Behind Bad Boy Bukele’s Bitcoin Bobada.
Bitcoin is an unsuitable means of exchange, and El Salvador’s Crypto-Play is a PR Stunt.
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- The Scoop
El Salvador’s 39-year-old President, Nayib Bukele, would have you believe that he’s a breath of fresh air.
His selfie-taking, backward-hat-wearing unconventional approach to politics is often portrayed as the arrival of Millenials to the table of political power in Latin America. Bukele is happy to perpetuate that narrative.
The script he follows, however, is pretty conventional: it’s like seeing Leonardo DiCaprio and Claire Danes re-interpret Romeo and Juliet: certain elements have been updated to accommodate the sensibilities of a new audience, but the words on the page are more or less the same as the original populist narrative.
In June, Bukele took advantage of a remote appearance at Miami’s Bitcoin 2021 conference to announce El Salvador would make Bitcoin legal tender. Not only would citizens be able to transact in Bitcoin, but stores and businesses would be forced to receive Bitcoin unless they lacked the technology to do so (currently El Salvador uses the US dollar as its official currency).
Most Salvadoreans heard the news of their country’s adoption of the volatile cryptocurrency through a translator: after all, Bukele hadn’t bothered to tell his fellow citizens of his plans before announcing it to the crypto-bros. His compatriots simply weren’t his primary audience.
Here’s the thing: rather than putting forward a well-studied and debated cutting edge monetary policy, Bukele was throwing a PR smoke-bomb into both the US Media circus as well as social media. More on why he needed to do that in a bit.
After Bukele’s speech, laser-eyed Twitter hodlers began praising the world’s first crypto-President without understanding the context or the proposed implementation. To Bukele, public policy was second and public standing was first: after months of unfavorable press coverage, he now had fanboys.
After his announcement, Bukele sent a bill to congress that was 16 articles long.
That’s right: a new currency would be introduced to the country’s citizens on the back of a brief, ambiguous and poorly worded law that stated that citizens must “accept” Bitcoin but did not have to “receive” Bitcoin. If you can’t tell the difference between the two, neither could most Salvadoreans.
The bill duly passed through the obedient and unquestioning congress. (for Spanish speakers, El Hilo has a comprehensive podcast on the subject you can find here). Given the surprise announcement and rushed execution, we can safely guess Bukele hadn’t entirely thought through his plan. Impulsive populist leaders rarely do.
Before going any further, let me clarify that I am a crypto-enthusiast and investor.
In 2018 I wrote a piece for TechCrunch asking whether or not Latin America would be the region where Bitcoin finds its practical use case. I’m far from a crypto-skeptic.
Like many Bitcoin enthusiasts and as a Latin America watcher, I’m attracted to the idea of giving people an alternative to fiat currencies. I like the freedom in being able to opt out of government-imposed mismanagement.
A lot of people who have lived through monetary crises caused by currency manipulation and mismanagement in places like Argentina, Venezuela, and Ecuador would agree with me.
This is not to say Bitcoin can’t be manipulated: a staggering amount of Bitcoin is held in the hands of few people. The price moves based on Elon Musk’s tweets. As a network, Bitcoin is a decentralized and distributed. As a currency, Bitcoin is wildly concentrated and unequal. I’ll get into the differences between the network and the currency in a minute.
First, the reasons why I don’t agree with Bukele’s imposition of Bitcoin in El Salvador are:
a.) It’s a PR stunt that can have dire consequences for many people;
b.) It’s an experiment with no research behind it;
c.) Imposing Bitcoin on people through government mandate goes against the Bitcoin community’s ethos;
d.) It’s not clear any problems will be solved through widespread Bitcoin adoption in El Salvador;
e.) Bitcoin is a terrible currency and payments processing machine. Indeed, Bitcoin’s use as a currency is its least interesting application. Allow me to explain.
Bitcoin is the first application built on a new technology called Blockchain. Blockchain allows us to make supercomputers by harnessing the power of every computer that connects to the network, and Bitcoin is the world’s biggest computer.
Remember when businesses used to have a closet full of servers? Those servers represented the company’s entire computational power.
Then we moved away from the server closets to cloud computing, which created duplication and redundancy, meaning every file or operation we send to the cloud is copied onto multiple servers, such that if one server crashed, the file/operation would still be available. With cloud computing, companies no longer need the closet full of servers. Amazon, Google, and Microsoft have all made a killing by making cloud computing ubiquitous.
With Blockchains, every file is copied onto every computer that’s part of the network. As a result, combining all the computational power of the computers connected to the Bitcoin blockchain, we have the largest computer in the world.
