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Saviors or Speculators?

Bitcoin becomes legal tender in El Salvador

Jack Mallers, a twenty-seven-year-old cryptocurrency entrepreneur, was a bundle of nerves in a hoodie. Standing backstage at Bitcoin 2021 in Miami Beach this June, his anxiety stemmed partially from the fact that Jake Paul and the Winklevoss twins were also going on at the world’s premier crypto event, the first major business conference of any kind held in the United States during the pandemic. Mostly though, it had to do with the monumental news he would soon help deliver. Unable to sleep the night before, he scarfed down a hot dog—no bun, no condiments—and tried to focus on preparation, but young TikTokers behind the stage kept asking him where the bathroom was. “I’m like, in my head, ‘Listen, I don’t give a fuck that millions of people like watching you dance fifteen seconds at a time,’” he later recalled. “I’m like, ‘I’m trying to solve systemic human freedom problems right now.’”

In the afternoon, Mallers, the son of a wealthy futures trader from Chicago, took the stage in Off-White sneakers, a Bitcoin Racing Team baseball hat, and a Fear of God sweatshirt that retails for $675. “Yo,” he addressed the crowd. “You guys ready for this? Rhetorical question. There’s no fucking way.” He swung his arms and paced the stage as he condemned central banking and extolled the promise of Bitcoin to provide “financial inclusion” in developing countries like El Salvador, where he spent three months in the depths of the pandemic.

Late last winter, Mallers flew to the Central American nation to launch a global pilot program for his company, Strike. Bitcoin companies are awash in start-up buzzwords and evangelical prose that obscure the meaning of their mission, but essentially the service is a Venmo-for-crypto app that slashes fees on remittances. Because remittances make up around 23 percent of the Salvadoran economy, Strike’s product began attracting attention from high-profile figures there. Sitting in a sushi restaurant in San Salvador with Spanish-speaking friends he brought on the trip to serve as translators, Mallers received a direct message from a brother of President Nayib Bukele, who wanted to discuss a plan to make El Salvador the Bitcoin capital of the world.

Their subsequent, free-ranging chat—on art, anime, and ideas to “provide a high quality of life to everyone in the world”—ultimately led to Mallers helping to draft the legislation he was in Miami to share. Breaking into tears onstage, he introduced a pre-recorded video in which Bukele announced that he was sending to Congress “a bill that will make Bitcoin legal tender in El Salvador.” The crowd went wild; Mallers pulled off his hoodie. Underneath was a baby-blue national-team soccer jersey given to him by the Salvadoran president. “It’s pretty sick,” he said. He put his direct email onscreen for anyone who needed his help, then thanked the crypto community for helping make this work possible: “I hope today you find solace in knowing that you helped those who maybe haven’t been helped in 250 years.” Overcome with emotion, he was unable to finish his outro. A dubstep remix of “Back in Black” played him offstage for the audience at home.

Bukele’s unprecedented economic experiment is in some ways very simple. The law, which went into effect yesterday, will provide $30 in Bitcoin to any Salvadoran citizen who opts in; these funds can be placed in a crypto wallet (an app for trading) developed with Strike called the Chivo, which is Salvadoran slang for “cool.” Taxes can be paid in Bitcoin, and all vendors “shall accept Bitcoin as a form of payment when it is offered by the purchaser of a good or service,” though Bukele later clarified that the Chivo app will be designed to allow businesses to immediately transfer crypto to cash using a state-sponsored $150 million slush fund. Unlike the last time El Salvador adopted a currency from abroad—in 2001, the nation ditched the colón, named after Christopher Columbus, for the U.S. dollar—the greenback will remain the reference currency, and salaries and pensions will still be paid in dollars for the time being.

With the law coming at a moment of flux in the world of Bitcoin, the party line among the young, white, American male investors supporting the experiment is that it represents a transformative moment: a “giant leap for mankind,”as Mallers put it in Miami. For years, the cryptocurrency has largely been a refuge for a new generation of libertarians frustrated by the confines of fiat currency—money issued by governments that is not backed by gold—and hopeful in the power of one-to-one economic transactions. But in 2021, the expulsion of scores of Bitcoin miners from China has shown that despite the rhetoric of autonomy, a thriving crypto sector most often relies on a welcoming host state, whether that’s the cheap, unreliable power and loose regulations of Texas; the pay-to-play laws in the new stronghold of Kazakhstan; or the gut rehab of the Salvadoran economy.

Unlike most client states welcoming a rush of crypto-investment, the El Salvador model intends to be a proof of concept for an egalitarian vision of Bitcoin that has so far escaped reality. Since the digital currency mysteriously appeared in 2009, it’s been used to buy illegal stuff online, in novelty exchanges in financial capitals where Bitcoin ATMs are available, and as the perfect tool for Eastern Bloc hackers to extort Western businesses that want their stolen information back. Primarily, however, it has been used as a speculative asset that has made rich people with the capital to buy a lot of it much richer.

