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El Salvador’s efforts to use Bitcoin as its official currency have resulted in people demonstrating in the streets, warning global politicians of “significant risks” to the economy. But the government says it is just trying to get a novel experiment working by tackling the virtual currency’s biggest flaw – price stability.
El Salvador officially recognized Bitcoin as legal tender in September. Since then, President Nayib Bukele and his government have been hoping to find the answers among the industry’s crypto brothers who will be released on Nov.
The self-proclaimed “CEO of El Salvador” faces significant setbacks in pursuing his crypto mission. Bukele’s critics take up his unprecedented monetary policy and accuse him of undermining the country’s judicial independence in order to consolidate an authoritarian regime. The parliament of the country where his party has the super majority recently passed laws allowing mass layoffs of judges and filled the country’s highest court with loyalists.
As for Bitcoin, however, the timing couldn’t be better.
China’s central bank effectively banned Bitcoin a little over a month ago. That drove the mining activities – an intense computational process that creates Bitcoin – out of the country. Miners are now looking for alternatives to cheap Chinese coal that fuels their energy-hungry industries, and El Salvador is ready to welcome them with open arms and show the abundance of energy its volcanoes can provide.
“People from Asia, South America and Russia are interested in investing in El Salvador,” El Salvador’s Vice President Félix Ulloa told POLITICO.
To attract crypto investors and miners, Bukele used Twitter to outline incentives such as the abolition of all capital gains tax on bitcoin and enabling immediate permanent residency for entrepreneurs in digital currencies. “[A Swiss investor] told me that they are interested in getting around 13,000 and 15,000 machines to make the bitcoin, ”Ulloa boasted.
A walk on the wild side
El Salvador is the first country to accept the decentralized digital asset as legal tender alongside the US dollar. The greenback replaced the Salvadoran Colón in 2001 after many years of severe inflation, which reached nearly 32 percent in 1986.
Bitcoin had the opposite problem. Instead of losing purchasing power over time due to inflation, its value has skyrocketed in its short existence and remains very volatile. This makes some unsettled, especially given the speed at which Bitcoin was introduced as the official currency: On June 5, Bukele announced that it would send a bill to Congress during a speech at a Bitcoin conference in Miami. Four days later, its super majority passed the law and rolled it out in September.
Critics have taken up the hasty procedure. “If you have something good to promote, propose it, discuss it, and then put forward your arguments. But that was not the case with Bitcoin,” said Ricardo Navarro, director of the environmental NGO Salvadorian Center for Appropriate Technology (CESTA .). ) said POLITICO. The votes came from “People from President Bukele’s party, and they say and accept everything he says”.
Navarro is also concerned that the new digital currency will attract drug lords, noting that anonymous transactions are being conducted through the virtual currency. He referred to 700 kilos of cocaine that was recently seized by Spanish authorities and that came from El Salvador. Navarro also rejected the idea that bitcoin miners could get their electricity needs from volcanoes alone – it is much more likely, he said, that they will have to turn to other energy sources to operate.
“My impression is that Bukele doesn’t really understand what’s going on in the energy situation,” he said. “That will certainly make the … demand more difficult.”
A government official, speaking on condition of anonymity, countered that the bill was based on research and other experience gained in El Zonte – a coastal town that has been using Bitcoin in its local economy for a year.
In general, Bukele and Ulloa are confident that Bitcoin will boost the economy after the pandemic, which likely helped increase the poverty rate at least 28 percent, according to the World Bank. Compared to just over 22 percent two years ago.
The introduction of Bitcoin could be especially helpful when it comes to boosting foreign investment and facilitating money transfers from Salvadorans working in the US. This economic boost could strengthen the country’s recovery. Economic output is expected to increase by 4 percent in the next year and thus reduce national debt to around 86 percent of GDP.
“For the people who live in the United States, they have this type of ATM at the consulate where you see long lines of people trying to send their remittances to their families in El Salvador,” Ulloa said, pointing out note that transfers can otherwise be made via companies that send money abroad, such as Western Union, for a fee.
People Using Bitcoin “Don’t Pay” [a] Cent, “he added.
That’s a big deal when you consider that personal transfers to El Salvador accounted for 24 percent of the country’s GDP last year.
