Millions of investors holding crypto assets are reeling. After a brutal six months in which more than $1tn in value has been wiped out, some of the losers are big names, such as Vitalik Buterin, creator of ethereum, and Mike Novogratz, the hedge fund luminary who backed the now-collapsed luna digital coin. Others are tiddlers. But one of the most interesting is the government of El Salvador.
About a year ago, Nayib Bukele, the country’s populist president, announced plans to become the first nation to adopt bitcoin as legal tender, alongside the US dollar. IMF officials and western central bankers decried the idea as something only a president with a wobbly grasp of economics could embrace. Bukele did not help his cause when he tweeted: “#Bitcoin has a market cap of $680 billion dollars. If 1% of it is invested in El Salvador, that would increase our GDP by 25%”, which seemed to fundamentally misunderstand how bitcoin and GDP work.
Bukele defiantly bought a pile of bitcoin (spending more than $100mn so far, according to my colleague Robin Wigglesworth) and asked his citizens to download digital wallets, which more than half of the population of 6.5 million duly did. Since then, however, that crypto store has lost about a third of its value, creating paper losses of $40mn for the country. This is a painful blow to a nation already in parlous fiscal shape.
Is El Salvador ready to renounce its embrace of cryptocurrencies? Last week, I chatted with Suecy Callejas, a former ballerina and lawyer who is now both culture minister and acting head of the national Congress. Her message was a defiant “No.”
Callejas told me bitcoin looks different from the viewpoint of an emerging market politician as opposed to western critics – or traditional economists. In these choppy geopolitical times, her points are worth noting, even if you disagree.
Her first point is about poverty. Right now about 70 per cent of El Salvador’s population does not have access to the banking system. But more than half have cell phones, albeit with patchy internet service. So offering people digital wallets can “promote financial inclusion”, or so the government argues.
A second issue, said Callejas, is that El Salvador’s economy relies on remittances from overseas workers, equating to about a quarter of the country’s entire gross domestic product. Currently, “people lose almost 20 per cent” of that money to the high transfer fees charged by companies such as MoneyGram and Western Union. Using digital wallets for transfers is potentially far cheaper.
What’s more, the country’s citizens have seen so much volatility that they are less shocked by currency swings. “We know money is always fluctuating,” she said. “Now bitcoin loses 25 per cent of its value, but in a few weeks maybe bitcoin is going to recover.”
Finally, there is the issue of geopolitics. El Salvador hates being vulnerable to the vagaries of Washington’s policies. And not just because the country, like many other emerging markets, suffers badly when dollar interest rates swing.
The wave of western sanctions against Russia has fuelled fears that the US is increasingly using the dollar as a political weapon. “We are a small country and we are vulnerable,” Callejas explained. “We are trying to be more independent and sovereign.”
Western finance officials and the mighty IMF would retort that bitcoin is the wrong “solution” to these issues. They may be right. Crypto tech is so clunky that there is little evidence it is being widely used to pay for things. And the disquiet over cyber theft and the energy usage required to mine digital currencies persists for good reasons.
But what westerners also need to understand is that resentment against the dollar-based system is rising in the non-western world. Indeed, Bukele is not the only leader curious about crypto. Last week, his government held a conference about its experience on its so-called bitcoin beach zone, and finance officials from dozens of other emerging market countries turned up. The highest per capita use of crypto today is overwhelmingly in emerging markets, according to research from crypto analytics group Chainalysis.
This makes sense. As Hyun Song Shin, economic adviser at the Bank for International Settlements, has noted with colleagues, while the frictions associated with bitcoin seem excessively high to westerners, this “cost” (ie risk) looks relatively lower in regions with weak trust in fiat currency.
So maybe El Salvador’s experiment will end in tears. It certainly looks risky. But the west needs to recognise it would also be risky to ignore the sense of economic desperation – and frustration with the dollar-based global order – that has sparked this move. Particularly at a time when economic pain is spreading, becoming the new theme of the age.
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