Fintech events are rarely famous for their theatrics, but bitcoin’s Miami conference last week was an exception. This was a bitcoin-only conference. Delegates were, however, unable to pay the $1,499 (£1,050) entrance fee using bitcoin. Their famous bitcoin pizzas were cash only.
Even so, most of the speakers, from skateboarder Tony Hawk to boxer Floyd Mayweather, repeated the mantra that “bitcoin fixes everything”. That is, as long as you don’t want to spend it.
El Salvador’s President, Nayib Bukele was also there to proclaim bitcoin the Central American country’s new official currency. Unlike most sensible bitcoin “hodlers”, Bukele plans for his 6.5 million subjects to be spending their bitcoins every day. All Salvadoran merchants are now legally required to accept bitcoin.
Bitcoiners are normally vocal in their dissent towards authoritarian government, or any sort of government. But the president’s news went down a treat, sparking a surge in crypto markets.
Bukele is an autocrat for the TikTok generation. When invited to speak at the UN General Assembly in 2019, he addressed world leaders while tweeting a selfie at the podium and announcing future sessions should be limited to a Skype call.
Despite sacking the country’s entire constitutional court and attorney general shortly after taking office, and using the army to swing votes in his favour, Bukele has consistently enjoyed an approval rating of above 90 per cent.
While some governments are coming down hard on bitcoin, Bukele is not the only populist leader to buck the trend and add bitcoin laser-eyes to his Twitter profile. President Rodrigo Duterte of the Philippines has signed off plans for a “Crypto Valley of Asia”, complete with its own airport and power plants for crypto mining.
Like Bukele, the Philippines president regularly attracts flack for heavy-handed leadership, including extrajudicial killings, and systemic human rights abuses. For both leaders, the repression of civil liberties has been pushed forward in the name of law and order.
Facing a huge public debt crisis, the Caribbean island of Puerto Rico has also become a hub for crypto developers, attracted by short-sighted tax incentives and light-touch regulation. Like Puerto Rico, El Salvador is in a pickle with its finances.
Bukele is seeking a $1bn IMF loan to help his country weather the pandemic and to fund his anti-crime push. But for the IMF, Bukele is not a safe pair of hands. They’ll be concerned that the country’s “Bitcoin Law” was developed by a 27-year-old crypto-investor, Jack Mallers from Chicago. In giving bitcoin equal footing with the US dollar, El Salvador’s loans could be put on hold by the US, which is already facing a border crisis from Salvadorans fleeing poverty.
Dollars sent home by the two million Salvadorans already living in the US accounts for more than 20 per cent of El Salvador’s GDP. Bukele hopes a shift to bitcoin will help his country claw back the big chunk swallowed up by foreign money transmitters.
Bukele claims the shift will enable the country’s unbanked majority to access credit, savings, investments and secure transactions. He’s also promised “immediate permanent residence for crypto entrepreneurs” without having to pay property or capital gains tax. But recent research from Northumbria University suggests a downside to this plan.
Offering these sorts of tax breaks means countries like El Salvador will continue to struggle to raise funds for basic services such as healthcare and education. Crypto-rich individuals will snap up the most sought-after properties, while touting the benefits of evading taxes via cryptocurrency as a means of helping the locals. The underlying poverty issues in many cases could be solved with tax systems that target the incoming crypto-rich.
Bitcoin can do very little to address the structural problems preventing Salvadorans from accessing financial services. Up to 49 per cent of adults without bank accounts simply don’t have the necessary documentation to open them. Others may not have a stable income to warrant it. Bitcoin on its own can’t solve either of these problems.
Bitcoin is a terribly inefficient payment system with exorbitant fees. But the El Salvador project aims to use Mallers’ payment platform, Strike, which he described as a “bitcoin neo-bank” and is untested at scale. Bitcoiners usually detest centralised banks. After all, bitcoin was designed as electronic cash, without the need for banks or intermediaries. But bitcoin can handle only seven transactions every second. VISA, by comparison, handles around 1,700 payments per second.
For day-to-day use, bitcoin can’t work without a bank of some kind. But a question remains as to whether the savings of millions of the world’s poor are better off managed by the Bank of Jack, or a real bank.
Latin America is no stranger to hyperinflation. But bitcoin’s price can drop by half in just a day or so. It’s done so twice in the past 18 months. Plans have been set up for a $150m trust at a state-run bank, but this is unlikely to provide the cushion necessary, should another derogatory tweet from Elon Musk send crypto prices plummeting.
As well as beachfront living, Bukele is also offering up the country’s volcanoes to incoming bitcoiners. El Salvador’s state-owned geothermal electric company is dedicating a 95-megawatt facility for “green” bitcoin mining. But mining bitcoin comes with antisocial side effects, including energy shortages and price increases for everyone else.
El Salvador does not produce enough energy to meet its existing needs, importing 25 per cent of its electricity from elsewhere in the region. According to the World Bank, the high cost of electricity in El Salvador is a big barrier to growth and a driver of poverty. Bitcoiners will only make that worse.
To secure holes in El Salvador’s finances, Bukele has run out of options beyond US demands to re-establish an “independent judiciary, a commitment to the separation of powers and a strong civil society [that] are essential components of any democracy”.
El Salvador is blighted by poverty and gang violence, and it has one of the world’s highest murder rates. Betting on bitcoin – a payment method favoured by criminals – as the country’s official currency, is unlikely to fix that.
Pete Howson is a senior lecturer in International Development at Northumbria University