On June 5th 2021, El Salvador President Nayib Bukele has announced that he would draft a legislative bill to make bitcoin a legal tender in his country. This means that, if the Legislative Assembly votes in favor of the proposal, then El Salvadorans will become able to use BTC alongside the other official currency, the US dollar.
This announcement is a culmination of Jack Mallers’ and Miles Suter’s efforts to make Lightning payments popular on the El Salvadoran seaside beach that they cordially renamed “Bitcoin Beach“. And historically speaking, it’s the first time when a head of state takes bitcoin seriously enough to make it an official currency.
If the bill gets passed by the Legislative Assembly of El Salvador, then the country will enter history books as the first to legitimize BTC at such a high level. Given the parliamentary majority of Nuevas Ideas (President Bukele’s party) and its allies, it’s extremely likely that the bill will pass.
And for the first 15 minutes, I was also excited that started thinking about the implications of bitcoin potentially getting treated as a foreign national currency (as opposed to a commodity like gold and silver).
However, it only took me 3 DuckDuckGo searches to realize that this financial experiment will not end well. While it’s the kind of legitimation that Bitcoin needs, it’s coming from the wrong place and it’s most likely going to pay a price that’s too high for both El Salvador citizens and bitcoiners worldwide.
To me, it was like the scene from The Big Short in which Ben Rickert (Brad Pitt’s character) tells Charlie Geller and Jamie Shipley (who were enthusiastic about opening their short positions against the US economy) that every time the unemployment goes up by 1%, 40,000 people die. What I mean by this is that while some wealthy and well-off individuals celebrate that the petrodollar is taking a hit, it’s likely that Uncle Sam will retaliate through some of the same economic and military tools that Latin America has known for decades.
You still think that El Salvador adopting Bitcoin is a good idea? Here are some of the facts:
- El Salvador’s debt to GDP ratio is 90.17%, the highest it’s ever been. And their official fiat currency is the US dollar. (Source)
- Just two weeks ago, on May 21st 2021, José Miguel Vivanco has written an article for Human Rights Watch, which he titled “The US Can Stop El Salvador’s Slide to Authoritarianism. Time To Act”. He cited President Bukele’s tendency to replace judges and intervene in the affairs of the judicial branch, as well as statements about “differences” and “concern” from Juan Gonzalez, US President Joe Biden’s lead advisor in Latin American affairs. (Source)
- Both Amnesty International and Freedom House have unfavorable reports which highlight political use of force (as seen in February 2020 when the military watched the parliamentary meeting), police brutality against citizens, abuses against activists and journalists, as well as a mediocre score for political rights and civil liberties. (Amnesty International Report, Freedom House Report).
- El Salvador’s 20th century history points out to decades of unrest and many political experiments. A civil war between the incumbent military dictatorship and the Marxist-Leninist Faramundo Marti National Liberation Front has taken place between 1979 and 1992. There really isn’t much political continuity or stability, and it’s likely that reforms started by one party or faction will get abolished by the next administration. (Source)
- El Salvador has a modest military force, with no ability to defend its territory or protect its political decisions against countries like the United States, Russia and China. (Source)
- As a United Nations member state, El Salvador supported Tibet’s case against China in 1950 (and therefore is unlikely to receive political support from China). (Source)
This sounds like El Salvador is the perfect place to adopt bitcoin as a currency, right? Since there is a lot of political unrest and there are lots of foreign interests trying to influence the political landscape, doesn’t it make sense for the country to switch to a currency which can’t be confiscated, censored, or arbitrarily inflated? And if El Salvador is in debt, doesn’t it make sense to opt out with bitcoin?
While ideological arguments legitimize President Nayib Bukele’s judgment, we must also consider international relations, geopolitics and history. Also, we must employ an adversarial mindset which considers what is best for the people of El Salvador, as opposed to the reputation of the incumbent government.
Historically speaking, heads of state don’t have long mandates in El Salvador. And the constant ideological changes make sure that there is no real continuity and the nation remains poor. Before Bukele, the country’s President was Salvador Sanchez Cheren – the first former guerrilla to get elected into office. Which means that it’s unlikely for bitcoin to remain a constant in El Salvador’s economic landscape. This may just be a one-mandate experiment.
