It’s like watching a clown car slowly racing towards a trash fire. More clowns keep jumping in making the tragic, ever approaching end ever more ridiculous.
— domingroso, a Salvadoran, on the Bitcoin scheme [Reddit]
There are three problems with trying to work out what’s going on with Bitcoin in El Salvador:
- There’s almost no public information.
- What public information there is doesn’t make any coherent sense — to Salvadoran locals or to outsiders.
- Even the small amount of detail we have keeps changing, as Salvadorans go “what on earth” at the previous bad idea.
We have to read frickin’ tea leaves to work out what anyone involved was thinking. And President Bukele and his ministers keep making up new stuff for the plan as they go along.
So far it looks like I guessed right in the Foreign Policy piece — Bukele wants to print “dollars,” and claim they’re backed by bitcoins. But good luck trying to convert the “dollars” 1-1 to actual dollars.
I’ve been continuing to ask local Salvadoran contacts if each stupid new detail is true. And it always is, and it’s always even stupider than it looks.
Any of the claims I cite below may change tomorrow. But here’s the news as of this evening!
Jack Mallers speaks!
Salvadoran media and locals have many questions about how all of this could possibly work — and Strike, a US payment processor who are heavily involved in the scheme, haven’t been willing to speak to any of them.
However, Zap/Strike CEO Jack Mallers, who announced the El Salvador Bitcoin scheme at Bitcoin Miami in early June, did a promotional podcast with What Bitcoin Did on 18 June. [What Bitcoin Did]
Mallers’ January blog post announcing Strike Global [Medium], with a remittance path from the US to El Salvador based in bitcoins and tethers, and terminating at one of the two Bitcoin ATMs in the entire country, seems to have been entirely hypothetical. It looks like nobody ever tested his planned route at all.
Mallers didn’t even visit El Salvador himself until late February, when he went to have a look at Bitcoin Beach.
(If you want to know about Bitcoin Beach and its founder, Mike Peterson, read Amy Castor’s article on Peterson.) [Amy Castor]
Mallers stayed in El Salvador for a month, promoting Strike. Mallers says that Bukele’s team contacted him to discuss a payment system, and he sold them on Bitcoin, meeting with them several times. He says that Bukele was completely into the idea of Bitcoin, including making Bitcoin legal tender.
Strike’s original plan for El Salvador used tethers — extremely dubious dollar-substitute crypto-tokens that may be backed by thin air, and are mainly used by the sort of crypto exchange that’s too dodgy to get a proper bank account.
Mallers says that tethers were a stop-gap solution to get Strike Global up and running; he says that Strike has local banking relationships now, and can use real dollars, so it doesn’t need tethers any more.
(There are no checkable details on these alleged banking relationships — so nobody can, for instance, ask the banks to confirm Mallers’ claims.)
Strike apparently has no official contract with the El Salvador government concerning any of this. Mallers says he’s doing all of this for the good of Bitcoin and the world.
Mallers also throws some shade on Brock Pierce’s recent visit to El Salvador, in a polite and nonspecific manner.
“If they’re forced to do it, they’ll learn, and they’ll learn quickly”
Peter McCormack, the host of What Bitcoin Did, was in on the El Salvador Bitcoin scheme before the June announcement. He says, talking to Mallers:
I thought the bravest thing they did, and I think is going to turn out to be one of the smartest things, is this part of the bill that says, “Every economic agent must accept Bitcoin”, but they will transfer it into dollars instantly if they need it. Now, there’s been a lot of questions about that part of the bill, “Are we ready? Can it happen in time?” etc, and the details have got to come, but I feel like that’s so important for driving Bitcoin into the country, raising the net wealth of the country, increasing prosperity for people. Also, I met with one guy and he said to me, “Listen, we can do this slowly, or we can just put it on the people and people will learn. If they’re forced to do it, they’ll learn and they’ll learn quickly”.
That is: forcing the Bitcoin scheme onto the people of El Salvador, without consultation or consideration, was always the plan. Bitcoin is the money of freedom, that you need to be forced onto for your own good.
A third Bitcoin ATM!
Athena installed a new Bitcoin ATM in La Gran Vía shopping centre last Thursday. Conveniently located in an upscale mall in front of its anchor, a regional department store. (To serve the unbanked.) [Twitter]
Unfortunately, Bukele is feuding with the Simán family, the owners of the mall and the department store — so the ATM has been unplugged and correctly relocated next to the toilets on the other side of the shopping centre, so as not to attract people to his rival’s shops in the mall. [Twitter]
Si quiere venir a la LVG solo para usar el cajero de BTC, le comento que lo movieron de lugar (por Papa Jhons) y no lo han conectado aún. Para que no venga de choto. pic.twitter.com/PwSqPYwWze
— Miguel Avolevan (@avolevan81) June 27, 2021
Government ministers and officials were previously promoting the Strike wallet, with a $5 signing-on bonus for new US users and a $1 bonus for Salvadoran users.
Now, Bukele has announced: Chivo! (Apparently Salvadoran slang for “cool.”) This will be downloadable in September. Bukele says it will be compatible with other Bitcoin wallets, in some unspecified manner. [Bloomberg]
Every new user will get $30 credit for signing up! Signing up involves your phone number, your ID number and a photo of you. (This information is already in your national ID; Bukele says they’re putting it in the app to minimise fraud.)
If you download the app, this is likely to count as being fully technologically equipped to accept bitcoins, per Art. 12 of the Bitcoin Law.
What can you do with the “$30” displayed in the app? Well, you can’t withdraw it as actual money.
