Is Bitcoin in El Salvador a Disaster or Success?
The following is the video script for my "Is Bitcoin in El Salvador a Disaster or Success?" YouTube video, here. I am sharing this script for transparency -- to cite the sources of the video. These are rough notes, and not edited/proofread.
Video Concept
Give an update on what's happened with Bitcoin in El Salvador.
Give a few points on what happened while I as there.
Discuss challenges that have happened since I've left.
Introduction
Bitcoin became world news becoming a legal tender in El Salvador.
This was such big news I actually went to el Salvador and documented the rollout of the new law which forces businesses to accept BTC.
You could say that my time there was dramatic and eventful.
And then... I left. (Light clicks out.)
How Is it Now?
I'm curious to find out, how have things gone since then?
After 6 months, was Bitcoin in SV a success, or failure?
There have been hints that El Salvador may not even be not exclusively USING bitcoin. Is this true?
Does El Salvador actually have any bitcoin left, or had any, to begin with?
These questions sound crazy, so I had to investigate.
And that’s what we’re doing today!
Bitcoin is a National Currency in El Salvador
Bitcoin became a national currency alongside the dollar in El Salvador on September 7th.
This happened for 3 reasons:
3 Reasons Bitcoin Came to El Salvador
1 - Protection against inflation.
El Salvador uses the US Dollar as its currency.
And as you might have heard, 40% of all bills printed in 2020.
The resulting inflation will hurt El Salvador.
Here’s a simplified version of why this matters:
The US government wants a bridge. To get the money, it prints $100.
In doing that, there's one more $100 bill in circulation, which means all $100 are now worth $99.
So, you, the end US citizen, now have $99 instead of $100. But you got a bridge. There’s at least an argument to be made about the validity of what occurred.
But if you live in El Salvador, your $100 turned in $99 worth of purchasing power, but you got no bridge.
2 - Remittances
70% of the Salvadoran population receives remittance payments.
President Nayib Bukele estimates that money services providers like Western Union and MoneyGram will lose $400 million a year in commissions for remittances, thanks to the country’s bitcoin adoption.
70% of the Salvadoran population receives remittance payments.
Western Union App fee is 12.5% for a $100 transfer.
Bitcoin can reduce costs, ease, and speed.
3 - Access to the World Financial System
Hiding money under your mattress doesn't work.
These are great reasons to use Bitcoin! But, like anything, there are cons to the pros.
Here are some of the cons I learned about from the people in El Salvador while I was down there:
3 Problems with Bitcoin in El Salvador.
1 - Giving their effectively 1 party government more uncontested power.
Their president, Nayib Bukele, has some concerning behavior:
Arresting a well-known technology expert, Marco Gomez, without a warrant and without cause after criticizing Bitcoin.
Bringing in heavily armed troops into controls to overtly threaten the representatives into getting a bill passed.
Human rights violations in regards to the treatment of prisons, especially during covid.
Spontaneous Sacking of judges.
Allegedly negotiating a secret deal with a violent gang, MS-13.
Dismantling the Secretary of Transparency and Anti-Corruption and the Anti-Corruption Unit within the Ministry of Finance was closed – this was done before COVID broke its campaign promise to create a strong anti-corruption body and manage public funds in an open transparent way.
By the way, the issue of financial transparency has exploded. Bukele casually buying BTC with public funds on his phone. Even twitter users know that’s a bad call.
Secretly hiring Lorenzo Rey to build their government-controlled Bitcoin wallet Chivo, a man who was caught, and admitted to, falsing records of another crypto.
Guess who holds the keys to the Bitcoin in El Salvador?
Bitcoin is unique because it's public and private at the same time.
You can see how much bitcoin I have simply by looking at the QR code I use to accept bitcoin, but you can't access my bitcoin.
In El Salvador, you'd expect the public would be able to see the bitcoin address to verify how much their elected officials hold and to make sure corrupt officials are stealing. Only you can’t.
Not only is El Salvador holding the Bitcoin in their own private wallet controlled by Bukele, but citizens can't even verify how much, if any, the state wallet is holding.
And, there’s evidence that Bitcoin is not even behind held physically in El Salvador at all! - but out of the country by Bitso, Bianace, and Coinbase! In other words, El Salvador’s leadership is trusting its entire country’s financial reserves in the hand of a private CEO, living in another country, with no public oversight. If true this may be one of the greatest incidents of governmental incompetence I’ve ever heard of.