Why is it safe? Bitcoin is governed by a sophisticated encryption system that, in order to approve every change, harnesses the combined network’s energy to solve complicated math problems. As a result, Bitcoin is our, until now, first unhackable computer.
Keeping all that computational power hooked to the network to process the transactions requires an incentive structure. The Bitcoin blockchain emits currency as a reward for supporting the network. You can think of Bitcoin as a speculative asset you can buy and sell. You can also think of it as the innate incentive structure designed to keep the network going.
As a supercomputer, Bitcoin is very slow and inefficient. As an example, Bitcoin processes around 4 transactions per second, whereas the Visa network processes 1700 transactions per second. Bitcoin is dial-up to today’s 5G.
Unlike FIAT (read, government currencies) currencies, Bitcoin has a pre-determined supply: by 2140, the Bitcoin blockchain will emit its last Bitcoin when it reaches 21 million. We don’t really know what happens next; we can only theorize. Such uncertainty from the getgo makes Bitcoin a wonky experiment for a nation to bet its wealth on.
A more compelling use case for Bitcoin is as a store of value. Worried their savings in FIAT currencies lose value over time due to inflation, wealthy people buy scarce things like art and gold in order to sustain and grow the value of their wealth. Bitcoin is our first truly scarce digital asset.
Furthermore, Bitcoin is a great store of value because it can easily be converted into Fiat currency.
Unlike a painting for which you might have to find a buyer, so long as there is demand for Bitcoin it can instantly be converted into Fiat currencies.
What’s more, Bitcoin can, in theory, be held anonymously. Bitcoin is held in digital wallets, and so long as no one can connect your identity to the random characters that make up your wallet’s digital address, you can move money around anonymously or benefit from capital gains (i.e. selling at a higher value than you purchased) without paying taxes.
Ojo! Transactions on the network are recorded, so if you get caught engaging in illegal behavior, you may go to jail or pay a fine. (Katie Haun, the prosecutor that led the government’s case against the former Silk Road Founder Ross Ulbritch, claims that his use of Bitcoin helped provide the government’s evidence against him. Her story here).
To summarize: As a network, Bitcoin’s blockchain is revolutionary. As a store of value, Bitcoin is interesting. As a currency, however, Bitcoin sucks. First, Bitcoin’s price is volatile. Its value changes based on things as inane as Elon Musk’s tweets.
Second, the costs of transactions on Bitcoin are volatile as well.
One of Bukele’s touted use cases for adopting Bitcoin is to lower the cost of transactions from the tens of thousands of Salvadorean immigrants who send remittances home.
In an article published on Coinbase, Steve Hanke (take into account that Steve Hanke is a bullish proponent of dollarization), argues El Salvador already has amongst the lowest remittance fees in the world, and Bitcoin fees are likely to be much higher, due to the unpredictable and complicated ways transfer fees are settled on the Bitcoin network.
Not to mention, Salvadoreans on both ends of the transaction may have to go through the hassle of converting USD into and then out of Bitcoin.
Furthermore, Bitcoin transactions are far from instantaneous. As I mentioned above, Bitcoin is a slow network and prone to delays due to congestion, meaning lots of people trying to transact at the same time on Bitcoin’s wobbly network. The world of computer science is working out how to accelerate transactions on blockchains. Even when we do figure it out, however, it’s not guaranteed that those changes will make it to the Bitcoin network.
There are many other cryptocurrencies, including stable coins that are pegged to the US dollar, that work well as currencies, but the field is so new that none are without risk.
Crypto may represent the revolution that the eventually internet came to be, but right now we’re at the equivalent stage of 286s running dial-up internet, and Bitcoin is AOL. Furthermore, many of the benefits Bukele mentions, like paying bills on your phone, could be fixed by upgrading El Salvador’s banking infrastructure. You don’t need a blockchain for everything, nor can the planet handle the environmental cost.
So given that Bitcoin is not a great currency, why is Bukele pushing forward with it, and why does he need a public relations victory in order to change the conversation about himself?
Like many Latin American populists, Bukele operates on the idea that his victory at the polls makes him a god-like figure with absolute control over the nation’s fate. He behaves accordingly. When the past congress didn’t want to approve his budget, he showed up at the doors of congress with tanks and threatened a takeover. Congress eventually conceded.
Then, in May, almost a month to the day before his Bitcoin announcement, Bukele fired the Supreme Court Justices and the country’s Attorney General. Bukele didn’t have the constitutional authority to fire the Supreme Court but he did it anyway.
The attorney general was responsible for, amongst other things, looking into corruption allegations against Bukele’s allies, including congresspeople from his party.
