Future Tense

Can El Salvador Save Its Risky Bitcoin Gamble?

A woman holds a sign saying "Bitcoin Accepted" at a counter in front of a wall of products.
Bitcoin is accepted at this store in San Salvador. Marvin Recinos/Getty Images

On June 7, 2021, El Salvador President Nayib Bukele announced an audacious plan: to make Bitcoin legal tender.

Anna-Cat Brigida is a reporter who covers Latin America. She lives in Honduras now, but was based in El Salvador when Bukele made his announcement. From there, Brigida says, everything went at full speed. Within 90 days El Salvador had to build its own Bitcoin wallet, install Bitcoin ATMs, and sell the country’s population on the idea of Bitcoin—an idea that had been brought there by expat crypto enthusiasts, and embraced by President Bukele. Despite the buildup, m many small businesses are still not able to accept Bitcoin payments. And now the price of Bitcoin has dropped by roughly 37 percent since September. That means El Salvador’s holdings of the cryptocurrency have plummeted.

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On Friday’s episode of What Next: TBD, I spoke with Brigida about El Salvador’s Bitcoin gamble: The country’s president is still all in, but could this lead to default? Our conversation has been edited and condensed for clarity.

Lizzie O’Leary: When the Salvadoran government made Bitcoin legal tender in September, it used the playbook from a small coastal town called El Zonte, also known as Bitcoin Beach. In El Zonte, people, mostly expats, had been using Bitcoin for a few years. You could still pay in U.S. dollars, which are El Salvador’s main currency, but townspeople had their own app and local businesses took Bitcoin. The central government took that blueprint and tried to go national with it. What exactly did they do to make this a national experiment?

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Anna-Cat Brigida: So the government developed an app, which is called the Chivo wallet, that can be downloaded on any smartphone. It works like many other crypto wallets. When you’re making a purchase, the vendor also has this app, and there’s a code to scan with the price. One person, either the vendor or the buyer, creates the code with the price, and the other person scans it, and that’s how you make a purchase. It’s easy if the technology is working and there’s no error message, but sometimes there’s some glitches.

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The government tried to get Salvadorans to adopt Bitcoin by offering a $30 incentive if you downloaded the Chivo app. You talked with lots of different Salvadorans about using the app and their Bitcoin experiences for a story. What did you find?

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What we found was that the adoption rates are pretty low, and that Bukele has not really been able to convince the average Salvadoran that they need to use this on a day-to-day basis. And it’s also not clear that is even the point of this whole experiment, to be using Bitcoin to buy a pupusa or to buy a coffee. It’s not very practical. The technology is a bit wonky still, and as we’re now seeing with the crypto crash, the price of Bitcoin can be very volatile, and for many Salvadorans, it just doesn’t make that much sense.

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One argument that the government had made before the Bitcoin law was that it might bring people who are un-banked into the financial system. Did that happen?

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At least anecdotally, some of the barriers to getting people banked are issues as well to people using Bitcoin. For example, people living in very rural areas where they might not have great internet access, or people who don’t have a smartphone. It’s complicated. I don’t know that we’ve seen data that shows for certain that un-banked people are now using Bitcoin regularly.

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The driving force in all of this is El Salvador’s President Nayib Bukele. He’s 40, he’s a right-wing populist with authoritarian tendencies and a love of Bitcoin. His Twitter account is full of things like videos of a bunch of bankers and crypto enthusiasts at a meeting in El Salvador, screaming about Bitcoin.

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We would all love to get into the head of Nayib Bukele and know exactly what he’s thinking. I will say that, just as a reporter in El Salvador, it’s a bit challenging to cover the Bukele Administration because he’s no longer very transparent. When he was mayor of San Salvador, he enjoyed speaking much more to the media, but now he basically only speaks to media that he knows will be very kind to him.

But I think one important aspect to understand is El Salvador’s economic situation. Basically, El Salvador needs to pay back its bonds, and it’s in a bit of a tricky situation because it has high debt that has been growing under Bukele and his predecessors. The IMF and other international organizations, multilateral banks, don’t really want to be lending money to El Salvador because of the risk, which has to do partially with this risky decision that Bukele took with the Bitcoin law, and partially with some of his other policies and the way that he’s been running the country and a lot of his authoritarian tendencies.