2 - Lack of opportunity
Like everything in life, there are opportunity costs.
If you buy one thing, you can not buy another.
SV now owns 1391 Bitcoins purchased with taxpayer money.
I found the dates of 1020 bitcoins purchased by Nayib via his Twitter and compared them with the price of the currency then, and now. (Now as in a few days ago when Bitcoin was at 46K.)
The results:
El Salvador Bought 1020 total bitcoins. Here's the return on investment:
Total spent on Bitcoin: $55M
1020 value today: $47M -
Difference: -$8,7M -
Bitcoin Trust Fund: -150M -
"Free" $30 per Citizen: $0 to $196M - depending on population count of 0 to 6.9M citizens.
ROI?: -$354.7 million dollars.
To break even, the Bitcoin price would need to be $155,588 to $350,000 per Bitcoin.
Meaning a market cap of 3,267,348,000,000 to 7,350,000,000,000. The global crypto market cap is 2T, meaning we’d conservatively expect Bitcoin (itself) to at least double the entire crypto market cap. Bitcoin doesn’t even have 1 trillion market cap yet, so we’d need to 3 to 7x it.
With crypto, anything is possible.
But it’s not happening any time soon!
3 - Reduction of personal rights.
It's been said, many times, that Bitcoin in El Salvador is optional. https://twitter.com/nayibbukele/status/1429620348216090627
Even the president of the country said this.
But this is not what the law says.
So far no enforcement of this law has gone into effect.
But a law is a law. You’re obligated to comply. You’re forced to accept bitcoin. There’s no wiggle room here, the law’s pretty clear.
You might say, “well, USD is forced for businesses to accept in the El Salvador and the US. Why not Bitcoin in El Salvador?”
Well, for one – you’d be wrong.
In the US, you are under NO obligation to accept USD. I can open a cafe and accept whatever I want. I have the freedom to do such.
With exceptions of paying debt.
Two wrongs don’t make a right. Forcing businesses to accept USD is just as wrong as Bitcoin.
People should have a personal choice to do commerce the way they choose.
These were 3 “pros and cons” for Bitcoin in El Salvador.
But there are some bigger questions now that Bitcoin IS there, whether people like it or not.
Fundamental questions – like… to what capacity is bitcoin ACTUALLY there at all? Does El Salvador ACTUALLY have crypto?
Does Bitcoin Even Exist in El Salvador?
This seems like a ridiculous question!
But, is it?
The whole tenant of cryptocurrency is trust is not necessary.
On a public ledger, everything can be verified!
That way you don’t have to believe anyone.
Right off the bat, we have a problem:
We have no way to verify El Salvador, as they don’t make their Bitcoin address public.
We need to “trust” that the president is being truthful in his tweets that he’s actually bought bitcoin.
But, it turns out the problem goes much, much deeper than that…
Numbers don’t Lie
Long story short, it compares when the president of El Salvador purchased Bitcoin versus how many users created an account on the Chivo wallet and got $30 of “free” Bitcoin.
(As a reminder, to incentivize users to use Bitcoin, the president offered $30 of BITCOIN (not USD!) to every user.
In short:
1. It took 26 days to reach 3M users, each who got $30 wroth of Bitcoin.
2. Meaning, a total of 2,003 bitcoins are required to cover the #40 of Bitcoin ONLY.
3. Only 1,391 bitcoins have been bought.
4. Chivo's consolidation wallet has only moved 295 bitcoins.
What this Means
This means one of 3 things, according to Mario.
Numbers don't match. I can change the curve to a logarithmic growth of the user base and that only changes the date of depletion. So...
1. Bitcoin purchases are a lie
2. User adoption # is a lie
3. There is an unidentified influx of BTC
Fractional Reserve
The situation we have here is known as fractural reserve.
Imagine your local bank, and you deposit all your money – $10.
And so do all 20 people in your small village.
Your local village bank now has a total of $200 stored in it.
Well, let’s say your village bank manager, Assistant to the associate manager, Nayib, is fiscally irresponsible and loses half of the money.
And, being a cunning man, he hides this fact from the villagers.
So long as less than 10 people take out their $10, there’s no problem.
But if 11 people try to take out their $10, there’s no money left.
Bitcoin was meant as a way to prevent predatory practices usch as fractural reserves.
When you don't have enough bitcoin to satisfy user's actions you get a mtgox (where everyone tries to take out, and cant, and the house of card falls.)
With El Salvador, it seems like we’ve got a similar situation. Hundreds of “ghost” bitcoins that don’t exist, within a system that cost hundreds of millions of dollars to set up.
And the bitcoins that do exist are hidden from public view, and very likely kept in the hands of private companies with no public oversight.
But It’s Not Just Bitcoin
The story of El Salvador is it’s only Bitcoin.
Adn there are YouTubers like me who deeply believe in Bitcoin – but ONLY bitcoin.
They call themselves “maximalists”, and believe that NO other crypto has any value whatsoever.
And describe any coin other than Bitcoin as a “Shitcoin.”
The story that’s been sold is that El Salvador uses Bitcoin. It’s the story in the media, ifrom Nayib, from the influencers.
But as it turns out, a great deal of the financial rails are build on a crypto know as Algorand, NOT Bitcoin or lightning!
Algorand
A very long story short, with links in the description:
El Salvador chose Algogrand to develop the governments blockchain infrastructure. This is corroborated by Fobres.
When someone tries to by a coffee with the Chivo app using Bitcoin, “Athena Bitcoin will provide some front-end services and Chivo’s ATM-related operations, while Algorand will act as the official blockchain provider.”
Athena is a Bitcoin ATM providor, by the way.
The Crypto infrastructure in El Salvador looks like this, details coming from an awesome, but behind a paywal, article on the Block.
This is a wonderful article, especially because it was exceptionally hard to follow the paper trail. Even they admit “Getting a full picture of the players involved has required piecing together various announcements and arguably has not been straightforward.”
The decision by the tiny Central American country of El Salvador to make Bitcoin legal tender has helped put it in the global spotlight. However, understanding which companies are involved in the project — and how their efforts fit together behind the scenes — has been far from straightforward. The public has largely been left to cobble together information about the bitcoin rollout from disparate company press releases, government presentations, tweets from the country’s populist president Nayib Bukele, news reports and first-hand accounts. This has resulted in confusion about which companies are doing what, exactly.
To touch on some of the players: There is BitGo, which provides security technology for the wallet. There is Bitso, which is the “core service provider”, according to Reuters. Then we have Silvergate Bank, which works with Bitso “on transactions that involve US dollars.’ Where Algorand comes in is through Koibanx.
Koibanx, a financial infrastructure company leveraging Algorand was the entity (along with Algorand) that made an agreement with El-Salvador which “involve the company building blockchain infrastructure on top of the Algorand blockchain.” They helped and are helping build the Chivo app.
It seems that Algorand is not just behind the wallet, but behind
This brings us to the central point:
The official blockchain providor of the Bitcoin wallet in El Salvador is not Bitcoin.
Lemon
But the story doesn’t end here:
Lemon, a LatAm fintech also runs on Alogrand and has investment from Coinbase ventures and Tim Draper.
According to an interview by Clarin, a south american newspaper, in an article titled “lemon Cash, teh Argentine company behind the implementation of Bitcoin in El Salvador” Lemon stated they are “providing a tool to one of the financial institutions of El Salvador to be able to accept payments in BTC and that simultaneously they do not run a risk due to the volatility of the digital asset giving them the possibility that the assets can be converted into dollars in real time.”
It’s Bitcoin, Brought to you By Algorand.
There’s a lot of technical sounding stuff here.
Bitcoin is of course involved with Chivo.
It’s just that the transactions happening behind the scene dont’ seem to be happening on Bitcoin or Lightning Network, but on the Algorand.
When users send money out of Chivo, Lightning/Bitcoin can come out.
I use the word can, because 100k+ has been lost.
In fact, Chivo “ate” $10 of mine, that I’m still waiting to receive, sent on September 9th in a video of mine.
Leaving El Salvador
I left El Salvador in September optimistic of the out come.
Algorand
Rumors Bitcoin isn't being used at all.
But rather Algorand.
How the Implementation Went
The second point of the video.
Curious how things are going Now
Recap the points of the video.
What we can learn
Recap the points of the video.
Suggest Another Video
Bitcoin Beach.
Bitcoin in El Salvador.
Outro
