of adults in El Salvador are unbanked, and there’s already an official programme to get them into the system. [Alliance for Financial Inclusion] Bukele claims Bitcoin will fix this too … without any details as to how.
“Legal tender” means that BTC would be acceptable pyament for all debts, public and private. The government and businesses would need to set up to take Bitcoin, in some manner.
Why would you do this?
Bukele is a right-wing populist; he was great friends with President Donald Trump — and is rather less so with the Biden administration, who have declared five of Bukele’s associates “corrupt.” [AP]
You would expect this Bitcoin announcement to be some sort of internal move on Bukele’s part to appeal to his base.
However, nobody inside El Salvador can work out what Bukele is doing either. Local news coverage is mostly a very short translation of the Reuters or CNBC stories. There seems to have been no official messaging at all.
Elsalvador.com got opinions from local economists, who don’t understand what on earth this could be useful for — you can already use and exchange Bitcoin in El Salvador. [elsalvador.com] Here’s a rough translation:
According to the economist Tatiana Marroquín, there is no clarity about what is the intention of legalising the currency, because it is already used in the country; there are people who hold cryptocurrencies, and it is legal to do so.
“Anyone can use cryptocurrencies in El Salvador; when he (President Bukele) refers to legalising it, the problem is why do you want to legalise it, unless you want the State to control that space?”
For economist Claudio de Rosa, it is also unclear why they will legalise this currency.
He says that it is a currency that is still under study by organizations such as the International Monetary Fund and the European Union, although it already enjoys wide acceptance worldwide.
“However, when one gives it the backing of the law, one is giving it liberatory power, and one can use it in any transaction inside the country’s territory; but that currency is already used around the world”, says de Rosa.
He says that there are concerns about this kind of currency, because there is no way to monitor the origin of many transactions.
“Thus there is a worry that these currencies could serve for money laundering, and that is what is being studied around the world”, says de Rosa.
Organised crime, of course, loves its bitcoins — the only problem is cashing out, but that’s easy if BTC is an official currency. Bukele has repeatedly denied links to MS 13 and Barrio 18, the two largest local drug cartels, despite considerable documented evidence of his past work with the gangs to assist his political party, Nuevas Ideas. [Insight Crime; Insight Crime, 2020]
The Lightning Network
Insofar as there’s a plan, it’s to do payments via the Lightning Network — or via the version available from Jack Mallers’ company, Strike. [press release]
Strike have been promoting Bitcoin in El Salvador for a couple of years now — they run the “Bitcoin Beach” project to run a village economy on Strike, “funded by an anonymous bitcoin whale.” It’s not clear that anyone involved ever touches anything other than the Strike app. [CoinDesk]
The Lightning Network was proposed in 2015, when the Bitcoin blockchain first clogged. The plan was to do a “Layer 2”, using Bitcoin as a backing store. The idea was a mesh network of individual participants, which Bitcoin holders could send small transactions over.
Lightning doesn’t actually work — it replaces the original blockchain clunkiness that doesn’t work with new clunkiness:
- You have to pre-fill a payment channel, set up with expensive Bitcoin transactions, with all the money you plan to spend for the life of the channel.
- There’s no general way to work out a path from user A to user B, and the liquidity in a path can change with every transaction — in computer science, this is called the Canadian traveller problem. At one stage, the network broadcasted all transactions to everyone just so they could work out the network graph. As I understand the current state of Lightning, you have to work out a viable transaction path on your own.
- There’s a huge list of technical and economic problems that follow directly from the protocol. Computer science professor and crypto critic Jorge Stolfi posted a short list a few years ago of just some of Lightning’s unsolvable issues. [Reddit]
- The developers still tell you not to put any money into Lightning that you can’t afford to have disappear to a bug.
The only function the Lightning Network serves is to be an excuse for Bitcoin’s miserable failure to scale. It doesn’t work and barely has users — not even Bitcoin Miami accepted payments over Lightning — but you can’t prove that it won’t be great in the future!
With sufficient thrust, pigs fly just fine. Lightning works only by strapping a rocket to Porky and then trying to sell you on his graceful aerobatics.
The actual Layer 2 these days seems to be the individual crypto exchanges. Beeple’s $69 million NFT was sold in a transaction that happened entirely inside an exchange, and didn’t touch the Ethereum blockchain.
But then, the best way to make blockchains work is not to use them.
Strike has their own payment network. Strike doesn’t open Lightning channels for its users — the Strike network is another layer over the top of Lightning. Strike only uses Lightning to move money between their own custodial accounts.
The Lightning bit is functionally a marketing decoration on top of the proprietary network that does the work. Because Lightning is useless and doesn’t work.
Human rights? But number go up!
It’s bizarre seeing a room full of supposedly-libertarian bitcoiners stand to cheer and applaud that this dictator, who makes Parliament pass laws literally at gunpoint [BBC, 2020], is good now, actually. You’d almost think the coiners’ only interest was number go up.
Human Rights Watch wrote about Bukele’s grab of all power in the country just a couple of weeks ago. [HRW]
But Bitcoin magically fixes everything. Just ask the Human Rights Foundation — not to be confused with Human Rights Watch — who spend a remarkable amount of time pumping Bitcoin: [Twitter]
Important to note: do not celebrate the leader of El Salvador, who has displayed authoritarian behavior. Celebrate the action, which will, over time, reduce the control that his or any following government has over the citizenry.
So that’s all right, then, because Bitcoin is magical human rights juice, and Bukele is just too thick to realise it.
Just ask the Uyghur forced labour in Xinjiang coal mines, whose use of slave labour is what makes the electricity for Bitcoin mining there so fabulously affordable! HRF doesn’t address the Bitcoin business’s forced labour inputs, ever.
Bukele is all about control. If Bitcoin threatened Bukele’s position in any manner, Strike would be kicked out of the country forthwith.
Bitcoin was created to implement anarcho-capitalism — bizarre goldbug conspiracy theory economics that can’t and doesn’t work.
Austrian economics and anarcho-capitalism talks about freedom, but has literally never had a problem with dictators — look at Friedrich Hayek’s dedicated work with Pinochet’s dictatorship in Chile. The rich guys did great, though.
The freedom, uncensorability and human rights that rich bitcoiners talk about on stage in Miami was only and ever about rich guys moving their money around how they like. (This was also a lot of what Facebook’s Libra was really about — see Libra Shrugged.) The rest of you are the suckers who think you’re the scammers.
Thanks to Ed Salazar and Jorge Stolfi for translation help
We are in store for some of the dumbest economic crises of all time https://t.co/XhgElZNjQY
— Gavin Mueller (@gavinmuellerphd) June 6, 2021
Update: the bill passed! Here’s the details. It’s a Tether scam.
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