The party line among the young, white, American male investors supporting the experiment is that it represents a transformative moment: a “giant leap for mankind.”

In Central America, however, boosters see an opportunity to reveal to the world that Bitcoin can benefit those outside the C-suite by providing widespread financial access in a country where 70 percent of citizens don’t have a bank account. With this state-supported entrée into a peer-to-peer financial system, they argue, remittances will be more convenient, with fewer fees for the Salvadorans abroad who sent home almost $6 billion in 2020. As proof of concept for their proof of concept, crypto proponents point to Bitcoin Beach in the surf-tourist town of El Zonte, where an anonymous donor fronted the evangelical Californian Mike Peterson $100,000 in crypto to set up a community where three thousand locals and visiting surfers enjoy a reliable right point-break and use Bitcoin for daily transactions. “For them to be able to buy something that’s going to go up in value over time?” Peterson said recently of the impact of their project. “Like that really just shifts everything in their mind.”

Will it work for a population of 6.5 million? There are some fundamental concerns. Though using Bitcoin as cash could allow for the unbanked to get in the game, only 45 percent of Salvadorans have reliable internet access, which could be a problem if the notoriously volatile asset tanks on the whims of a billionaire or the whisper of Congressional regulation. (As for crypto’s paper tiger of fiat inflation, the U.S. dollar fixes this, with El Salvador experiencing Latin America’s lowest rate of inflation since it ditched the Colon in 2001.) Aside from wireless access and larger questions about the benefits of financial inclusion—particularly inclusion reliant on a new private firm—there is the question of demand: a survey conducted by the El Salvador Chamber of Commerce and Industry found that over 90 percent of respondents did not want to be required to accept Bitcoin; around 75 percent said they would continue using the dollar. The day of the rollout did not inspire confidence either, with the Salvadoran government temporarily disabling the Chivo wallet to boost server capacity. 

The egalitarian motivations for the law may also backfire. According to a recent survey in the United States, the average household income of those who own Bitcoin is $111,000; if this trend holds in Central America, crypto investors will not be working-class laborers, but those earning almost double the country’s median income. Bukele’s messaging, referencing “world-class surfing beaches,” “beach-front properties,” and “no capital gains tax” to attract investment, clearly isn’t catered toward Salvadorans trading basic goods for fractions of a percentage of a coin. More explicit on this front is the permanent residency promised to foreign investors who own three Bitcoin (worth $46,135.22 each as of publication), an enticement already causing concern that hackers paid in crypto could park their money along the nation’s coastline, or even launder their loot through the state-sponsored exchange.

Then there’s remittance fees, the enemy of Jack Mallers, who established his payment processing app so that traditional money transfers are “not going to take fucking half” of what is sent home. The percentage he cited in the speech announcing the law may be inflated: while Western Union charges as much as 5 percent on a $100 payment, fees for money orders are, on average, below 3 percent, and are delivered in a familiar and universally accepted currency. Though the fee structure may have been exaggerated, the effect of Mallers’s presidential crypto-whisperer press cycle on his firm was not. Following a wave of investor interest after El Salvador’s announcement, he is hoping to close a new funding round in the coming months. Through a representative, Mallers declined to comment for this piece.

In a region devastated by generations of Westerners rushing south to cash in on exciting new commodities, the historical echoes of current affairs are never that far out of reach. For El Salvador’s state-engineered Bitcoin boom, a parallel lies in the coffee fincas that shaped the nation’s course in the late nineteenth and early twentieth centuries.

In the 1880s, the emancipation of slaves in Brazil and a previous, multi-year blight in Ceylon provided the opening for a new force to meet global demand for the morning pick-me-up becoming a staple of the industrial workday. With tax breaks offered to foreign investors who planted at least five thousand trees, El Salvador filled this void in the market, as coffee production grew to make up 90 percent of the nation’s exports. On the plantations themselves—which were cultivated on indigenous land stripped away in rounds of privatization—some owners enforced the monoculture by slashing the tomatoes, blackberries, figs, and fruit trees grown alongside the rows of Coffea, making laborers reliant on the meager rations provided by their employers. In Coffeeland, historian Augustine Sedgewick’s document of the brutal rise of Arabica in El Salvador, he writes that the “plantation production of hunger itself” became a method of coercing rural Salvadorans into the system. Instead of cash, workers at the massive estate of James Hill on the side of the Santa Ana volcano were often paid in a different currency: a pile of beans on two tortillas.

For El Salvador’s state-engineered Bitcoin boom, a parallel lies in the coffee fincas that shaped the nation’s course in the late nineteenth and early twentieth centuries.