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Unlike a lot of other countries, El Salvador doesn’t have its own currency. It uses the U.S. dollar. It has for 20 years (although now, of course, people can use Bitcoin). This means the government can’t do what other countries sometimes do to get out of a sticky economic situation, which is print money. So Bukele seems to have doubled down on risky assets, both hoping that the value of Bitcoin will rise and make the country some money, and trying to offer an exotic bond to international buyers. The bond is supposed to raise $1 billion and be backed by Bitcoin, but so far, it hasn’t happened. Can you explain the reasoning behind the bond?

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The bond was supposed to be available for sale at the beginning of this year. It’s been pushed back now multiple times. It still hasn’t been available for sale. But basically, people are able to buy into this Bitcoin bond, and probably the people who are going to be buying this are the typical Bitcoin crowd. The money raised by this is supposed to go into building Bitcoin City, which is going to be in eastern El Salvador,  and then part of it is going to go back into investing in Bitcoin with the idea that the value is going to go up in time and it’s going to be able to pay out to the investors.

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The idea is also that—this is partially speculation, but the finance minister has basically confirmed it—that eventually this is a way for the government to take in some money that they’re no longer able to get through the IMF, and through other multilateral banks, because they don’t want to lend them money anymore because of the risk.

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When you look at Bukele’s Twitter account, he’s still tweeting about Bitcoin, promoting a meeting of central bankers who are talking about crypto. Would you say he is still “all in” on Bitcoin?

At least from his Twitter account, it seems so. He hasn’t really backtracked on anything since he’s become president, so I would be surprised if he backtracked on Bitcoin.

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Is it possible to know how much money El Salvador has lost in its Bitcoin holdings in the current crypto crash?

There are some estimations, but it is difficult to know exactly how much El Salvador has lost. Bukele has tweeted when he has bought, supposedly, Bitcoin with public funds, but all Bitcoin has a public key, so Bitcoin actually is transparent. You should be able to see the public key where El Salvador has bought this Bitcoin. But nobody has actually ever seen the public key so we can’t actually be sure how much El Salvador is holding at any given time. We can’t actually be sure of the exact price that El Salvador bought Bitcoin for, so it’s just a guess based on when Bukele said he bought it. And of course, since the price literally changes, even throughout the day, it can be a little bit off, but there are some estimations. The latest that I saw was that El Salvador could have lost about $38 million.

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What does all of this mean for El Salvador’s economy and its ability to provide services for its citizens?

It’s not good. It’s already in a very fragile state, and so it just emphasizes that this has been a gamble. This is a gamble that Bukele made, and he made it with public funds, and I think that has been what so many journalists have been trying to focus on in covering this. I think many crypto followers, crypto enthusiasts, haven’t really understood why journalists are being so critical of this, but I think it’s just really important to remember: It’s public funds. El Salvador has so many different problems going on, it’s currently under a state of exception after a spike in homicides, which was the result of a break in a gang truce between Bukele and the MS13 gang. There’s also high rates of poverty, inequality, lots of different issues in El Salvador.

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I think the crypto crash really drives home the point that many Salvadorans have been saying for a long time, and the issue that they have with this law, which is: Why do we need this law? When all these other things are happening, why do we need this? And now it puts the country in a more precarious economic situation and makes it more difficult for them to spend money on what they need to be spending money on.

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There is also the possibility of debt default. El Salvador is supposed to make an $800 million bond payment in January, and it’s unclear if the country will be able to do that. When you were talking to economists for your story, did they raise the specter that the wild fluctuations in Bitcoin value might mean that El Salvador couldn’t make its debt payments and default on its sovereign debt obligations?

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Yes, that is definitely a concern. They weren’t necessarily concerned in terms of the fluctuation of the price of having bought the Bitcoin, but just the law in general, and the fact that the law has isolated the country from the traditional worldwide economic system.

What happens to Salvadorans if this whole thing just blows up?

That is really the question, and that’s why so many people have been concerned about it. It’s really the Salvadoran people who are going to be feeling the results of this, it’s not going to be the Bitcoiners who have come down to El Salvador and who are living in El Zonte. They’re not going to be the ones who are going to be feeling the hurt and the pain from the crypto crash, or from whatever fallout can happen.

Future Tense is a partnership of Slate, New America, and Arizona State University that examines emerging technologies, public policy, and society.

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