Also, it’s extremely unlikely that Joe Biden’s administration (which was already unhappy with the government in El Salvador) will ignore the fact that a Latin American country which owes a lot of debt starts using the US dollar less than before. Bitoinization and dollarization are opposing phenomena, you can’t have more of both. As a country, you either make allies or else declare your financial independence from the rest of the world. You can’t really have both.
Top-down bitcoin adoption is not such a good idea in the case of nation states
Bitcoin is the currency of the people. A digital bearer asset which grants financial sovereignty and resistance to government abuses. But when a government officially adopts a currency like bitcoin, it starts a movement which either spawns imitations or else gets crushed by greater military and financial powers.
In the case of El Salvador, the attempt will most likely not end well. And the issue isn’t the acceptance of bitcoin, but the fact that the US dollar already is the official fiat currency. The country’s debt and modest military power aren’t of much help either.
Ideally, if El Salvador politicians wanted their people to be free, they would have allowed a black parallel market to flourish without imposing any kind of regulations. The government most likely stepped in for reasons which concern power and the legitimation of the status quo (which is very important in countries that change leaders and political parties often). But this decision will also be the regime’s downfall in terms of foreign relations.
The United States won’t like the new Bitcoin standard which reduces the power of the US dollar, and will most likely impose economic sanctions. And given how Uncle Sam can coerce Latin American states to follow its vision and has all the incentives to do so, we might see trade restrictions and even large-scale embargoes in which El Salvador’s neighbors will agree to partake.
More or less direct military intervention isn’t unlikely either. Staged coups are part of the nation’s history and are unlikely to stop happening because the US foreign policy respects Satoshi Nakamoto’s vision and wants to give it the benefit of the doubt in a country which recognizes the US dollar as the official fiat currency.
Had this been the case of Russia or China, there was very little that other world powers could do in terms of deterring the bitcoinization of the economy. But this can’t end well for El Salvador, a country where human rights activists demand for interventions even before Bitcoin joined the conversation.
It would have been really great if citizens were unofficially incentivized to use bitcoin and local economies blossomed for many years. But the official legitimization of BTC as a national legal tender in El Salvador will only lead to sanctions and more suffering from innocent people.
And yes, you can argue that El Salvadorans become sovereign citizens during the current administration, as they acquire or earn bitcoins. But somewhere down the line, someone has to pay debts and bills in the local fiat currency (which just so happens to be the US dollar). And bank accounts can get easily closed, and access to cash can also get limited under economic sanctions. If crossing the border becomes a life and death situation, then El Salvadorans will HODL indefinitely, without a way to effectively use their money for all transactions.
If El Salvador’s bitcoin experiment fails, it’s going to be bad for the currency’s reputation
Think outside the Bitcoin Twitter bubble. Imagine the mainstream media coverage about how and why adopting bitcoin was such a bad idea that it led to the financial collapse of an entire country. News anchors will conveniently forget to mention the already-high debt to GDP ratio and suggest that it was BTC that caused the issues.
Millions of Latin Americans will feel disillusioned and think that this evil internet money causes them nothing but trouble. And millions of Spanish speakers who don’t know any English will hear the news and most likely share similar views.
Then there’s Uncle Sam’s point of view: adopting bitcoin to replace the dollar is evil. It’s for financial pirates. It’s the currency of dictators who infringe fundamental human rights and the supporters who enable them. Ergo, there is a greater need for blockchain surveillance and KYC/AML procedures that mirror USA’s, but on a continental or global scale.
Are you a good ally of Uncle Sam’s? Then you’re going to have to follow these regulation guidelines and only buy from these trusted custodians who undergo the proper blockchain analysis procedures. What are you, some kind of sympathizer of human rights-infringing dictatorships? Are you using your money to finance illicit activity worldwide?
The media can easily milk the story to turn it into another Silk Road situation, where bitcoin is against the goals of globalization and an enemy of democratization. A tool that anarchists use to slow down the progress of our civilization. The money that boils the oceans and also threatens the democracies for which our ancestors gave their lives.
Ask yourself this: are we really ready to face this multi-lingual and multi-continental type of attack? And is writing history for Bitcoin really worth the suffering that it may cause in a small country from Latin America? It seems like instead of focusing on grassroots adoption, we are seeking the validation of corporations and governments. And it’s all happening too soon, before most people even get to own their first bitcoins to understand how this technology works and why it exists.
This won’t end well and feel free to return to this article as the events unfold.
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