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El Salvador Is Starting Printing Money With Bitcoin

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El Salvador Is Starting Printing Money With Bitcoin

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El Salvador Is Starting Printing Money With Bitcoin

Nayib Bukele, the president of El Salvador, is young, dynamic and impulsive. In a video posted at the Bitcoin Miami conference in Florida on June 5, Bukele announced a major change in economic policy: El Salvador would adopt bitcoin as its official currency, along with the US dollar, the country’s currency since 2001.

It will likely be a disaster for the country, but it is typical of Bukele’s erratic style of government. It is also typical of Bitcoin fantasies; a project totally unsuitable for everyday life in El Salvador created largely to improve the image of the cryptocurrency itself.

Bitcoin is the first cryptocurrency, originally created to be a form of money outside of government control. Bitcoin has absolutely failed to be useful as a currency, except for ransomware payments, so the promotional line is now a ‘store of value’. That’s quite a complaint about speculative commodities due to spectacular asset bubbles, the price of which can go up and down 50 percent in a matter of months.

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The Bitcoin law was passed from 62 to 19, with three abstentions, just after midnight local time in early June. No one had seen the law except the president and possibly the Minister of the Economy, María Luisa Hayem, before it was proposed at 8 pm on June 8; Parliament debated it for a few hours and rushed to pass it with the large parliamentary majority of Bukele.

Bitcoin will be legal tender for all debts, including taxes. Merchants must accept bitcoins for goods and services unless they are technologically unable to do so. (In practice, that’s a loophole big enough to drive a truck – bitcoin is functionally useless as a payment system.) Accounts will still be kept in US dollars; bitcoin is just a substitute for the dollar. The executive branch will build the infrastructure for bitcoin payments; in fact, article 15 of the law says that any provision of a previous law that regulates bitcoin is repealed, an enabling act that encompasses everything, as long as it is bitcoin. The law will take effect on September 7, 90 days after its approval.

A quarter of Salvadoran citizens live in the United States and send money home; Remittances exceeded $ 5.6 billion in 2019, at the level of El Salvador’s total export earnings. After the fees, these dollars go to the recipients. That’s the money the government and its bitcoin partners are after.

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The bitcoin scheme is being run in association with Strike, a unit of the American payments company Zap, which claims to make remittances using bitcoin. Strike CEO Jack Mallers outlined in January how Strike will make the remittances to El Salvador: It will take US dollars from the sender, buy bitcoins, transmit them to El Salvador and turn them into ties, a crypto token that is supposed to replace the dollar.

Backed up. to one in real dollars, although apparently, no one in finance can find the evidence that should exist to back this up. At the end of all this, the recipient would get a supposed dubious crypto dollar in his Strike app, instead of the genuine dollar bills that he would normally withdraw. If he wishes to remove the bonds from him as dollars, Mallers posited that he can buy bitcoins with the bonds and then cash the bitcoin at any bitcoin ATM. At that time, there were two bitcoin ATMs in the country, a few kilometers away in the coastal towns of El Sunzal and El Zonte; no more have been installed yet.

El Salvador works with physical cash; 70 percent of the adult population does not even have a bank account. It will take more than a phone app – the executive branch has 90 days to install a large amount of necessary infrastructure. Only 45 percent of Salvadorans have access to the internet and around 10 percent in rural areas; Bukele proposes a new satellite Internet network, in partnership with a bitcoin company. The government plans to distribute a version of the Strike app for both consumers and merchants; but Strike currently doesn’t work well on older smartphones or those with restricted data limits. Then there are new ATMs to import and install.

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Bukele did not tell anyone in El Salvador about the bitcoin plan before the public announcement. There were no official messages. Local press published translations of the Reuters and CNBC stories, peppered with tweets from Bukele. Elsalvador.com (El Diario de Hoy) sought the opinion of local economists, who did not know either the head or the tail of the scheme, or how it could be a good idea.

At the root of this is Bukele’s own financial dilemma. The president is popular, with an approval rating of over 90 percent. He finances this popularity by increasing spending without raising taxes. But El Salvador cannot print US dollars on its own to make up the deficit; so Bukele is looking for other sources of income.

The United States is unhappy with the authoritarianism of Bukele and his corrupt cronies, and has redirected funding for its foreign aid to civil society groups. The market valued Salvadoran government bonds at a steep discount, in the order of 7-9%. Bukele met with the International Monetary Fund the day after the Bitcoin law was passed, as part of negotiations to borrow a billion dollars. At a previous press conference, the IMF politely indicated that it had more than one doubt about the project.

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Bukele appears to be preparing the country to pump bitcoin into the economy, mark them as “dollars” to cover its deficit; and use real dollars to pay off foreign debts. For Salvadorans, the plan looks like a stealthy de-dollarization attempt.

Bukele explained some details of the Bitcoin law during a group public call with English-speaking Bitcoin enthusiasts just before the bill is voted on. A $ 150 million trust will be established at Bandesal; the national development bank, to compensate traders for fluctuations in the price of bitcoin between accepting payment and depositing it with the bank. For comparison, the central bank’s total US dollar reserve is $ 2.5 billion.

Trust dollars will gradually be replaced by bitcoins, so-called currencies accepted by traders; the trust will end up having $ 150 million worth of bitcoin, not dollars.

All debts will be repaid in bitcoins. This includes government loans, such as retirement funds, replacing public dollars with bitcoin. Public employees can also receive bitcoin payments.

It is simply not possible to perform Know Your Customer checks on bitcoin transactions according to international standards accepted by the FATF; and also to treat bitcoins as cash. The first thing that will happen is that the holders of contaminated bitcoins will lose confidence and get rid of them asap; the trust will become a gateway to launder $ 150 million worth of dirty bitcoin.

El Salvador has a good track record in combating money laundering (AML); despite the country’s problems with organized crime; but El Salvador’s AML status is directly threatened by the uncontrolled adoption of established bitcoin. This, in turn, puts El Salvador’s current remittance income at risk.

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Politicians like National Security Advisor Alejandro Muyshondt are promoting the Strike app with a credit of $ 1 for every referral from a Salvadoran, or $ 5 for every referral from the United States; they promise to “not pay no fees “for remittances. This allows the government to get its hands on the money from the remittances; which it previously could not, assuming it could withdraw the money from Strike.

The tricky part of the Bitcoin system is convincing the Salvadoran public to accept it; given that they often trust US dollars more than the government. Many already see the Bitcoin law as an attempt to expropriate their dollars; it would be trivial to exert more coercion by increasing the dollar withdrawal fee or restricting the amount that can be withdrawn. Professional economists have also called on the government to withdraw the law for further consideration.

Argentina tried a similar trick after its financial crisis at the turn of the century. The Argentine peso had been trading at par with the dollar since 1991. But by early 2001, the economy was stagnant and the government was seen as having insurmountable deficit problems. The public feared the hold might break; those who could took out all the dollars they could. Argentina introduced the “corralito”, effectively freezing all bank accounts and allowing only small withdrawals, to stop a bank run. The corralito ended a year after massive public unrest toppled the government.

Bukele wants to be successful as president and to be seen as having successfully pulled El Salvador out of its economic woes. But it has long been handed over to the government for the seat of its pants. The question is whether he can get away with a bitcoin-fueled monetary policy before an angry population starts setting the buildings on fire.

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