A number of individuals with no experience in the health sector are alleged to have won inflated contracts to supply the country’s ailing health system during the pandemic. Those investigations are no longer going forward.
Bukele’s march towards absolute power doesn’t end there: Bukele’s government has raided the offices of critical news outlets, including the well-respected El Faro, and banned its editor from the country. Anyone who opposes him risks being attacked, including with the full power of the state apparatus.
Bukele has therefore consolidated power in the office of the President and his actions have provoked condemnations from abroad, including from the country’s closest ally, the United States. Bukele’s Bitcoin play has turned mostly negative news about him into a more mixed bag discussion, with Bitcoin bros quick to defend the increasingly unchained power-hungry leader.
So why do people in El Salvador support Bukele?
First and foremost, El Salvador is a country that has been overrun by violence. The origin of El Salvador’s violence is the country’s geographic misfortune of being located between the supply and demand of illegal drugs. Drugs and gangs have penetrated most elements of Salvadorean society.
In 2020, homicides in El Salvador were cut in half.
Bukele takes credit for the drop by claiming his “tough of crime” approach is working.
Many others believe Bukele has cut deals with the gangs to allow them to operate with impunity in exchange for a reduction in violence. Recent events in Salvadorean history make it complicated for a leader to admit to making deals with the gangs, but it doesn’t stop them from doing so.
Herein lies another possible motivation behind Bukele’s Bitcoin master plan.
Drugs transit from Colombia, Bolivia, and Peru to the United States through a variety of means. After they arrive, money must travel the other way.
Literally billions of dollars must make their way back from the United States to all the points on the supply chain. The global banking system is risky for drug dealers to use.
Large transactions can be flagged. Managing many small transactions is tricky and time-consuming. Lugging cash backward into countries like El Salvador is also logistically difficult as well as risky.
Insofar as it can easily be converted into fiat currencies, Bitcoin solves a major problem for drug traffickers but then creates another: how do you create demand for crypto in a small country like El Salvador such that millions of dollars worth of Bitcoin can quickly and easily be exchanged into USD? The answer is that you create obligatory universal use of the crypto-currency. And Voila! Now, El Salvador’s entire economy is Bitcoin-friendly.
I have no evidence that my ponderance is behind Bukele’s Bitcoin masterplan, but to quote The Wire’s Lester Freamon: “you follow the drugs, you get drug addicts and drug dealers. But you start to follow the money, and you don’t know where the f$ck it’s gonna take you.”
Bukele’s distraction tactics are not new to the region. Cuba has survived as a totalitarian state by drawing enough attention to its “wins” to convince otherwise liberal individuals that its dictatorship has merits. It doesn’t.
At different points in its history, Venezuela has trodded out celebrities to vouch for its “innovative” economic model. Venezuela is in the midst of an entirely predictable political, social, economic, monetary, and health crisis. The Venezuela defenders are silent.
In Ecuador, a few years back our then President charmed a section of the media by offering citizenship to Julian Assange and then putting him up in our embassy in London. At the same time, he harassed and forced into exile journalists who were reporting on his government’s corruption.
Going further back, Chile’s dictatorship had (and has) many defenders who claim the benefit of its economic model earned it a free pass on its less-savory behavior, such as executing political opponents.
The young and dynamic Bukele has updated the script for the times: he found a fanbase that will overlook or better yet refuse to look beyond the lasers to see the intentions in his eyes.
Crypto has immense potential to change how Latin America works. As a crypto-enthusiast, I am discouraged that a poorly conceived and executed experiment might damage the crypto brand, and might claim the well-being of thousands of Salvadorean citizens as collateral damage. Bukele is not interested in crypto. As he scrolls through his Twitter feed, I can only imagine him recalling that famous line from Watchmen, “I’m not locked in here with you, you’re locked in here with me”.
- What I’m listening to:
Mangaliso by Bongeziwe Mabandla
- Anecdotes
Over 90% of my team in Ecuador has now received the first dose of the COVID vaccine. Ecuador started as one of the worst-hit countries: we’re now picking up speed towards Herd Immunity, though the delta variant threatens, especially against the untested Russian and Chinese vaccines.
- What I’m Reading/Listening To:
a. Colombian Entrepreneur David Velez discusses how he created a digital bank in Brazil despite no experience in the field, draconian regulations, and embedded incumbent advantages. Listen here.
b. The assassination of Haiti’s President keeps getting stranger and stranger. Here the latest updates.
c. People Aren’t Just Quitting their Jobs. They’re Redefining Success. Why the Great Resignation is about more than burnout. read Here.
- Random Thought:
