Today, Explained - El Salvador’s bet on bitcoin

Episode Date: April 25, 2022

By making bitcoin a national currency, El Salvador tried to transform its economy. Rest of World’s Leo Schwartz explains why the bet hasn’t yet paid off. This episode was produced by Will Reid, edited by Matt Collette, engineered by Paul Mounsey, fact-checked by Laura Bullard, and hosted by Sean Rameswaram. Transcript at vox.com/todayexplained Support Today, Explained by making a financial contribution to Vox! bit.ly/givepodcasts Learn more about your ad choices. Visit podcastchoices.com/adchoices

In June of last year, El Salvador did something no other country had ever done before. The country announced it would adopt Bitcoin as a form of national currency. I will send to Congress a bill that will make Bitcoin a legal tender in El Salvador. The country's president, Nayib Bukele, claimed crypto would create jobs, attract investment, and make financial services more accessible to people in a country where 70% of the population didn't have a bank account. Six months into this experiment, Bitcoin Nation is not looking so hot. Having spent months investigating what this actually looks like on the ground, what we

found is that the project is really a smokescreen. What happens when a country adopts crypto as a national currency? I'm Sean Ramos-Verm, that is Ahead on Today Explained. groceries delivered across the GTA from Real Canadian Superstore with PC Express. Shop online for super prices and super savings. Try it today and get up to $75 in PC Optimum Points. Visit superstore.ca to get started. At this point, it's still a little surprising any country would try to make Bitcoin a form of national currency. Yeah, so contrary to its name, cryptocurrency generally does not function very well as a currency. Leo Schwartz covers crypto for rest of world. It's a tech news website. It's expensive to send. It's slow to send. It takes a lot of technical expertise. The United States doesn't necessarily function as the best case study for cryptocurrency.

The U.S. dollar is relatively stable. There's not necessarily a reason why people would need an alternative. And for that reason, cryptocurrencies like Bitcoin usually function as a vehicle for speculation. But it turns out for a country like El Salvador, this might make sense. In El Salvador, the country runs on the U.S. dollar, and it also relies very heavily on remittances. So 20% of the GDP comes from remittances from abroad. Low-income groups in particular rely on family members working abroad

to send money home. This often involves significant fees and time. Because of that, you start to have reasons why maybe it would make sense to adopt Bitcoin as legal tender or to try different types of experiments around cryptocurrency. Then of course you have this dynamic that El Salvador is a country that's largely determined by narratives of gang violence

and of immigration out of the country. One of the most dangerous countries on earth, a place where criminal gangs control entire neighborhoods. And these gangs from El Salvador are now operating in nearly every corner of America. So this is an opportunity for the country to really reframe its narrative and maybe attract investment from outside the country. Leo spent months following El Salvador's big Bitcoin experiment with his colleague, Anna Cat Brigida.

We asked him to tell us where it began. So Bitcoin in El Salvador starts on a beach. It's known as Bitcoin Beach internationally. It's gotten a lot of coverage over the past few years. The place where Bitcoin has seen perhaps the widest adoption is not a big city, but actually a sleepy beach town in El Salvador. It's this little town on the Pacific coast called El Sonte. A few years ago, an evangelical surfer from the United States named Mike Peterson moved down there and partnered with a local named Jorge Valenzuela to create this circular economy around Bitcoin

after Peterson received a large anonymous donation in Bitcoin from someone in his church. I came back with this ludicrous idea that we were going to, you know, start a Bitcoin circular economy on the coast in El Salvador and that we were going to start injecting it in the community in different ways through our programs. And we'd bring all these businesses on board and we would, you know, kind of demonstrate how it could impact the lives of people that have been locked out of the banking system. What they wanted to do was see in this small town, if they started ceding Bitcoin to the community, if people could use it to buy groceries, to buy food, if it could really serve as a replacement to the dollar.

If you look at the population of El Salvador, 70% of the population is unbanked. That means you're going to have fairly low trust when it comes to financial technology tools. What they want to do is actually build a digital wallet, which you can think of as an alternative to, say, Venmo or PayPal PayPal that would allow you to send Bitcoin back and forth to people as easily as you would be sending dollars or any other currency. That was the main emphasis of the project there. And because it's such a small population, it obviously was a little more effective and easier to pull off. At the same time, even in this place that has been practicing with Bitcoin for a few years, it hasn't really served as a substitution for day-to-day transactions.

It's mainly used by tourists coming in from outside the country who want to get that photo op of buying a pupusa or a coconut using Bitcoin. Welcome, everyone. We made it to El Zonte, El Salvador. Good morning and welcome to El Zonte, a.k.a. Bitcoin Beach. You might be thinking, what the heck are you doing in El Salvador. Good morning and welcome to El Zonte aka Bitcoin Beach. You might be thinking what the heck are you doing in El Salvador and the answer is Bitcoin. They're making some kind of food over here. Now it says this place takes Bitcoin so we're gonna we're gonna figure out if that's actually the case. Apparently they take Bitcoin. Literally just a beach stool, someone with a coconut and I could just pay to their mobile phone with Bitcoin. I'm in a pupus area. So how does this go from Bitcoin Beach to all of El Salvador?

Mike Peterson wanted to get the blessing of the president of El Salvador, who's Nayib Bukele. I mean, El Salvador has not been the country that's recognized to be the first in innovation. But why not this time? A lot of the story of Bitcoin in El Salvador begins and ends with Bukele, who's this larger-than-life figure who a lot of people would call a wannabe dictator. Since assuming power a few years ago, Bukele has engaged in a lot of autocratic behavior.

To other news now, El Salvador's new legislative assembly voted Saturday to dismiss top Supreme Court judges hostile to populist president Nayib Bukele. From having military displays in the legislative branch to removing top judges. U.S. officials criticized the move and warned it could harm relations with Washington. A lot of this is buoyed by the fact that he does have a massive approval rating, upwards of 85 percent is often the estimate. From our understanding, what happened when Peterson introduced the project to Bukele is Bukele got a light bulb of an idea above his head that Bitcoin could serve as this interesting project for El Salvador to, again,

really reframe this narrative around the country, which had been more determined by gang violence and by immigration. I think having Bitcoin as legal tender, even though nobody has done it before, it was a no-brainer. It's funny to hear that this sort of strongman, president, quasi-dictator would get super into Bitcoin. Because isn't it kind of like inherently anti-government crypto?

Isn't that the idea? So this is the core tension, which is that cryptocurrency and Bitcoin started as this really idealized vision of a decentralized currency. Whether they know it or not, people who buy Bitcoin are strengthening a tool for protecting human rights. So a currency that didn't rely on any institutions like banks or governments. Payment processing is done not by a regulated company like Visa or MasterCard, but by a decentralized global software network. Obviously, when you have a wannabe dictator who's implementing Bitcoin in a country, you start to have a lot of contradictions. And I think within the Bitcoin and the crypto community, this is something that some people acknowledge. It's something that a lot of people also whitewash. A lot of people in the crypto community see the fact that a president on the world stage

is adopting Bitcoin, and they see this really as the first domino to fall in the crypto community see the fact that a president on the world stage is adopting Bitcoin, and they see this really as the first domino to fall in the crypto revolution. So when does it become official? What does that look like? Does he just flip a switch and all of a sudden the country's on Bitcoin? Yeah, so in June, he announced the intention of the country to adopt Bitcoin as legal tender. El Salvador's president picked the perfect place to unveil his country's crypto plans, the Bitcoin trade show in Miami. President Nayib Bukele's pre-recorded video message was created especially for the trade fair

and was well received. I will send to Congress a bill that will make Bitcoin a legal tender in El Salvador. So the irony of him introducing the project in Miami in English is that you already sort of see the intention that this is not really a project for El Salvador. It's a project for him in the outside world. So I'm not really sure what the reaction was from everyday Salvadorians in June when he first announced the project.

Lawmakers in El Salvador broke into applause after voting to approve Bitcoin as legal tender on Wednesday. Of course, because he has a lot of support and power in the government, they're able to get the law passed pretty quickly, and then it rolls out in September. So just a few months later. In the interim, you have to implement an entire financial system,

which makes it possible for Salvadorans to actually be able to send Bitcoin back and forth and use it as a daily transaction. Then in September, when it's actually rolled out for the first time, you see a lot of chaos. More than a thousand people protested against Bitcoin in El Salvador's capital on Tuesday, rallying against its adoption as currency there amid a bumpy digital rollout.

There starts to be protests as people are wary that the government is spending all these resources and implementing a Bitcoin ecosystem. They're going to spend $200 million on this? All right, so have you sorted out the rest of our problems? Have you sorted out education or health care? Well, there's a lot more problems to solve after that, before you come and impose a law that Salvadorans don't agree with. And I think there's just a lot of confusion of what it actually means for the country and how it can really be used on a day-to-day basis. Thank you. software designed to help you save time and put money back in your pocket. Ramp says they give finance teams unprecedented control and insight into company spend.

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charge. BetMGM operates pursuant to an operating agreement with iGaming Ontario. Leo Schwartz, a minute ago you told us that El Salvador took this bold, unprecedented step and adopted Bitcoin as a country in September of last year. Tell us what that looks like in practice. Like, what's the practical nature of your entire country using Bitcoin as its primary currency? So, obviously, implementing Bitcoin as legal tender is a pretty broad idea. I think in practice, what the Bukele administration wanted that to look like was businesses would be able to accept Bitcoin just like they would accept US dollar. And also the population would be incentivized to use Bitcoin for daily transactions.

