Tales from the Cryptos

Blockchain visionaries and old colonial scams in Puerto Rico

o
u
t
b
u
r
s
t
s

“He told them eat a rainbow.” Major Dream and Robert Anderson are bent over the island bar of the Monastery Hotel in Old San Juan, laughing hysterically. They are telling the story of how Bitcoin billionaire Brock Pierce reacted when four young women interrupted #RestartWeek, the conference he and his friends hosted this past May inviting cryptocurrency investors to descend on hurricane-torn Puerto Rico to build a techno-utopia. Robert repeats the phrase: “eat a rainbow—it was the kindest, most respectable thing he could have said.”

Pierce and his fellow crypto boosters have become well known in this neighborhood since “Making a Crypto Utopia in Puerto Rico” appeared in the New York Times detailing Pierce’s plans to build a blockchain infrastructure to renew urban development. Philanthropic concerns are, however, far from Pierce’s mind. He was enticed to Puerto Rico because the money was right and the risks were low. In an effort to save its economy, the island now offers highly lucrative tax breaks to high net-worth individuals: they can massively reduce their tax burdens if they are willing to set up residence on the island.

It’s free money for people with a lot of money, and it gilded the cryptos with an unflagging optimism about their investment plans, despite the impending return of hurricane season and high levels of municipal-government debt eating away at the Puerto Rican paper economy. Before the night is over, the cryptos will repeatedly cite the Times article as the reason why around half a dozen like-minded investors and entrepreneurs are arriving at the Monastery Hotel each week, with cash and business plans in hand.

Major Dream (one of his many aliases) is himself one of scores who have shown up on Pierce’s doorstep since February, although Dream is not himself a crypto. “Everybody has some for-profit project down here,” he explains, “mine is healthy food.” He is the cryptos’ wellness coach and yoga instructor. His well-toned legs stretch out from under a long lavender T-shirt topped with a pile of beaded necklaces. Dream holds up four fingers and explains that he lives for the four w’s: “women, weed, wine, and wellness.” I watch him pick at a grass-fed steak (rare), which he chases down with a glass of activated-charcoal lemonade.

It’s free money for people with a lot of money, and it gilded the cryptos with an unflagging optimism about their investment plans.

Vape cartridges and vitamin supplements clutter the bar where we are sharing stories. While the rest of the island dances to bomba y plena on sidewalks and in corner stores turned clubs, the crypto cadre are blasting Nirvana on stereo turntables. Nevertheless, they assure me of their intention to “do it the Puerto Rico way” once they’ve amassed the requisite investment capital to get the great crypto experiment up and running here. The cryptos plan to replace worn-out, storm- beaten physical infrastructure with tech-based business plans, which will serve as proof-of-concept for their mainland investor friends: running government on the cheap, via blockchain; running hurricane-insurance schemes, also via blockchain; and setting up spaceX launchpads. What any of this has to do with native Puerto Rican concerns is not obvious.

Yet the cryptos are unfazed. The women interrupting #RestartWeek and the flurry of bad press the conference organizers have been getting is, from their point of view, simply misguided—and something they see themselves overcoming with time. Dream, a New Yorker, briefly turns livid when recounting the interruption. “They are from New York!” he exclaims. But does that mean that they have less of a stake in the island’s future?

Blockchain Pullers

Following decades of out-migration, there are now more people of Puerto Rican heritage living on the U.S. mainland than there are left on the island itself. Still, bonds between mainlanders and islanders remain strong—as evinced by the steady stream of cash flowing back to the Puerto Rican homeland from economic expats. The cryptos would prefer to think of the hurricane as having cleared the island for their arrival. For nimble crypto entrepreneurs, the island is something of a blank canvas, as much real as virtual, which they’re planning to bedeck with their cables, drones, and blockchains—in order to try out some weird new tricks for ending poverty that they make up as they go along. In the vanguard of the anti-poverty measures, inexplicably, is the much-touted hurricane insurance scheme, which ties insurance payouts to cryptocurrency values, and seems therefore all but designed to crash precisely when it’s most desperately needed.

In reality, though, the blockchain elite’s approach to investment in Puerto Rico is nothing new: the island has already suffered through a series of short-term boom and bust cycles, stoked by the shifting policy maneuvers in Congress (where it bears reminding that Puerto Rico, a U.S. territory since 1898, still lacks representation). Tax breaks periodically give incentives for investment from the mainland, with names like the 1947 initiative “Operation Bootstrap.” Typically, these enrichment schemes for investors will leave devastation in their wake when incentives expire and capital flees. The cash-strapped municipal government is then left holding a bag full of liabilities—a grim dynamic that in the aftermath of Hurricane Maria and the island’s slide into bankruptcy in 2017 is playing out with exceptional harshness.