A pretty penny
As of Wednesday evening, investors would have to spend over 59,000 euros to own a Bitcoin. That is 46,750 euros a month ago and more than double the value of around 25,300 euros on July 21.
Massive fluctuations like this can make it difficult for the average person to figure out how much Bitcoin to pay for a cup of coffee, a liter of milk, or a loaf of bread. It’s a lot more complicated for a government that pays $ 150 million a month for its state pension and civil servants.
“How can you insure? [regular payments]? “Ulloa asked.” You can be at $ 66,000 now and $ 40,000 tomorrow, and that’s one of the criticisms of this currency. “
Bukele’s government is now trying to find a workaround for this volatility. San Salvador will be running a tender to anyone who can offer the government a financial contract to keep the value of Bitcoin stable for salary and pension payments.
A Swiss company that Ulloa did not name has offered the government some sort of futures contract that promises to buy from the country’s bitcoin stash at $ 50,000 per unit, regardless of the daily market value.
This price means, for example, that El Salvador would have a lead of $ 10,000 with a daily value of $ 40,000, he said. If the market price is $ 60,000, it would lose $ 10,000. “But we will have the assurance that it will be a permanent change for us,” he added.
The government has yet to sign the Swiss offer because “we will probably have more offers at the November summit,” said Ulloa.
It’s not just about people’s retirement and livelihoods. To date, the government owns around 700 Bitcoins – worth over 38 million euros today. A sudden drop in value could have catastrophic effects on public finances.
However, for critics like Navarro, it’s like reaching out to the crypto industry for answers, like asking oil barons for a stable price.
“Oil [producers]like Saudi Arabia, have the ability to influence the price of oil by simply not producing oil or by reducing the amount of oil that goes into the market, “he said.” It’s the same with Bitcoin. And that’s very scary. “
Regardless of these concerns, Bitcoin adoption has been strong. Around three million Salvadorans have set up a Bitcoin account, Ulloa said. That’s nearly half the population – especially impressive when you consider that only 30 percent of adults have a bank account.
“You can pay with Bitcoin in the supermarkets,” he said. “You can fill your cars with the gas … you can buy drugs in the drugstores. And you can do that at McDonald’s and all restaurants. That way it becomes more natural for normal people in daily operations.”
However, some media reports have described a more problematic side. The Bitcoin rollout was not accepted by everyone and has sparked protests. Identity theft was also a problem. Navarro said he doesn’t personally know anyone who uses Bitcoin.
“There were some mistakes,” admitted Ulloa. “But it goes without saying in every process when you try to implement something new. You have to make adjustments and that’s still a job we’re trying to improve. And hopefully everything will be in place by the end of the year. “
The El Salvador experiment is a risky rebuke to the many regulators and academics in the US and Europe who have long pointed to Bitcoin’s instability as a reason to avoid it. These critics now fear that the fad might catch on.
Among them is the President of the European Central Bank, Christine Lagarde. Without naming El Salvador, she recently warned in a letter to an EU legislator that “the widespread use of such crypto assets for payments would raise concerns, among other things due to the lack of accountable issuers and their fluctuations in value.”
The lack of accountability is a particular concern for EU lawmakers like German conservative Stefan Berger, who is holding talks in parliament on rules regulating the market for crypto assets.
“The decentralized system could pave the way for illegal and anonymous transactions,” he told POLITICO, “in the worst case, Bitcoin as legal tender could even enable ‘reverse anarchy’, in which state-sponsored money laundering and state corruption are favored. “
No governments have yet reached out to San Salvador to learn more about its Bitcoin experiment, Ulloa admits. But he hopes the Bitcoin community will not only help with price stability but also solve the dirty money problem. Since Bitcoin technology runs on a decentralized online ledger that keeps track of all transactions in a highly secure “block”, it is almost impossible to hack – which makes it easier to track suspicious activity.
However, who should pursue them is another question. It will not be the Salvadoran government, said the vice president, as the country does not have the funds to set up a crypto police unit.
“It’s impossible in a small country like ours,” said Ulloa. “This is one of the jobs and the main concern of the miners who will produce this because it is they who are offering the Bitcoin.”
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