Now, Bitcoin as a currency, as I've said before, is really difficult to use. So what they did was they built a digital wallet, which is called Chivo, Spanish for goat or in El Salvador slang for cool. That would allow people to be able to send Bitcoin back and forth to each other, to be able to load their wallets with Bitcoin by using US dollar. They actually had physical ATMs. We're at the Chivo ATM and we're going to show you how a transaction, okay? And they could put in dollars and their balances would be loaded with Bitcoin. And then the idea is that go to a store and you actually want to buy something using Bitcoin, but you can just essentially scan a QR code and be able to send that money right through.

So scan the QR code, Michael. Now you just need to press send. And now just confirm. Yes. It's paid, right? It's paid. I think the criticism there that you hear from a lot of people in the Bitcoin community is that if you're basically just sending Bitcoin back and forth in a digital wallet, the same way that say, if you have Venmo, you're just sending money back and forth with each other. That's not really Bitcoin. That's essentially just an alternative to typical banking systems or to any financial app out there. So because you're not really doing on-chain transactions, it's really no different than having a Venmo wallet. But that was the government's solution for being able to take

this very difficult technology and making it more applicable for general use. So other than literally calling this Chivo, which is slang for cool, how does the government try to convince people to actually adopt the system and get off that USD? So the main tool the government had was actually loading wallets with $30. So if you signed up for your Chiba wallet, you would get $30 worth of Bitcoin. And I mean, that's no small sum in a country where, you know, the average minimum wage is $365. Free money. Free money. Free money always works. Everybody loves free money. I think anecdotally and also from government stats are released a huge percentage of the population immediately signed up for the wallet. Then the question is, okay, you have this money, are you going to actually

use it for doing transactions? The answer for that, for everything we've seen is no. So you have this money, you can take it out from the ATMs if you want, maybe you do one or two transactions. But for the most part, the Chiba wallet really isn't being used as an alternative for US dollar. Again, I think it's fair to say that we're still very early on in the project. It's only been about six months. As we learned from Bitcoin Beach, the main challenge isn't only giving people money and getting them onto the system. It's teaching them how to use it and why it actually makes sense to use. And I don't think the government has really done much outreach or had much progress on that front. So everyone's excited about their free $30, but that excitement

doesn't really last. Is that what you're saying? It lasts enough to sign up for the wallet and get the free $30. I don't think it lasts enough to say, oh, this is cool that it's in Bitcoin. I'm going to start using Bitcoin exclusively as an alternative to just using cash to buy my groceries or buy my food. One big challenge is that to be able to use Chibo, you need to have access to internet. In the cities, you might be able to have data to be able to send transactions back and forth, but a lot of the country is rural. So it's going to be difficult to actually have access to this app and access to internet to be able to use it. The other main dynamic here is just trust. If people are already using physical

dollars in their day-to-day transactions, it's not necessarily easier to be using the Chivo wallet. So why does it actually function as a better alternative? And especially if businesses aren't really starting to accept it, there's no real mechanism in play where it makes more sense to use Bitcoin or use Chivo for your daily transactions in place of dollars. Six months in, do we have any data about how much of the country is actually using Chivo, Bitcoin? So recently, the Salvadoran Chamber of Commerce released a survey that found that 86% of businesses have never done a transaction in Bitcoin. And I think that's the most convincing stat we've seen. Of course, the government says

that I think 4 million people have downloaded Chivo or have a Chivo account, but that doesn't really explain anything about how often they're using it. The fact that so many businesses aren't using it, I think is the most demonstrative of the actual efficacy of the wallet. And then anecdotally, if you talk to anybody, they'll say, I'm not using Bitcoin in daily transactions. And I think a lot of people have been even skeptical of downloading Chivo in the first place and getting their $30 saying they don't really know what their data is going to be used for.