The Puerto Rican government was already deep in the red, and the island’s economy flailing before the hurricane hit. Today, kiosks on the beach are once again selling sunshades and T-shirts—the paraphernalia of an island paradise—but nowadays the shirts say things like “PR Strong,” in an attempt to sell resilience back to the island’s struggling native population, saddled with a crumbling infrastructure and ballooning debt.

During rainy nights the sewer system overflows onto the streets. As close as Caguas, many inhabitants only got electricity back, and hence air conditioning and fans, in August 2018, some eleven months after Maria made landfall. The summer heat is overwhelming—especially at night when there is no escape. These are not only the effects of a natural disaster. Waves of austerity have crashed for decades now, further eroding already dilapidated public services as various mainland investment schemes go bust and get revived on short-term time horizons that leave the chronic structural woes of Puerto Rico’s economic order unaddressed.

Disaster Capitalists

Robert Anderson is more familiar with the problems of the municipal government than many crypto boosters on the island—but he retains the tech elites’ near messianic faith that they can be dispatched swiftly in the twinkling of an app. Anderson is a systems architect for the governor’s office in Puerto Rico, calling himself an OG cryptologist. “I played polo in Menlo Park during the first dotcom boom,” he explains. After his tour in Silicon Valley, Anderson chased defense contractors to Dallas. He arrived in Puerto Rico six years ago, after doing a stint in Panama—a “pretty strategic location,” he notes.

At the time Anderson arrived in Panama, the country was ranked sixty-second in GDP per capita. He was there to cash in on that ranking, by providing the telecom industry with an assessment of Panama’s investment potential. He oversaw an update of the country’s out-of-date networks with a faster internet and blockchain infrastructure. The point? “To see where investments can be made.” The recent opening of the Blockchain Embassy in Panama City—a privately owned, one-stop shop for crypto-evangelism, complete with Bitcoin-branded products and a cryptocurrency ATM—demonstrates the extent of his success. Panama is now said to be among the top ten countries in crypto innovation and boasts one of the “most vibrant ICO” investment climates—as in, initial coin offerings—in the world, according to the website Hacker Noon.

In Puerto Rico, Anderson sees his role as a restorer of order. His engineering and army backgrounds made him an expert problem-solver. A BBC news crew followed him in his 4×4 as he travelled to the interior with medical supplies and a doctor, Sally Priester. The documentary is in the hagiographic vein of many foreign-aid sagas, but behind the scenes, Priester tells a different story: Anderson was using her humanitarian aid expeditions for publicity, she says, shedding “crocodile tears” about the fate of locals while buddying up to government officials; those relationships then made it easier for him to replicate his Panama strategy in Puerto Rico.

In 2016, a year before the hurricane hit, the government ran out of cash to pay for its obligations. According to Anderson, that was because the public-sector payroll was simply too large—the typical diagnosis favored among the global tech-investment class. Anderson tends to talk about the public sector like a millennial describing how many files his grandmother saves directly to her desktop; he’s there to hit the delete key. Anderson led a team of cryptos who approached the Board of Education for financial backing. They got the board to agree that “we could pay ourselves in money we found poorly invested,” and his team quickly discovered “that $350,000 a year was being spent on licensing for programs that never got cracked.”

If it were up to Anderson, everything on the island would get rebooted. He sees no problem with closing hundreds of schools. “There were too many, too close together because it’s a colony, so all the kids used to walk to their neighborhood school,” he says. “Now that the roads are updated, we don’t need so many schools.” Kindred stories of postcolonial over-exuberance and mismanagement are retailed to each arriving crypto—they’re kind of a campfire tale of native squalor and inattention, meant to buck up the morale of the incoming tech cadre as the island’s next great white hope. And they all share the same basic moral, which is that the government here has no idea what it’s doing. That message also doubles as the cryptos’ de facto mission statement: to make everything run more efficiently, while realizing a healthy return on investment along the way. There’s just one flaw in this variation of the ur-disruptive crypto gospel: it’s woefully misidentified the core problem behind Puerto Rico’s long-term economic slump, and you can’t fix a problem that you don’t understand.

