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Bitcoin Promotes Financial Freedom, A Strong One Is Testing That Promise

Proponents of bitcoin dream of a financial system that is largely free from government interference. But the first time cryptocurrency became a national currency, it was imposed on a reluctant population by an increasingly authoritarian ruler using a secret state-run system.

The surprise announcement last month that El Salvador had adopted bitcoin, the world’s largest cryptocurrency as legal tender, took its population by surprise, and made the poor, conservative Central American nation an unexpected bellwether of global technological change.

The result of the anonymous experiment could help determine whether cryptocurrency confers freedom from the regulation its proponents envision – or whether it becomes just another tool of control and promotion for autocrats and corporations.

“We are now at a turning point in cryptocurrency,” said Len Ratig, an entrepreneur and former senior programmer at the Ethereum Foundation, an organization that supports the technologies behind Ethereum, the world’s second largest cryptocurrency. “The same techniques of freedom may become part of a new technological dystopia.”

Ratig said that the threat of government and corporate sabotage to the liberal roots of cryptocurrencies is due, in part, to the development of digital technologies such as the Internet and social media. Built on a democratic basis of freeing up information and connecting people, these innovations have proven vulnerable to censorship, manipulation by campaigners and control by profit-driven corporations, he said.

And now, after years of largely ignoring cryptocurrencies, governments around the world are scrambling to respond to the $2 trillion industry as it begins to disrupt banking and seep into everyday life.

In June, the 40-year-old populist president of El Salvador, Nayib Bukele, announced that he would make bitcoin – a highly volatile financial token powered by a decentralized community of technology entrepreneurs – the national currency, on par with current fiat currency. , U.S. Dollar.

“It will create jobs and help provide financial inclusion to those outside the formal economy,” Bukele said in a video address. He also said that it will turn the country into an innovation and tourism hub.

The idea stemmed from a social experiment that began in 2019 in the Salvadoran surfing town of El Zonte, where grassroots activists used bitcoin donations to build a community network of cryptocurrency payments. The project, Bitcoin Beach, overcame residents’ distrust by integrating the currency into everyday life, using bitcoin to reward students for doing homework and provide pandemic support to families.

Thousands protest against President Nayib Bukele after the adoption of bitcoin in San Salvador, El Salvador, September 30, 2021. (Fred Ramos / The New York Times)

“Our strategy to build an ecosystem where bitcoin will operate is based on two elements: timing and trust,” said Bitcoin Beach organizer Luis Morales.

Both elements are clearly missing from Bukele’s strategy.

According to a survey conducted by the Chamber of Commerce of El Salvador, 93% of merchants, international organizations and Salvadorans oppose the adoption of bitcoin.

Nevertheless, using Bukele’s control over the country’s Congress and the courts, on 7 September, the government legally obliged all sellers to accept bitcoin – a move that marked the biggest roadblock in El Salvador’s years. The performance began and garnered Bukele’s tremendous popular support.

“We all understand that cryptocurrency is the future, but you can’t promote it by forcing everyone to use it,” said George Hasban, the head of the Chamber of Commerce.

To promote the use of the currency, the government has created a cellphone application – Chivo Wallet – that allows citizens who do not have bank accounts to send and receive bitcoin-denominated claims, convert them into dollars and withdraw from specialized ATMs. allows. It also gave $30 in bitcoin to every Salvadoran who adopted the wallet.

But the app has been plagued by technical failures, and many ATMs ran out of money as people rushed to convert their bitcoin holdings to more stable dollar bills.

The government also said it had set aside $150 million, equivalent to 12% of El Salvador’s public investment budget last year, to ensure bitcoin’s free convertibility into dollars. Officials did not provide any explanation about how they would stop the use of bitcoin for money laundering, or what would happen if the conversion funds ran out of cash.

Despite the lack of public funding, Bukele announced in a series of Twitter postings that his government had bought nearly $30 million worth of bitcoin last month. When the price of the cryptocurrency temporarily fell later, he announced new purchases, his purpose unclear.

