Innovation Monitor: El Salvador’s crypto experiment
Welcome to this week’s Innovation Monitor.
El Salvador’s grand bitcoin experiment started in one of its sleepy surfing village called El Zonte, where in 2019 a team of volunteers began transforming the economy to run on cryptocurrency. And for some time, it was the country’s best indicator for where it was heading. According to Bloomberg:
“Workers now receive their salaries and pay bills in Bitcoin, tourists can buy pupusas with a special Bitcoin payment app, and community projects are financed with Bitcoin donations…. Adrian Torres, 62, one of the [construction] crew, tells me he fixed his teeth with the money he saved in Bitcoin, and now he’s saving up to buy a cow.”
How does the relative success of a surf town, representing 0.04% of the country’s population, apply to the whole? We didn’t have to wait long to see. A few years later, El Salvador’s newly elected president Nayib Bukele expanded the idea nationwide.
In this week’s edition, we’ll explain the cryptocurrency-as-a-national-currency initiative launched in El Salvador, and what this may mean for the future of money. And read our previous edition on central bank digital currencies (CBDCs).
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Erica Matsumoto The Big Launch In early September this year, three months after Bukele announced the idea at a Miami crypto conference, bitcoin became El Salvador’s legal tender. As Business Insider put it:
“The radical experiment in cryptocurrency was designed to dynamize the economy, and make it cheaper for 3 million Salvadorans living abroad to send remittances back home.”
Which makes sense, as the World Bank estimates remittances (or remesas) make up nearly 25% of the country’s GDP. The rollout included a government digital wallet called Chivo (slang for ‘cool’ similar to ‘chevere’), which allows citizens to withdraw dollars from official cash machines.
With such a short timeframe, Bukele’s lean methodology was bound to hit snags, as well as echos of some of the discontent voiced in El Zonte: on launch day, citizens trying to use the digital currency, mostly for the PayPal-esque $30 incentive, experienced glitches, and new Bitcoin ATMs weren’t working. The Other, Very Important Half Amidst the problematic rollout, some 1,000 people took to the streets in protest, “demanding that the government focus on El Salvador’s real issues, like the increasingly high cost of living, human rights concerns, and an epidemic of disappeared women,” according to Business Insider.
One protestor, Xenia Barrera, said that citizens were rejecting the cryptocurrency “because it hasn’t been done in a way that would benefit the working class.” While global crypto enthusiasts were ecstatic to see long-held beliefs manifest on a national scale, local polls showed a different story.
“According to… Universidad Centroamericana José Simeón Cañas, about 7 of every 10 Salvadorans oppose the Bitcoin law…. People said they fear that Bitcoin’s volatility will endanger their salaries, pensions, the ability to access products and services, and even the remittances themselves.”
The underlying infrastructure of bitcoin — Bitcoin itself (capital “B”, aka the protocol) — requires the internet, to which less than half of El Salvadorans have access today.
“Jennifer, a 17-year-old girl who sells vegetables in a street market, noted that Bitcoin remains inaccessible to people who can’t pay for Internet access.” (Business Insider)
Meanwhile, parties in the country’s capital, San Salvador, were packed with crypto investors and enthusiasts from around the world on “launch day.”
Autocratic Tendencies Are these autocratic tendencies — businesses cannot legally refuse bitcoin in El Salvador now — really true to crypto’s decentralized, free-from-government dream?
Vitalik Buterin, Ethereum’s founder, and a true-to-form “crypto-anarchists” (check out The Infinite Machine), is critical of El Salvador’s push. In a reddit post, Buterin wrote:
“Making it mandatory for businesses to accept a specific cryptocurrency is contrary to the ideals of freedom that are supposed to be so important to the crypto space. Additionally, this tactic of pushing BTC to millions of people in El Salvador at the same time with almost no attempt at prior education is reckless, and risks a large number of innocent people getting hacked or scammed.”
The lack of education is definitely reckless, as are the lack of real contingency plans for rise in criminal activity or volatility. From The New York Times:
“The government also said it has set aside $150 million, equivalent to 12 percent of El Salvador’s public investment budget last year, to ensure bitcoin’s free convertibility into dollars. Officials offered no explanation on how they will prevent the use of bitcoin for money laundering, or what would happen if the conversion fund ran out of cash.
“Despite shortages of public funds, Mr. Bukele announced in a series of Twitter postings that his government bought about $30 million worth of bitcoin last month. When the cryptocurrency’s price temporarily plunged afterward, he announced new purchases, their purpose unexplained.” IMF Weighs In… Well, the IMF blogged about crypto as a national currency in July, but we can easily superimpose what was said months ago to what critics (including the crypto-sensible) are saying against bitcoin maximalists.
“If goods and services were priced in both a real currency and a cryptoasset, households and businesses would spend significant time and resources choosing which money to hold as opposed to engaging in productive activities…. Financial integrity could also suffer. Without robust anti-money laundering and combating the financing of terrorism measures, cryptoassets can be used to launder ill-gotten money, fund terrorism, and evade taxes.”
While the IMF blog was published over a month after Bukele’s announcement, there is no mention of him or El Salvador. Still, the point feels directed… and prescient:
“Legal tender status requires that a means of payment be widely accessible. However, internet access and technology needed to transfer cryptoassets remains scarce in many countries” This Week in Innovation History
October 10th, 1980: Pac-Man launches in the U.S.
After a very successful launch in Japan in May of the same year, Pac-Man is released in the U.S. and will on to sell 1 million units in its first year, revolutionizing the video game industry.
The game was conceived by its founder, Noru Iwatani, as an antidote to violent-themed games like Space Invaders and Asteroids. The game was released in Japan as Puck-man, after the phrase “puck-puck” which is an onomatopoeia for chewing or munching. However, the name was changed in the U.S. out of concern that the “P” would be defaced to an “F” in arcades (really!).
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