Crisis on Auto-Play

University of Puerto Rico Professor of Hispanic Studies and gubernatorial candidate Rafael Bernabé has a more nuanced grasp on the island’s plight. “You have to look at the crisis in Puerto Rico as something that has many layers,” he says. The first layer is obvious: the damage caused by Hurricane Maria. Below that layer there is the debt crisis, which gave rise to the largest municipal bankruptcy in U.S. history in 2017. Following decades of worsening deficits, the island currently owes seventy-four billion dollars to a diverse group of bondholders, including mainland pensioners. Most observers assume that both debt forgiveness and debt repayment are equally untenable, so instead of a lasting solution, the island’s economy has been periodically restructured. That’s the deepest layer of the crisis: for more than a century, the structure of the Puerto Rican economy has been built and rebuilt to meet the shifting needs of U.S. firms.

Sugar was the first industry to be radically transformed by U.S. investors after the United States acquired the island as a result of the Spanish-American War. Those investments were also preceded by another terrible hurricane, San Ciriaco, which wiped out the coffee crop in 1899. On arrival, Charles Herbert Allen, the first U.S. civilian governor of Puerto Rico, dramatically raised property taxes on farmers as a way to push them out of production. Many people lost their land. Some then found employment on sugar plantations. That was Allen’s big idea.

As governor, Allen had a team travel the island, collecting soil samples to determine the most fertile agricultural zones, but he barely stayed long enough to learn the results. After a mere seventeen months, Allen resigned from his post in Puerto Rico, and resurfaced on Wall Street with new friends and bright ideas for Puerto Rico’s future. By facilitating easy access to farmland, irrigation, railroads, and favorable tariffs on imports into the United States, Allen soon became president of the American Sugar Refining Company, now known as Domino Sugar.

In one night, I saw a dozen new guys arrive, each sporting a starchy shirt and a big grin.

The island had been cleared of coffee growers to make way for the sugar trust—a move that created a punishing legacy of structural inequality, with millionaire landowners lording over a workforce of low-wage sugarcane plantation hands. However, the sugar boom did not last. In the 1920s and again in the depression years of the 1930s, sugar prices declined, creating widespread hardship. Even in the good years, as sugar production consumed the island, many poor farmers were displaced by large plantations, dispossessing large parts of the population. In this context, the movement for Puerto Rican independence gained strength. In 1950, a nationalist uprising shook the island and was violently suppressed. And in the decade that followed, many sugarcane mills ceased production or saw their profits dwindle.

But by then, a new boom was already under way. In the 1950s and 1960s, “Operation Bootstrap” radically transformed life on the island a second time. In 1947, the passage of the “Industrial Incentives Act” made it so U.S. manufacturers did not have to pay taxes on the income they earned in Puerto Rico. Since the island was a U.S. territory, firms were also exempted from duties and restrictions on imports into the United States. Yet even though they operated on U.S. soil, those same firms were also exempted from federal minimum wage laws. Based on these incentives, Puerto Rico became the go-to destination for companies looking for cheap labor. U.S. firms built factories for processing food, assembling toys, sewing T-shirts, and rolling cigarettes.

The Puerto Rican economy grew rapidly during this period, but the unemployment rate never dropped below 10 percent. There were never enough jobs in light manufacturing for all the people who needed them. Unemployment levels on the island would have been even higher had it not been for a mass exodus to the mainland, where Puerto Ricans sought better opportunities in the barrios of New York City and Chicago. Most immigrants remained poor, but at least on the mainland their wages were bolstered by federal minimum wage laws.

Meanwhile, back on the island, Operation Bootstrap was sowing the seeds of its own destruction. In effect, Puerto Rico served as a testing ground for today’s supply chains, which link high-tech firms in California to far-flung production and assembly sites in China and Mexico. Puerto Rico was the proof of concept for globally integrated production, spurring the opening of export processing zones in Taiwan, South Korea, and India in the mid-1960s. As these other sites opened up—offering the same incentives for incoming capital alongside even cheaper labor markets—production in Puerto Rico seemed less and less attractive. Light manufacturing operations continued until the mid-1970s, but when the international recession hit in 1974 and firms struggled to cut costs, many of them fled the island for good.

The Scams Before the Storm

In the decades that followed, Puerto Rico’s economic growth rate decelerated significantly, from 7 percent per year in the 1960s to just 1.6 percent per year between 1970 and 1990. And the Puerto Rican economy’s underlying woes were even worse than these figures suggest. After the demise of Operation Bootstrap, the Puerto Rican government tried many tricks to lure U.S. companies back to its shores. It offered all kinds of tax breaks. Puerto Rico’s major export in this period became financial magic tricks: transfer pricing allowed companies to claim that they earned tax-free income from sales in Puerto Rico, when in reality they were avoiding paying taxes on income they earned abroad. These accounting hacks at least kept the island’s economy from descending into chaos, but they also obviously offered virtually nothing in the way of stable long-term prosperity for Puerto Rico’s working- and middle-class population.

