Nayib Bukele, El Salvador's populist, social media-savvy president, has bedazzled the ruby-red laser eyes that dot the Twitter profiles of Bitcoin fanatics. They're cheering his decision earlier this month to hitch his country's wagon to the cryptocurrency. Beyond the true believers, however, the reception has been chillier. And that's what should be on his mind.
The cryptocurrency.is now legal tender in El Salvador, meaning merchants have to accept it. A geothermal Bitcoin mining project is in the works; and a golden visa program for Bitcoin-denominated investors is being launched. Crypto influencers have gushed over how “fast” Bukele was able to roll this all out, but they've been seemingly oblivious to the distinctly non-libertarian methods he's used to tighten his grip on power, from sending soldiers into Congress to seizing control of the top court.
It is still too early to judge where Bukele's crypto experiment will go. But the risk of worsening governance and regulatory oversight in El Salvador is real, as highlighted by the International Monetary Fund, whose cautious stance on Bukele's plans has raised fears it may turn down his recent request for a $1.3 billion loan. For all his worthy rhetoric of financial inclusion for impoverished Salvadorans and signs of a pick-up in remittances on which the tiny country depends for 20% of GDP, the courting of Bitcoiners as a source of investment feels like a “Move fast and break things” moment — in a bad way.
Consider Bukele's pitch for the crypto-wealthy to come to El Salvador. Using carefully-constructed social media charm, he's promised beachfront properties for sale, no real-estate tax, no capital gains tax on Bitcoin, and permanent residency to anyone with three Bitcoins (approximately $120,000 at current prices) to invest. “Enticing,” tweeted the boss of crypto exchange Binance, posting a GIF of Mickey Mouse packing his clothes. In terms of a target market, there are around 360,000 addresses holding more than $100,000 in Bitcoin
Such investor residency programs have had a checkered past. They exploded in popularity after the 2007-2008 financial crisis as countries competed for wealthy “Anywheres” to fill holes in budget coffers. But they ended up running afoul of resident “Somewheres” as criteria got looser, the negatives of corruption and fraud became more obvious and the positive effects less clear. The influx of hot money from abroad has costs as well as benefits: Cyprus, for example, raised an estimated 4.8 billion euros ($5.8 billion) from golden visas between 2013 and 2018, but the program ended in scandal last year over reports of widespread abuse.
For a country like El Salvador, which has historically struggled with crime, poverty and corruption, combining this setup with pseudonymous cryptocurrency.flows looks like a dangerous mix — not least because Bukele is accused of backsliding on commitments to fight graft. Without oversight, bad actors and illicit money flows are likely to prosper. Although speculative or volatile inflows look better than none, ordinary Salvadorans' needs won't be well-served if property prices surge without a corresponding lift to tax revenues, according to Pete Howson, of Northumbria University.
Even the stories emerging from the rural fishing village of El Zonte–whose local Bitcoin economy apparently inspired Bukele–point to an obvious divide between the crypto haves and have-nots. The initiative was subsidized by an anonymous wealthy investor; and not all merchants are convinced. One told Reuters her ailing smartphone and the patchy Internet connection meant she rarely used Bitcoin. Another said she feared losing money on a financially risky investment, which is understandable given Bitcoin's 40% fall in the space of two weeks last month. Bitcoinization won't be a cure for the one in four Salvadorans who make less than $5.50 a day. Dollar remittances will likely continue to dwarf Bitcoin equivalents for a long time.
Bukele enjoys overwhelmingly high domestic support and so a confrontational approach from the u.s. and other Western countries — intent on cracking down on tax evasion and bad crypto actors — would probably only play into the president's hands. Still, the country is dependent on external financing and the IMF especially, says Siobhan Morden, managing director of Amherst Pierpoint. Cynthia Arnson, director of the Wilson Center's Latin American Program, suggests the IMF should use loan negotiations to press for more oversight and accountability of crypto risks. The market pressure of a recent sell-off of Salvadoran debt, which saw yields rise to over 8%, their highest since January, should help.
El Salvador has been here before. Twenty years ago, it adopted the U.S. dollar as a path to future prosperity but the results were disappointing. Given the role played by deeper, non-currency issues, such as corruption and governance, it's possible Bitcoinization could go the same way–with the added headache of being yet another external force over which Salvadorans have little control. Bukele seems convinced his new laser-eyed friends are a passport to greater wealth. Right now, it looks like a gamble.
