- El Salvador has introduced Bitcoin as an official currency as part of a plan by President Nayib Bukele.
- Despite Bukele’s strong approval, more than two-thirds of Salvadorans don’t like the Bitcoin plan.
- The plan also comes amid a power-grab by Bukele that legal scholars have called unconstitutional and other countries, including the US, have criticized.
- See more stories on Insider’s business page.
Nayib Bukele, El Salvador’s millennial president, is used to making decisions that ring alarm bells among democracy advocates while triggering little concern at home, where he remains wildly popular.
But El Salvador’s dramatic moves of the past few days have had the unprecedented effect of producing sharp rebukes across multiple sectors in and out of the country, while generating great excitement in the world of Bitcoin devotees. They were thrilled to see the iconoclastic leader make El Salvador the world’s first country to make the cryptocurrency legal tender.
Starting Tuesday, Bitcoin became an official currency in El Salvador, along with the US dollar, whose adoption two decades ago crushed inflation and brought a measure of stability to a country that had suffered wild economic swings.
More on the digital currency in a moment. But first, it’s important to note the context, in terms of what else is happening in El Salvador.
Just days before Bitcoin’s introduction, the country’s top court issued a ruling that essentially overrode the constitution, allowing a president to seek consecutive reelection and thus opening a path for Bukele to extend his presidency.
Earlier, the Bukele-controlled legislature had fired five key members of the Supreme Court and the attorney general, in a power-grab legal scholars called unconstitutional and several democratic countries, including the United States, sharply criticized. The replacement judges, loyal to Bukele, were the ones who opened the door to a consecutive second term in office for him.
Separately, just days ago, Bukele’s party passed a series of legal reform bills that, among other things, would remove hundreds of judges and prosecutors, cementing his hold on the judiciary. Enfeebled opposition parties cried foul, while the U.S. Embassy again decried the mounting evidence of “democracy in decline in El Salvador,” comparing Bukele to the late Venezuelan President Hugo Chavez.
Against this backdrop, Bukele, the former public relations executive, was no doubt happy to see world headlines and local attention turn instead to the introduction of Bitcoin and his role as the cutting-edge visionary bringing digital currency to prime time.
Bukele had announced his plan to make Bitcoin legal tender in June, in an English-language video address to a gathering of Bitcoin proselytizers in Miami, where it was greeted with rapturous applause. Within three days of the announcement, the National Assembly approved the controversial plan without any meaningful debate.
The idea has never been tried before, and it’s possible it will bring great benefits to El Salvador’s impoverished people. But the negative reaction from financial analysts and development specialists shows that, at the very least, it deserved more scrutiny.
Making the case for Bitcoin, Bukele says it will save Salvadorans hundreds of millions of dollars in transaction fees. Remittances from Salvadorans working abroad make up more than 20% of the country’s GDP. Most people don’t have bank accounts and work in the informal, cash economy, so they have to pay steep fees to cash the checks from relatives abroad.
Bukele says the Bitcoin economy will also attract foreign investment and bring a wave of growth and development.
Critics point to some of the obvious risks of his plan. On Tuesday morning, the day of the cryptocurrency’s introduction, Bitcoin’s price plummeted 17% before recovering some of its losses.
The notoriously volatile currency can swing in hours more than most currencies move in a year. In a country where the per capita GDP amounts to less than $300 per month, that could be devastating for individuals who put their savings into Bitcoin. It could also be catastrophic for the economy and for the treasury, which could see the value of its tax collections sharply eroded, making reliable planning all but impossible.
Just as disturbing is the one characteristic of cryptocurrencies that has made them a favorite for criminals: their lack of transparency. By making El Salvador the first country on Earth where everyone – including the president, judges and police officers – will have a Bitcoin account, Bukele is throwing gasoline on the destructive flames of corruption.
He may well turn his country into a global epicenter for money laundering. The influx of dirty money could propel a deceptive wave of prosperity, one that is accompanied by a surge of criminality whose harm will ultimately outweigh any benefits.
One thing is certain: Bukele’s introduction of untraceable Bitcoin is good news for drug cartels and other criminal enterprises.
The law requires that “every economic agent must accept Bitcoin as payment,” a mandate that has alarmed some economists and students of totalitarianism. Bukele later softened the mandate, saying the use of Bitcoin is optional. But it remains unclear whether penalties will be imposed against businesses that refuse to accept it.
The World Bank rejected Bukele’s request for assistance in introducing the currency, arguing that it would be harmful to macroeconomic stability and noting the high environmental cost of Bitcoin “mining,” which requires enormous amounts of electricity to power the server farms that “create” new coins.
The introduction of Bitcoin has also complicated the country’s path forward with the IMF. Officials were negotiating a $1.3 billion aid package, but El Salvador’s financial footing now looks uncertain.
Although the 2001 dollarization program – which phased out the old currency, the colon – limited the government’s ability to control monetary policy, it brought a measure of fiscal discipline and predictability whose absence had previously crippled the economy.
Despite this week’s rocky rollout, Bitcoin will in all likelihood eventually make its way through the economy. Bukele has launched a grand experiment, turning his country, and its people, into the digital currency lab that many Bitcoin faithful had long hoped to see.
If El Salvador’s Bitcoin experiment is unprecedented, the same can’t be said for the other measures Bukele is taking, like dismantling judicial independence, taking full control of all the branches of government and installing a personality-driven government in which institutions gradually become beholden to one man.
We have no historical experience to turn to for guidance on how the cryptocurrency experiment will end. Unfortunately, we’ve seen the other experiment many times before, especially in Latin America. It does not end well, and it can take a very long time before it does.
Frida Ghitis is a world affairs columnist. A former CNN producer and correspondent, she is a regular contributor to CNN and The Washington Post. Her WPR column appears every Thursday. Follow her on Twitter at @fridaghitis.