A clothing store that accepts bitcoin in San Miguel, El Salvador, September 24, 2021. (Fred Ramos/The New York Times)

Almost a month after bitcoin’s launch, it is unclear whether the dollar funds and government-held bitcoins are reflected in Chivo wallets, or what they are worth.

Although all bitcoin transactions have a code to ensure transparency, Bukele treats bitcoin policy as a state secret. They have classified all information related to Chivo Wallet, which was created with taxpayers’ funds but is run by unknown persons, as a private enterprise.

“He is playing Russian roulette with public money,” said Ruth Lopez, a Salvadoran lawyer for the non-profit organization Cristosal, which sued the government over Chivo Wallet’s funding irregularities.

Bukele, his minister of economy and finance, the business secretary, the attorney general, the head of the Congressional Economic Committee, financial regulators, the central bank and the state banks that fund the bitcoin fund all declined to comment.

On the streets, the policy’s impact has been mixed.

Bukele says that 3 million Salvadorans, or more than half of all adults, have installed a Chivo wallet, but in reality, the use of bitcoin is limited. The extreme price volatility of the cryptocurrency scares most people, saying they lack technical skills or mistrust the intentions of the government.

But the cryptocurrency has allowed at least some Salvadorans without bank accounts to access digital payments, make savings investments or increase earnings, and its use is gradually increasing among youth.

In the provincial town of San Miguel, the Argueta Pérez family said sales of streetwear from their market stalls increased because they indicated they accept bitcoin.

Nearby, 29-year-old Laura Trejo, a student, lined up outside a Chivo ATM to withdraw money sent by her uncle, without any commission. Next to him, Jose Ercidio, 50, a vegetable vendor, was waiting for his turn. He said that Chivo Wallet allowed customers to send small amounts to them to increase sales.

“It is a benefit to the poor and the humble,” he said.

Last month, Bukele changed his Twitter profile to read “the best dictator in the world,” in an outspoken joke targeting critics. But, as he increasingly consolidates power and cracks down on opponents, there are growing concerns in El Salvador that Bukele’s adoption of bitcoin may stem from his quest for control rather than his desire for financial inclusion – and from international pressure. was motivated more by the desire to escape.

As Bukele tightens his control over the nation, relations with the Biden administration have deteriorated, with Bukele worried about Washington’s outside influence on the country’s economy, said two Salvadoran officials familiar with the president’s thinking. He spoke on condition of anonymity to avoid reprisals.

For example, remittances sent by immigrants, mainly from the United States, account for a quarter of the country’s GDP. Both officials said that by building a parallel financial system based on cryptocurrencies, Bukele could bypass the US banking system and continue to keep remittances in the state-run Chivo wallet in the event of future Washington economic pressure.

Other countries already facing sanctions, including Venezuela and North Korea, are believed to have used cryptocurrencies to evade surveillance.

“For the government, bitcoin is about a Plan B,” said Ricardo Castaneda, a Salvadoran public policy expert.

The adoption of bitcoin has deepened Bukele’s standoff with international lenders. His talks with the International Monetary Fund over a significant $1 billion loan have come to a halt, as the lender has become increasingly concerned about the deterioration of the rule of law and bitcoin’s threat to financial stability.

The lack of IMF funding has in turn blocked other traditional sources of funding, complicating Bukele’s populist spending program. El Salvador’s bonds fell sharply after the adoption of bitcoin as Wall Street became concerned about Bukele’s ability to pay off existing debts.

 

The government is now exploring ways to issue bitcoin-linked sovereign bonds and create new bitcoins with geothermal power. Experts said both the moves could create an alternative source of funding that bypasses the demand for accountability to traditional lenders.

“What Bukele is doing is not bitcoin, but a centralized, state-run banking system,” said Salvadoran data expert Mario Gomez, who was detained by police and held for six hours last month on unspecified charges of financial crimes. Seminar on Cryptocurrency Risks. “This is in conflict with the principles of the Bitcoin champion.”

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