The real state of the economy at this time is best indicated by the unemployment rate, which rose to around 15 percent in the crisis decade of the 1970s, and then to more than 20 percent in the decade that followed. Even then, so many workers were discouraged from looking for work that no one knew how high the unemployment rate actually was. Even today, when the unemployment rate is back below 10 percent, Bernabé explains, “the vast majority of people are not even in the labor market because they don’t have any hope of finding a job.”

In order to survive, Puerto Ricans have become more dependent on transfers from the U.S. federal government—chiefly food stamps, to which islanders finally gained access in the early 1970s. At the same time, the Puerto Rican government itself continued to receive federal funding for its operations. Federal employment rolls doubled between 1970 and 1990. Many of these jobs were probably unnecessary, as Anderson and the other cryptos repeatedly point out. But the Puerto Rican government was not as self-evidently stupid as the brave new cohort of digital disruptors claims—rather, the boom in federal jobs was a classic stimulus measure, in the tradition of many countercyclical periods of government expansion in other economies, most recently in the wake of the 2008 meltdown.

Things began to unravel when tax breaks for operating in Puerto Rico expired between 1996 to 2006. Mainland firms quickly liquidated their assets and fled. Since these companies hadn’t produced much in the way of genuine growth in the bricks-and-mortar economy, the stateside corporate exodus left behind a series of island neighborhoods that looked to be bombed out. As Bernabé puts it, “A broken crutch was not much help, but compared to that, nothing is even worse.” After 2006, the island was plunged into a vicious cycle of escalating debt and austerity measures enacted at the behest of global bondholders. And then the hurricane hit.

The Land of Lost and Found

As I walk around San Juan, I see ruins of all these periods of economic development etched into the landscape. In Old San Juan itself, there’s the Caribe Hilton, monument to the optimism of the Operation Bootstrap era. Supposedly, the piña colada was invented there. Rumor has it that crypto-titan Brock Pierce is now looking to buy the building. Farther west and south on the island one can see rusting oil refineries, the shells of abandoned factories, and long-disused sugar mills. The southern landscape of rust and ruin is where President Trump now wants to lay down a natural gas pipeline that local environmental activists have already blocked twice over in the past decade.

Puerto Rico has been ravaged in other ways, too. One of the most depraved instances was the program of mass sterilization conducted there between the 1930s and 1970s. Demographers wanted to solve unemployment by slowing the growth of the labor force, rather than creating jobs. Many women were sterilized without consent. Later, in the 1950s, poor and illiterate women were again used as experimental subjects: the FDA had approved clinical trials for the development of birth control pills, with extremely high hormone doses.

Today, the island remains stuck in place. As in other climes, Puerto Rico’s basic strategy for stoking economic development—using tax incentives to lure investors, who then seek still greater returns—remains the same but is now applied against cheaper and more docile labor forces. The latest emollients to global investors are Puerto Rico Acts 20 and 22, which aim to turn the island’s debt-ravaged economy into a tax haven for hedge fund managers and other high net-worth individuals. Maritza Stanchich, another professor at the University of Puerto Rico, spelled out the stark hidden costs of these giveaways. “Local Acts 20 and 22, now in effect for several years, have enticed hundreds of U.S. multi-millionaires to set up residency in Puerto Rico for six months each year,” she explains, “in order to pay no personal income or capital-gains taxes for twenty years, as well as a low corporate tax should they choose to engage in business here.”

Anderson tends to talk about the public sector like a millennial describing how many files his grandmother saves directly to her desktop; he’s there to hit the delete key.

She adds that “cryptocurrency carpetbaggers spouting tabula rasa visions à la Ayn Rand are among the visible newcomers.” Of course, the blockchain technology is not the problem, per se. The problem is that, just as in the past, mainlanders are showing up to use Puerto Rico as their personal laboratory. They leave as soon as their experiments are concluded, without having invested more broadly in the people and land as a whole; also without—thanks to the provisions of Acts 20 and 22—having contributed the bare minimum in taxes to the territory’s treasury. In the absence of any plan to cultivate and sustain long-term investment, unemployment has become a chronic drag on the island’s prospects for growth.

Worked Over

How do the crypto-utopians plan to solve the problem of endemic joblessness? It isn’t that they haven’t thought about it; the problem, rather, is that they think about it in the same facile way they approach every other problem—as a theater of disruption. The cryptos explain to me that “brain drain” is a major challenge: young people are getting educations in Puerto Rico, but when they find that there are no jobs here, they leave, taking their skills and income-generating potential with them. That’s one key reason, they say, why the island’s population has been slowly falling since the early 2000s. (Some studies of migration statistics don’t support this claim.)