Bukele has tweeted a thread on the topic. [Twitter] Chivo will have no fees to make or receive payments, no fees to send or receive remittances, no fees for merchants, and no fees to convert either way between dollars and bitcoins.
(You’d almost think it was a custodial money transmitter, with a centralised database, and all transactions were just numbers changing inside a single system!)
They plan over 200 Chivo Points (“puntos Chivo”) where you can withdraw dollars.
There will also be different Chivo wallets for citizens and for businesses, with different permitted transaction limits. [Elsalvador.com]
The only Chivo money that can’t be converted into actual money is the $30 free credit. This is intended to be spent, and at that point the merchant can then withdraw it for dollars.
If Salvadorans are prevented from withdrawing their “$30” of BTC as dollars, there will promptly emerge a “market” exchange rate, well below one dollar for “$1” from the app, as people try to get what they can for these fake dollars.
Apparently, Bitcoin — the very hardest money, that people would certainly flock to in times of economic instability — wouldn’t survive free market competition with dollars. Oh well.
Strike keeps claiming the Bitcoin scheme will make remittances work better and cheaper.
This claim is just not true. Remittances from the US to El Salvador are already very cheap and near-instant. Remember that there isn’t even a foreign exchange step — it’s all US dollars. [World Bank]
A new paper, “Bukele’s Bitcoin Blunder” by Steve Hanke, Nicholas Hanlon and Mihir Chakravarthi, sets out actual remittance costs from the US to El Salvador — and why Bitcoin can’t possibly compete. This paper also documents Mallers’ ridiculously false claims on What Bitcoin Did about US to El Salvador remittance costs. [paper, PDF]
Yes, but does it work?
Mallers told What Bitcoin Did his ambition for Strike in April: make Bitcoin work for ordinary people. [What Bitcoin Did]
We want the best experience, the best team and the best brand; and so, we try and make your interaction with this open monetary network [Bitcoin] as good as it can possibly be. That’s it; that’s the core product. We want to make your usage of this monetary network great.
They’re not doing so well on that one. Strike was deeply inspired by Bitcoin Beach, and worked closely with them — but interoperability is not good so far.
Plenty of Salvadorans are technically competent, and they’ve been heading down to Bitcoin Beach to test the systems and the channels between networks.
They found an effective 35% fee on small remittances, a system that wasn’t cost-effective unless you were sending over $1,000 — an amount almost never seen in the US to El Salvador remittance corridor — and difficulties and errors moving money between the Bitcoin Beach and Strike wallets via the Lightning Network. [Twitter; Twitter]
It’s almost as if it was all a paper-and-string mockup that only worked in rigged demos by the faithful.
Zap has been funded by $18 million in venture capital. It’s possible Strike could use that to subsidise the remittance channel while the money lasts. [Crunchbase]
Alternately, Zap/Strike could spend some time and money on the licenses that would let them accept dollars at the US end — “An investigation by Decrypt discovered that Zap lacks licenses to operate in most US states. Experts suggest this means many cash and crypto transfers to El Salvador using Strike are potentially illegal.” Strike are working through a bank — but they deal directly with customers, so the bank’s licenses are unlikely to cover them. [Decrypt]
The world responds
The World Bank has refused to help Bukele in his Bitcoin scheme. The bank said in an email to Reuters: “We are committed to helping El Salvador in numerous ways including for currency transparency and regulatory processes. While the government did approach us for assistance on bitcoin, this is not something the World Bank can support given the environmental and transparency shortcomings.” [Reuters]
Unfortunately, other politicians who are out of ideas are looking at Bukele’s Bitcoin scheme, and thinking that trying something similar at home might look like they’re doing something. [Rest Of World]
El Diario de Hoy (Elsalvador.com) wrote up my Foreign Policy article — no wonder we got so many hits from El Salvador. Local economists say it’ll take four to five months to drain the $150 million trust fund, which Bukele has stated he plans to fill with dollars, which he will then replace with bitcoins. [Elsalvador.com]
Four to five months is longer than I’d thought — I’d figured it at weeks at most, because crypto people have no sense of restraint whatsoever, and I’d predicted they’d immediately try to get clean dollars out through this system as fast as they could.
Dave Birch: Bitcoin Republic: El Salvador, Bitcoin, legal tender and Hyman Minsky’s maxim. [Forbes]
Doomberg: El Salvador will reverse the bitcoin law within months. [Substack]
Amy Castor: El Salvador’s bitcoin plan: take your USD and turn them into worthless tethers. Amy wrote her article as I was writing my previous article, and we reached basically the same conclusions about the scheme. [Amy Castor]
George Selgin is an Austrian School economist and historian of economics. He likes the idea of adding Bitcoin as a choice for El Salvador — but he’s dead against making it compulsory. [Alt-M]
Frances Coppola thinks there’s a possibility that using bitcoins to pump dollars into the Salvadoran economy could conceivably work out. [CoinDesk]
But could this all end up working?
There’s a case to be made for Bukele to try something to print dollars. I could make that case — I made about half of it in Foreign Policy, and Frances Coppola makes this case also. Particularly as the Bitcoin scheme may have blown Bukele’s chance of landing that $1 billion loan from the IMF. [IMF]
I’d have more trouble making the case that Bukele would add dollars responsibly, and not just go mad with the printing press — and even more trouble making a case that Salvadorans would put up with it.
But even if I made the case that all of this could, hypothetically, work … I’d be putting more effort myself into justifying the El Salvador Bitcoin scheme than its proponents seem to have bothered putting in.
looks like libertarian paradise https://t.co/sFoSdwACL0
— Magda Borowik (@magdaborowik) June 17, 2021
— lya cuéllar (@lalittlelya) June 17, 2021
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