For those operating the plantations, profits soared: between 1880 and 1914, the value of coffee exports rocketed up over 1,100 percent. The economic crutch these exports provided meant that political power, too, depended on the coffee plantations. These oligarchical years are often known as Las Catorce, referring to the fourteen coffee-producing families that owned half the land in Central America’s smallest country. As Sedgewick writes, the oligarchs cultivated a “virtual monopoly on national politics” beginning in 1894. To protect the revenue drivers from any dissent that arose due to their brutish tactics, in 1912 the Department of the Interior founded the gendarmerie Guardia Nacional to provide security on the plantations and crack down on dissent. Even with this state protection—sweetened by direct payoffs to the GN by planters—coffee could not float the Salvadoran economy forever.

Amid a downturn, the nation agreed to a controlled-loan program with the United States in 1921, developed by an economist and architect of the Fed named Edwin Kemmerer. Known as the “money doctor,” he at one point wanted to develop a single unit of currency in the Western Hemisphere. El Salvador’s close economic relationship with the United States would have brutal consequences for those who resisted the right-leaning governments that the latter supported. As dissent grew against the oligarchy in the 1920s, the United States encouraged the Salvadoran government to crack down on organizing laborers “centered around the Santa Ana Volcano,” according to Sedgewick. In the hands of the anti-communist general Maximiliano Hernández Martínez, who overthrew the coffee growers’ government in 1931, this crackdown led to the massacre of thirty thousand Salvadorans in 1932, most of whom were indigenous. (Despite opposing the overthrow at first, the U.S. maintained the loan program and allowed coffee imports from El Salvador.)

Almost fifty years later, a U.S.-trained counterinsurgency battalion slaughtered more than seventy-five thousand civilians in El Salvador’s brutal civil war, during which the Reagan administration sent the military dictatorship hundreds of millions in aid. The effect of industrialized coffee and the regimes that invested in it are still felt in the twenty-first century: a 2012 study conducted in the coffee-producing areas of western El Salvador found that 97 percent of households experienced chronic hunger.

This history is not a perfect rhyme; the Bitcoin adherents promoting the government plan claim to have altruism in mind, and open state atrocities are unlikely. But the plot to take crypto to the next level and ease the burden of migrant remittances could provide President Nayib Bukele with his own volatile asset to consolidate power with.

A forty-year-old who often wears a backwards baseball hat in official appearances, Bukele points to his relative youth as a source of his “new way of thinking.” The party he founded, naturally, is called Nuevas Ideas. Leading this splinter party, he has also found a unique formula for autocratic success after jacking up spending without increasing taxes; cracking down brutally on gangs within the prison system; and locking down the country in the early days of the pandemic. Thanks to these measures, he has a staggering 85 percent approval rating, according to a poll last week.

With that mandate, Bukele has centralized power within his administration. Before parliament rubber-stamped the Bitcoin law in June, very few lawmakers had actually seen the proposal; when it hit the floor, there was only a few hours of debate before the Nueva Ideas coalition passed it in a 62-22 vote. Broader, more alarming actions have also been taken, including the dismissal of all five justices of the Salvadoran constitutional court in May after the body ruled that arresting citizens for breaking Covid lockdowns was illegal; firing the attorney general amid corruption inquiries into the government; and a terrifying stunt in which Bukele marched soldiers in full battle gear to convince lawmakers to approve a $109 million loan for military and police equipment. The week before the Bitcoin law went into effect, Salvadoran police also detained a prominent critic of the plan without a warrant, alleging financial fraud.

With this track record in mind, opposition leaders and skeptics worry that Bukele could use the Bitcoin law to feed his autocratic streak, fueling further spending by inflating the economy with cryptocurrency and sucking out the actual dollars to pay foreign debt in order to secure yet more loans. “My fear is that, unable to borrow in the international markets, Bukele is trying to find a way to ‘print’ money to finance populist programs that will enhance his popularity,” says Héctor Lindo-Fuentes, a professor of Latin American history at Fordham University. He adds that Bukele’s “problem is that he is a populist in a country that doesn’t have a valuable export product to finance populist gestures.”

Opposition leaders and skeptics worry that Bukele could use the Bitcoin law to feed his autocratic streak.

To solve this problem, Bukele hopes to fill the economic void by importing a risky new system. If he succeeds, the popularity he enjoys at home may be recognized around the world. But if the plan ends up only consolidating his power in a false promise to reduce inequality, the Bitcoin law could ultimately replicate the coffee industry’s damage to the country, allowing Western capital to scoop up land and influence amid a democratic backslide.

In a place as small as El Salvador, it’s inevitable that the two commodities would collide. To avoid the pitfall of carbon-intensive Bitcoin mining in a region where climate change is driving migration, Bukele has proposed using geothermal electricity from volcanoes to run the computers solving the complex math problems which pop out new coins. There are only a handful of volcáns still active enough to power such a mine. One is the Santa Ana, the site of great resistance to the early twentieth century oligarchs. Its hills are still covered by coffee plantations.