Understanding What Turned El Salvador’s President Bukele on to Bitcoin
It’s February 3, 2019, and the world’s media is reporting that Nayib Bukele, “the Latin American Donald Trump,” has just swept to power in El Salvador’s presidential elections. Turns out this is some pretty lazy reporting: Yes, Bukele is a right-wing populist. But it will soon turn out there is more to this former mayor of San Salvador, college dropout, and ex-motor salesman-turned-President than many once thought.
Few will imagine, for instance, that he will go on to author the world’s first-ever bill to make bitcoin (BTC) legal tender.
Diego Sánchez-Ancochea, Head of Department at the University of Oxford’s Oxford Department of International Development, told Cryptonews.com,
“The election of Bukele resulted from the dissatisfaction of the population with traditional parties’ ability to promote equity and human development for the majority of the population.”
And despite “some improvements” under two of Bukele’s predecessors, Sánchez-Ancochea added that “economic growth remained low, dependence on remittances high and income concentration significant.”
“Bukele promised a new way of doing politics even if he was never clear about what economic model he would promote,” he said.
Bukele (39) bucked the system by winning in 2019, but did so on a tide of public approval for his policies. El Salvador and the Salvadorian economy have been dominated (and terrorized) by violent gangs for decades, with violent murders and political corruption a daily occurrence. Bukele promised to end that. And he quickly showed his stripes.
In 2020, the media outlet El Faro reported that the President had been “negotiating” with the (imprisoned) leaders of notorious gangs like Mara Salvatrucha (MS-13) in a bid to cut the homicide rate. In 2012, a tri-party gang truce fell apart, leading to chaos on the streets in the years leading up to Bukele’s election. The media outlet alleged he had traded favors to the gang in exchange for peace on the streets.
The Trump parallels are not totally without merit: Bukele, like Trump, prefers to do his talking on Twitter, and often in English, so the Western world can understand him loud and clear, as bitcoiners have recently learned.
In response to the allegations, he published a series of photos showing cramped prisons, with bare-chested prisoners handcuffed and squashed up against one another in what the BBC called “unsanitary conditions” at the height of the coronavirus pandemic. Observers, speaking to Americas Quarterly, labeled the move a “shocking” display of “strongman tactics.”
On Twitter, he wrote:
“Show me one privilege [I’ve granted the gangs], just one.”
In the United States, the Democrat members of the House Foreign Affairs Committee in Washington wrote to Bukele to express their “alarm” and at what they called an “extremely troubling” response.
The seeds of a coming rift between Bukele and Joe Biden’s Washington had already been sown.
Fast-forward to February this year and the situation appeared to have deteriorated.
“The Biden administration turned down a meeting request with El Salvador’s president,” reported AP. Earlier, details of an ill-fated lobbying deal with Robert Stryk, “one of the most successful lobbyists during the Trump presidency,” were exposed by the same outlet.
In April, Bukele returned the slight, with AP reporting that Bukele had “snubbed” a meeting with Ricardo Zuniga, the Biden administration’s envoy to the region.
In March, Bukele’s policies got a massive thumbs up from the public – who voted overwhelmingly in favor of his Nuevas Ideas Party at the legislative elections, granting the party 56 seats out of 84 in parliament.
The largest opposition party, ARENA, has just 14. A slew of new MPs took to the floor. They are all overwhelming young, ambitious, charismatic, almost totally inexperienced in politics. Like Bukele, they are big on tech and have a totally different profile from the greying career politicians that have dominated Salvadorian parliamentary sessions until recently. One of them is aged just 25 – the lowest legal age for a Salvadorian MP.
By May, the relationship between San Salvador and Washington seemed on the verge of total collapse. Reuters reported that the United States Agency for International Development (USAID) had decided to stop granting aid to El Salvador’s national police and a public information institute and “instead redirect the funding to civil society groups,” after Bukele had moved to “oust” the nation’s attorney general and a number of top judges, reportedly replacing them with Nuevas Ideas allies.
USAID said it was “deeply concerned.” Bukele didn’t seem to mind.
With Washington souring to him fast, Beijing has apparently rushed to his side – coughing up USD 500m worth of public investment funding, also per Reuters. The country has also been using the Chinese Sinopharm vaccine as part of its coronavirus immunization project.
