[Twisting Bitcoin] El Salvador's Goal Is Not Bitcoin

'Naive Bukele,' the populist president born from corruption in both parties
But El Salvador's economy rapidly declines after COVID-19
Accepting Bitcoin as legal tender but not abandoning the dollar
Experts say, "El Salvador's goal is the dollar, not Bitcoin"

Cryptocurrency is sweeping across the globe. It is even likened to a so-called 'frenzy.' However, the wilder the frenzy, the more necessary it is to pause and observe. If problematic aspects are swept away along with the hype, they are bound to resurface as bigger issues someday. This is a time to calmly review the cryptocurrency market, in a segment called ‘Twisting Bitcoin.’

[Image source=Yonhap News]

[Asia Economy Reporter Gong Byung-sun] On the 9th (local time), El Salvador, a Latin American country, became the first in the world to approve Bitcoin as legal tender. The approval bill passed overwhelmingly with 62 votes out of 84 in the parliament. Bitcoin, which was originally created as a currency, was given its first opportunity to prove its value. El Salvador’s decision acted as a positive factor, causing Bitcoin to rise by 12.43% that day.

Opinions on El Salvador’s decision are divided. Some question how such a volatile currency will be utilized, while others praise it as a courageous decision and foresight in embracing technology. Some speculate that other Latin American countries in similar situations might also adopt Bitcoin as legal tender.

So, is Nayib Bukele, the President of El Salvador who decided to accept Bitcoin as legal tender, truly a visionary leader? Or is he merely a reckless populist acting at a young age of 39? To conclude, experts explain that Bukele’s goal is not Bitcoin itself. Then, what is Bukele aiming for by accepting Bitcoin as legal tender?

A Populist President Born Amid Disillusionment with Politics

First, we need to look at how President Bukele came to power. El Salvador has a troubled history, having abandoned its legal tender, the colon, in 2001 and adopted the US dollar. After gaining independence from Spain in 1821, El Salvador saw a center-left government come to power, but the regime collapsed due to a military coup in 1931. From 1980 to 1992, a civil war raged between the military government and leftist guerrillas, ending with a ceasefire mediated by the United Nations. Subsequently, the left-wing Farabundo Mart? National Liberation Front (FMLN) and the right-wing Nationalist Republican Alliance (ARENA) alternated in power, but severe corruption led the public to grow disillusioned with politics. Weapons distributed during the civil war were never recovered and were used in organized crime, increasing public dissatisfaction.

President Bukele emerged amid this environment. Affiliated with the third party Grand Alliance for National Unity (GANA), he won the presidential election in February 2019. A businessman and former mayor of San Salvador, the capital of El Salvador, he gained public favor with his straightforward criticism of established politicians and efforts to reduce crime rates. During his tenure as mayor, he approached organized crime by supporting youth education and welfare to rebuild communities, resulting in a 16% drop in crime rates in San Salvador within one year.

Riding on public popularity, he seized power. However, the political landscape was still dominated by two major parties. In February last year, Bukele submitted a $109 million (about 121.7 billion KRW) ‘Territorial Control Plan’ bill to strengthen security, but it faced opposition from the opposition parties and was difficult to pass. His party, GANA, held only 11 out of 84 seats in parliament, making it a minority party.

In response, President Bukele deployed the military to the parliament. This was the first time since the end of the civil war in 1992 that troops entered the legislature. He began to show populist tendencies by appealing to the public. Although the opposition protested, Bukele mobilized supporters, sending messages like “Let’s pressure the parliament by taking to the streets,” and his supporters gathered outside the National Assembly to voice their demands.

Later, during the spread of COVID-19, he implemented policies with a populist authoritarian character. The El Salvador government detained thousands for violating curfew orders. Although the Supreme Court ruled these detentions illegal, Bukele ignored the ruling, claiming the decisions were made for the greater good of many lives.

Populist President Failing to Deliver Results

[Image source=Yonhap News]

Bukele’s regression of democracy is also reflected in numbers. According to Reporters Without Borders in April, El Salvador ranked 82nd out of 180 countries in the 2021 World Press Freedom Index. This was an 8-step drop from 74th place last year and the largest decline among Latin American countries. In the World Democracy Index published by the UK’s Economist Intelligence Unit (EIU), El Salvador scored 5.9 out of 10, ranking 77th globally?the lowest since 2006. The EIU harshly criticized El Salvador, stating there is no country moving toward dictatorship as much as El Salvador.

Although Bukele’s regime emerged due to corruption by the two major parties, it has failed to address corruption. According to the 2020 Corruption Perceptions Index released by Transparency International on January 28 this year, El Salvador scored 36 out of 100, ranking 104th out of 180 countries. Transparency International evaluated that power became more concentrated in the El Salvador government after COVID-19, leading to an explosive increase in corruption related to COVID-19 procurement. In fact, according to the ‘Government Procurement Transparency Index during the COVID-19 Public Health Emergency’ report published by the Central American Institute of Business Administration (INCAE) Business School, El Salvador scored 0.42, lower than Guatemala and Honduras. Previously, El Salvador had higher transparency than Guatemala and Honduras.

