El Salvador - A Bitcoin law has done more for president Nayib Bukele than Salvadorans, foreign investors
Many investors expressed optimism a year ago. But the El Salvador bitcoin experiment has delivered few tangible advances amidst a context of increased corruption risks.
On 7 September 2021, El Salvador’s congress gave Bitcoin legal tender status. One year afterward, there are some clear successes, failures and risks surrounding the Central American nation’s experiment with Bitcoin technology.
President Nayib Bukele’s Bitcoin law did succeed in some ways. It allowed for a laissez-faire sandbox in which Bitcoin companies and transactions can operate. The experiment mainly revealed what Bitcoin can do and cannot do as a cross-border payment tool. It is clear that Bitcoin infrastructure in its current state in El Salvador cannot replace what the traditional banking system does for Salvadorans wishing to remit money from the US back home.
Likewise, Lightning Network wallets, like Strike and Muun, still lack the government incentives and integration guidance with existing financial infrastructure in El Salvador’s banking system. That means Bukele’s sandbox is more useful for showing blockchain companies all the work there is to be done if the technology is to succeed.
The Bitcoin law failed on several fronts. It failed to do what Bukele and Salvadorans wanted it to do: to resurrect public finances and fix a highly indebted sovereign debt profile. This was Bukele’s promise, and it seemed that a year ago, there was political will and investor interest to leverage the country’s geothermal energy assets for public-private partnership Bitcoin mining. The state-run electricity firm is mining at a pilot unit, but the volumes are still insignificant.
There was also a view that Salvadorans would benefit from low-cost Chivo transactions as compared to traditional remittance pathways like Western Union. But Chivo does not seem to have significantly moved the needle for households in El Salvador. In fact, the government was forced to hire a firm to fix Chivo’s back end in early 2022 because it suffered from bugs and dysfunction.
Over the past year, there was even talk about floating a series of bonds that would wipe out some of El Salvador’s debt. Blockstream’s former CSO Samson Mow was the main lobbyist in this campaign. But the promise of a $1 billion volcano bond backed by geothermal energy assets, Bitcoin mining, or even government BTC holdings, has not materialized. The bond remains something of a mirage with few details about its status coming from the Bukele administration.
In fact, Bukele’s status as a leader has probably increased the corruption risks for Bitcoin and investors interested in building on bitcoin infrastructure, like Lightning Network wallets. Two Bukele administration officials - Osiris Luna Mez and Carlos Amilcar Morroquin Chica - were sanctioned by the US Treasury Department in December 2021. Bukele’s security crackdown on gangs alarmed many in Washington DC for lack of due process and rights abuses. An anti-mafia investigation known as ‘Catedral’ could take down high government officials in a corruption scandal, possibly ensnaring president Bukele himself.
Pro-Bitcoin, DC-based advocacy organizations, like Human Rights Foundation, have responded to Bukele’s politics by distancing themselves from his leadership while clinging on to the law and the experiment itself. If Bukele were to let institutions like the Central Bank and state-run energy firm CEL guide policy-making and investment priorities from a less politicized posture, maybe some of this Bukele risk for Bitcoin infrastructure investors could be averted. One year on, it seems more likely that Bukele will further consolidate his policy of Bitcoin populism, leaving the nation’s institutions, and finances, to flounder in his wake.