Just one thing has held Bukele back from a total split from the USA: dollarization. When the country adopted the USD as its official currency in 2001, it effectively surrendered control over its monetary policy – a factor that has thus far bound Bukele to Washington, like it or not. Enter Bitcoin.
Escaping the greenback
During Bukele’s recent live session with the crypto community, Castle Island Ventures partner Nic Carter asked the President point-blank if adopting BTC as legal tender was “the start of de-dollarization” and (if his move was “motivated by fears of inflation in the dollar”).
The President’s answer was “no.”
Bukele and his government have been keen to emphasize that the USD will remain legal tender. But providing an alternative to the greenback is already a huge step in the fight to win back control of his economy.
The bitcoin bill might not be an endgame de-dollarization strategy, but it is certainly an interesting mid-game move. Attracting some of the world’s most influential tech players to set up shop in the nation would be another.
Frances Coppola, a British financial commentator, opined on Twitter,
“Adopting BTC potentially gives El Salvador the hard-currency peg and monetary discipline it needs, while breaking its monetary and fiscal policy dependence on the United States. It is not total monetary sovereignty, but it is an improvement on the present situation.”
But she claimed that in order for this to work, Bukele would need businesses to buy into his policies.
“El Salvador will have to attract BTC into the country to build up reserves. […] The President appears to be trying to attract BTC whales, which is a reasonable strategy, but the country will also have to develop BTC-based export industries, otherwise money will be very, very tight,” Coppola wrote.
Indeed, Bukele and his allies appear exceptionally keen to convince overseas crypto entrepreneurs to relocate to El Salvador, and had begun offering assistance with fast-tracked residency and tax breaks as incentives. Also, the country might become another hotspot for Bitcoin miners.
Pedro Mendes Loureiro, a Lecturer in Latin American Studies and PhD Director at the University of Cambridge’s Centre of Latin American Studies, told Cryptonews.com that “part of” the reasoning behind Bukele’s move “is related to his young, tech-orientated profile.”
He added that “Bukele was elected largely as an anti-establishment president” who is “young and tech-savvy” and “a tough anti-crime agenda” – and despite accusations of authoritarianism, human rights violations and even enabling massacres in prisons, he has proven “one of the best presidents in dealing with COVID-19 in the Latin America region.”
Mendes Loureiro also added that “part of” Bukele’s reasoning “is undeniably related to the large role that remittances from the United States – migrant workers in the US sending money to households in El Salvador – estimated to be around 20% of GDP, play in the economy.”
Remittances account for 23% percent of El Salvador’s gross domestic product and benefit about 360,000 households, per AP data. The money sent home to El Salvador by migrants hit a record high of USD 5.92bn in 2020.
“Bitcoin can, potentially, facilitate these remittances. Bitcoin transaction costs for everyday purchases, though, are likely to be prohibitive, so in all likelihood, its introduction is being planned for large-scale transactions.”
The economist Luis Hasburn appeared to concur. He said that accelerated public spending under the Bukele regime has seen debt spiral, adding that “Salvadorans abroad send USD 4 billion in remittances back home a year. [Bukele] wants access to these funds.”
Meanwhile, Sánchez-Ancochea stated:
“Bukele has argued that [the new law] will give more access to financial services to the poor, but this argument makes no sense. I wonder whether this is more a publicity move than anything else and will have limited policy implications.”
Within the country, financial experts have expresses doubt.
Per the media outlet ElSalvador.com, the economist and talk show host Luis Membreño claimed that by obliging merchants to accept BTC payments, the government “is restricting economic freedom” and opined that “the volatility of bitcoin is going to introduce macroeconomic distortion to the country.”
Another economic thinker claimed in the same piece that the move had put El Salvador “at the forefront of irresponsibility, not of technology.”
But the author of an editorial piece in the Diario El Mundo claimed that the while still not devoid of “risk,” the move was nonetheless “bold” and concluded:
“The truth is that there is a growing acceptance of [crypto] in the world and in El Salvador. […] For now, it is clear that [BTC] will not replace the dollar, and that will give people peace of mind.”