Even if all this was sacrificed, it would be somewhat fortunate if the people at least had enough to eat. However, El Salvador’s economic situation is reaching its worst. The government is failing to deliver results that could appease the public who have given up on democracy.

According to the Central Bank of El Salvador’s 2020 export-import statistics, El Salvador’s exports decreased by 15.4% compared to 2019. Conversely, the debt ratio surged. Last year, El Salvador’s public debt reached $2.773 billion, exceeding the combined debt of $2.555 billion from 2017 to 2019. Consequently, international credit rating agency Moody’s estimated that El Salvador’s public debt-to-GDP ratio would approach 90% in 2022, up from 70% in 2019.

International financial institutions also have a bleak outlook. Earlier this year, Moody’s downgraded El Salvador’s credit rating outlook from ‘positive’ to ‘negative,’ citing the large scale of future financing needs and the lack of sources for dollar inflows. Economic analysts have assessed that El Salvador has entered a phase of actual economic recession.

'Earning Dollars with Bitcoin'... A Gamble Backed by Popularity

President Nayib Bukele of El Salvador (Source: President Bukele's Twitter)

Exports are declining, and El Salvador’s legal tender, the dollar, is beginning to run out, yet expenses remain. However, Bukele’s new party, Nuevas Ideas, won a landslide victory in February this year, and public support remains strong. In response, Bukele took a gamble to earn dollars by deciding to accept Bitcoin as legal tender.

However, experts analyze that the El Salvador government did not truly believe it could use Bitcoin as currency. Their sole objective is the dollar. Professor Hong Ki-hoon of the Department of Business Administration at Hongik University explained, “If they really wanted to use Bitcoin as legal tender, they would have to abandon the dollar, but the dollar still retains its legal tender status. It is expected that they are trying to earn dollars by leveraging the international attention focused on Bitcoin.”

El Salvador is presumed to have aimed for side effects alongside dollars by accepting Bitcoin. Professor Hong said, “Since the state officially recognized Bitcoin, the government can sell Bitcoin to earn dollars. Also, by being the first country to recognize Bitcoin, Bitcoin supporters may visit as tourists, generating tourism revenue.” In fact, President Bukele emphasized that accepting Bitcoin would create ‘jobs,’ which is presumed to mean attracting tourists to create employment.

Why El Salvador Cannot Succeed: Standards, Exchange Rates, Taxation, and Currency Control

However, it is expected to remain difficult for El Salvador to accept Bitcoin as legal tender. Beyond volatility, issues remain regarding standards, exchange rates, taxation, and above all, control.

First, standards. Even if Bitcoin is to be used as currency, it is unclear which exchange should be the reference. Professor Lee Byung-wook of Seoul School of Integrated Sciences and Technologies said, “Problems will arise regardless of which exchange is used as the standard. Above all, the economic sovereignty of a country becomes tied to the trading trends of an unspecified majority.” The exchange rate issue is similar. As legal tender, there must be a standard when exchanging with other countries’ currencies, but Bitcoin’s price fluctuates constantly, and there is no clear standard. Furthermore, since currency exchange is difficult, it could damage the country’s credibility.

Taxation issues also remain. It is difficult to track Bitcoin transactions due to its decentralized system. Although the US Federal Bureau of Investigation (FBI) recently tracked hackers’ wallets, it is presumed they received help from exchanges. In other words, if transactions are made through personal wallets rather than exchanges, taxation is impossible unless the government seizes the wallet’s private keys. Professor Lee said, “Even if the government creates certified wallets, taxation is impossible. Once Bitcoin is moved from a government-certified wallet to a personal wallet, that’s it.”

The government also cannot control the currency. When liquidity supply is needed, the government cannot print Bitcoin. Considering these factors, President Bukele announced plans to mine Bitcoin using geothermal energy, an eco-friendly energy source, but this is practically impossible. According to the University of Cambridge in the UK, the electricity consumption for Bitcoin mining reaches 133.68 terawatt-hours (TWh) per year. However, according to the International Renewable Energy Agency, El Salvador produced only 204 megawatt-hours (MWh) of geothermal energy last year. This means only about 0.00000152603% of the electricity required to produce all Bitcoin annually is available for mining. Mining is practically impossible, and the government cannot supply Bitcoin to the market when needed.

Professor Hong explained, “Ultimately, El Salvador’s decision is just for show. Since they are actually pursuing dollars, it will serve as an example of why Bitcoin cannot become currency.”

This content was produced with the assistance of AI translation services.