In response, Pierce and the other crypto boosters have launched two modestly scaled tech startups in Puerto Rico. Not long ago, Red Cat hired eight Puerto Ricans who recently finished their engineering degrees on the mainland. These hires are part of a small team that is designing black boxes for drones to record and upload data to the blockchain. After the last tax exemptions expired in 2006, capital flight resumed in earnest; the ensuing contraction of the labor market meant that some 525,769 Puerto Ricans left the island in the ten years that followed. In other words, the Red Cat bosses are still more than a half a million jobs shy of turning the island’s grim employment picture around.

The other crypto-backed startup, Dronazon—think drones plus Amazon—is working with the FAA to develop drone delivery routes. These drones will carry twenty-pound packages from the Isla Grande Airport to Arecibo. From the roof of the Monastery Hotel, Anderson traces the aerial route with his hands: “from this place to that place.” As he does so, I imagine a parade of drones like dragonflies gripping hand soap and toilet paper and then flying off into the distance. Like Red Cat, Dronazon will generate a few highly paid tech jobs, but as a net job creation scheme, it looks to be a wash at best; its employees will be working to create technologies designed to displace far more jobs as the company expands.

By now, it’s a familiar story: tech companies are lured to a city on promises of tax breaks but create a smattering of net jobs. They build their own infrastructure of campus cafeterias and wifi-enabled buses, while rents rise and long-term residents can’t afford to live in their cities any more. It is no wonder the islanders are skeptical. I, too, am at a loss to see how Red Cat and Dronazon will solve the problem of brain drain. The cryptos are also laying the groundwork for Spaceport, which will construct a rocket launchpad—perhaps to create new jobs in space.

In any event, one thing is abundantly clear: the cryptos will continue amassing huge quantities of capital along the way. In March 2017, Act 22 was amended to include a requirement that investors make annual contributions of at least $5,000 to nonprofit companies operating in the territory. Pierce’s Restart Foundation is set up to capture such donations. Each incoming wave of cryptos chips in. In one night, I saw a dozen new guys arrive, each sporting a starchy shirt and a big grin. Anderson told me the donation money would be funneled to Dr. Sally Priester’s foundation as well.

“Not true, Chloe,” she tells me later. “Last time I spoke with Mr. Anderson was on July 17 at my office. Before that, was a few months ago. I didn’t know he was working with Mr. Brock. If that’s the case, that’s no good at all.” Priester says she wants the cryptos to make their data public to prove that they are really helping with reconstruction. “I hope they are not raising money in Puerto Rico or in the world in the name of the reconstruction of Puerto Rico.” As her voice rises in anger, she stresses the all-too-evident distinction between the crytpo version of Puerto Rican recovery and her own. “I’m working hard in this island, and I’m breaking my bones to play hard and be able to continue doing what I’m doing, for the change we want for Puerto Rico.”

Back in Old San Juan, Major Dream and Robert Anderson are talking a lot about disruption, as is their wont. They repeat a puzzling phrase to me a number of times: “You can’t turn an omelette back into eggs.” It sounds like a garbled translation of the old saying (mistakenly) attributed to Josef Stalin about having to break eggs in order to make an omelet. On my way home, I download a copy of the book the cryptos’ assistant tells me they swear by, The Internet of Money (Vol. 1 and 2) by Bitcoin evangelist Andreas Antonopoulos. It’s dedicated to “The Bitcoin Community,” and in a sense, they are dedicated to him: I discover the same line about omelets there. And in a transcript from his YouTube channel reprinted in the book, he goes into a revival style transport about the millennial promise of disruption: “You want disrupt?” he shouts. “I’ve got disrupt!”

I think of the legions of crypto-backers now streaming into the front ranks of Puerto Rican economic life under the sway of a similar battery of garbled catchphrases and slogans masquerading as business plans. And I suddenly have a queasy sense of what it might mean to eat a rainbow.

Chloe Watlington is the associate editor of Commune.

You Might Also Enjoy

The Meme Hustler

Evgeny Morozov

While the brightest minds of Silicon Valley are “disrupting” whatever industry is too crippled to fend off their advances, something. . .

salvos

Feedback Loop

G’Ra Asim

When one is permanently alienated in the land of one’s own birth, the seasons consist entirely of road games.

word factory

Baffler Newsletter

New email subscribers receive a free copy of our current issue.

Further Reading

Heads Up: We recently updated our privacy policy to clarify how and why we collect personal data. By using our site, you acknowledge that you have read and understand this policy.