The sad Bitcoin experiment in El Salvador

The El Salvador Bitcoin experience has gone horribly bad so far.

 The sad Bitcoin experiment in El Salvador

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• The story: On June 5, 2021, El Salvador President Nayib Bukele declared that bitcoin, the first cryptocurrency, would become legal tender in El Salvador. The Bitcoin Law was also passed, to take effect Sept. 7. Now, businesses would be required to accept bitcoin for all payments.
• How it came about: Bitcoin was originally created in 2009, to be a form of money outside government control. Using bitcoin as a government-endorsed currency had a number of obvious issues: Cryptocurrency has a money-laundering problem, the price of bitcoin is incredibly volatile, and cryptocurrencies remain difficult and unwieldy to use.

1. Building a payment system that users trust takes time. One needs to run pilot programs and fix the sort of problems that only show up in production.
2. Deploying a system from scratch at national scale in just three months with no testing is a recipe for disaster—especially when that system is an electronic payments system in an economy that still largely ran on physical cash (U.S. dollar notes) and with a a strong memory of the rushed dollarization of 2001.
3. But the government there tried to sell speed and totality as an advantage.

• Details: Salvadorean government claimed a number of times that accepting bitcoin would be entirely optional, and a number of other times that it would be mandatory. Article 7 of the Bitcoin Law, which makes bitcoin acceptance mandatory, stayed in place. President Bukele announced an official bitcoin wallet, "Chivo", which was Salvadoran slang for “cool.” This would work like PayPal — one would have a balance in dollars and a balance in bitcoins, held at Chivo. New users would get a signup bonus of $30 in bitcoin. 200 Chivo ATMs were deployed, and 50 staffed Chivo kiosks were constructed around the country.

1. The Chivo app would be available internationally for remittances—dollars go into Chivo, the government subsidizes transmission costs and keeps the actual dollars, and the recipient gets virtual “dollars” that are numbers displayed in the Chivo app.
2. Bukele announced the name “Chivo” in late June, but the corporation operating the network, Chivo SA de CV, was not put together until Aug. 24, two weeks before launch. Chivo SA de CV is a private company, so it is not subject to freedom of information laws as a government department would be, despite being funded with $60 million of public money. (The plan for Chivo was promoted by the president and his brothers Karim, Ibrajim, and Yusef Bukele Ortez, who are thought to be the main bitcoin advocates in the president’s circle) .

• Talent from Venezuela: The Chivo project is led by a Venezuelan team, part of a long-standing “shadow cabinet” of unofficial advisers known to work with the Venezuelan opposition. In the run-up to the launch of the Bitcoin Law, it remained wildly unpopular. One public critic of the law was arrested without charge on Sept. 1 and held for five hours before public outcry secured his release.
• The launch: Chivo launched just after midnight on Sept. 7. The system started failing at three a.m. Server capacity was increased, and app installations were not re-enabled until 11:30 a.m. Transactions failed through the day; customer service lines were jammed; Chivo ATMs ran out of cash.

1. Shortly after ten a.m., the price of bitcoin crashed by $10,000 in three minutes, as Chivo users watched their $30 in bitcoin drop below $25 in real time!
2. Bukele blamed the crash on the International Monetary Fund, though it was more likely due to leaked news of crypto exchange Coinbase receiving a warning from the U.S. Securities and Exchange Commission (SEC). Bukele had purchased $20.6 million in bitcoins for the national treasury the day before.

• Protests: Many started protesting, not against the bitcoin itself but against the forced acceptance, the complete lack of transparency from the government, and the dysfunctional Chivo payment system.

1. Since El Salvador’s currency is the U.S. dollar, Bukele can’t print money; so he needs to borrow—or use the Bitcoin Law to skim the remittances sent from abroad.
2. But the Bitcoin Law, and the disastrous launch of Chivo, has frightened the bond markets; El Salvador’s sovereign debt dropped almost five cents in a single day, ending Sept. 7 trading at 87.6 cents on the dollar.
3. The World Bank and the International Monetary Fund are already reluctant to supply further funding because of the Bitcoin Law.
4. Chivo’s problems continue. To sign up for Chivo and get their $30 of bitcoin, Salvadorans ostensibly need a photo of their national ID card, a photo of themselves, their ID card number, and their date of birth. But Chivo’s identity verification functionality didn’t even check the photos—you could register with only a DUI number and a matching date of birth. Some users discovered their DUI number had already been used!

• Reluctance: Traders are reluctant to accept bitcoin. Others didn’t trust money they couldn’t hold in their hands. Street vendors may not even have phones and many of their customers are illiterate. Using Chivo is not mandatory, so some are installing the Bitcoin Beach or Muun wallets. But interoperability is spotty, and transaction fees on Bitcoin Beach or Muun are not subsidized by the government.
• The road ahead: Bukele is pressing ahead with the Chivo project—his plans need those remittance dollars, and he still hopes for an influx of foreign bitcoins. Fears of criminals bringing in dirty bitcoins and exchanging them for clean dollars, draining the $150 million trust that was set up as a buffer between bitcoins and dollars, have not come to pass—because Chivo doesn’t work well enough. An electronic payment system could be of vast benefit to El Salvador if it were designed to gain the public’s trust. But if Bukele wanted Salvadorans to hate everything about bitcoin, and electronic payment systems in general, Chivo has been a worked example of how to get there.
• EXAM QUESTIONS: (1) Explain what went wrong with the Bitcoin launch in El Salvador. (2) Bitcoin was never meant to be a legal tender anywhere. So how can it be made to work in El Salvador? Explain.

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