They've heard a lot of conflicting things about the project. It's not worth it. Did you find people who were using it and were happy about it even? To be honest, I haven't. I tried to talk to a wide swath of people, and it's very difficult to find someone who were using it and were happy about it even? To be honest, I haven't. I tried to talk to a wide swath of people and it's very difficult to find someone who's saying, yes, I'm using Bitcoin every single day. I think in Bitcoin Beach, this is probably the best example where you'll find some merchants who are very pro-Bitcoin, partly because it's incentivized a lot of tourists

to come in, which is improving their businesses. Also, Bitcoin can work as an investment tool for a lot of people, especially near the beginning of the project when Bitcoin was rising in price. If you get paid, say, a dollar in Bitcoin, maybe tomorrow that Bitcoin you're holding will be worth $2. So in that sense, it's better than a dollar. Unfortunately, since hitting a high of almost $70,000 in November, Bitcoin's price has dropped precipitously. One Bitcoin was worth less than $36,000. It's lost almost half its value in two months. Which takes away that sole advantage where Bitcoin can function not only as a currency, but also as an investment vehicle. If one day you're

holding $10 worth of Bitcoin, the next day it's worth $7, maybe the next day it's worth $12. It's not a very stable way of conducting your daily financial life. How much money has the government invested in this program? I mean, they offered up $30 to anyone who wanted it. What did that end up costing? It's hard to get actual estimates on this. And the government is not transparent in sharing details on both how they're implementing the system and how much money they're spending. I think our best estimates would put this at hundreds of millions of dollars that they've spent both developing the wallet, seeding the accounts with $30, and also buying huge amounts of Bitcoin, which Bukele has done and bragged about on social

media. The irony being that since he's bought the Bitcoin, it's gone down an immense amount, which is another criticism a lot of people have. Why are you spending money on Bitcoin when this is certainly not the best use of money a government could spend, especially if the price is going down. Where does he see this experiment going in the next few months and years? So I think for Bukele, he's really adopted this idea of Bitcoin maximalists or crypto maximalists who say, we're still very early on in this crypto revolution. This is the first days of what's going to happen. You can't look at it on a six-month timeframe. You have to look at it on a 10-year timeframe. Obviously, it's hard to really see

what's going on in his mind if he's freaking out that he's lost millions of dollars on his fairly ill-advised Bitcoin purchases. But he's embarking on projects that would reinforce the Bitcoin adoption in El Salvador. And finally, several folks in the Bitcoin community are headed to the Latin American Bitcoin and Blockchain Conference in El Salvador. So when I was reporting this story in El Salvador in November, there was a large Latin American Bitcoin conference that happened. You had people pouring in from all over the world,

all here to witness this first country that adopted Bitcoin as legal tender. During the conference, there were rumors of when Bukele was going to show up, when he was going to talk. He kept delaying and he kept delaying. Finally, the last day of his conference, he announced that there was going to be this talk on a beach near Osonte. It happened at night. There were fireworks, there was ACDC music. It was this whole spectacle.

So how's Bitcoin? How's Bitcoin week going? It fine? Did you like our country? Yay! But he announces at the speech that El Salvador will be building a Bitcoin city. Bitcoin city. Bitcoin city. Which will be this bastion to Bitcoin that will be exempt from a lot of taxes, where the goal is to just attract crypto companies from around the world.

It will be this hub where Bitcoin can be celebrated. So the city is going to be totally circ circle except for the place of the volcano. And in the middle, you would have a huge plaza, which would be from the air. You will look at it as a Bitcoin sign. The way that it would be paid for is with a Bitcoin bond. So a one billion dollar bond that would be raised from, I guess, investors who want to support the project. Half of the money would go to building infrastructure and to Bitcoin mining projects.

The other half would go to buying even more Bitcoin with the idea that if Bitcoin skyrockets in price, then all the investors will get even more rich. So I think for Bukele, this is the future. El Salvador will be a country, at least from the outside, that will be defined by Bitcoin, by this Bitcoin city, by this Bitcoin bond. And by being able to raise money through bonds like this, he'll be able to circumvent a lot of the traditional international financial markets and no longer have to rely on institutions like the IMF or from international bondholders

and instead can just raise money directly from the global Bitcoin community. Looking into the future, it's nice to be part of it, isn't it? Yeah! So, you know, let's all be part of it. And let's all push the future even forward. Thank you guys.

Have fun. We love you everybody. Bitcoin City sounds sort of like a graduated version of Bitcoin Beach, where this all started, El Sonte. Yes, on a much wider scale. But didn't you say that the experiment in El Sonte didn't really work? People were just showing up to take a selfie of themselves buying a pupusa with Bitcoin? Yeah, this is always the question when it comes to Bitcoin. You always have to separate the hype from the practicality. Even now, crypto is

one of the biggest news stories in tech and finance and business. However, in a country that's adopted Bitcoin as legal tender, when it comes to everyday people, adoption rates are still incredibly low. Even on the smallest scale, which is Bitcoin Beach, people still struggle with using Bitcoin as day-to-day currency. Leo Schwartz is a reporter at RestOfWorld.org. Our show today was produced by Will Reed, edited by Matthew Collette, fact-checked by Laura Bullard, and engineered by Paul Mounsey. I'm Sean Ramos for him. It's Today Explained. you