In September 2021, El Salvador made Bitcoin legal tender to spur foreign investment and economic growth. Since then, the Central American country is poorer and walks the tight rope of financial default. Contrary to the expectation that the cryptocurrency would bring financial inclusion, Bitcoin adoption has depleted El Salvador’s Treasury, ballooned its foreign debt, and failed to tackle mass migration to the U.S.
The experiment started seemingly as a great strategy to attract Bitcoin enthusiasts to build-what many fans of the Salvadoran president Nayib Bukele called the “Salvadoran dream”. The head of state of this small country, the size of Massachusetts, tried to lure crypto entrepreneurs by promising no capital gain tax, immediate permanent residency, and beachfront properties. The scheme included using public money to purchase $1.52 million in Bitcoin and launching an electronic wallet called Chivo (cool in Spanish) with a network of 200 ATMs.
El Salvador has wasted at least $425 million adopting the cryptocurrency, equivalent to nearly a third of the 2022 Salvadoran budget for education and more than 40% earmarked for healthcare. El Salvador has the lowest foreign direct investment in Central America, and the World Bank envisions an economic recession by 2023.
This is a massive blow for an economy 14 times smaller than Los Angeles County. The Bukele administration owes $30 million to the Universidad de El Salvador- the state university- which accounts for 22% of the university’s budget. To account for this major deficit, the university has slashed half funding earmarked for STEM programs. Cities are bankrupt after Bukele cut 75% of their funds, and public employees' unions have demanded improvement of their work equipment and the payment of a “promised” raise.
El Salvador’s domestic woes reflect Bukele’s – who has labeled himself as “the world's coolest dictator”- disastrous dealings with international finances. Bloomberg Intelligence has pointed out that El Salvador is one of the riskiest nations in danger of default. To diminish nonpayment fears, the country has promised to buy back $1.6 B in foreign bonds before September 15, 2022. Bukele’s plan includes paying debt with loans from a multilateral bank and compromising the country’s foreign exchange reserves.
The Biden administration -Vice President Kamala Harris- promised $3.2 billion in private sector commitments to “create opportunities” in Central America and tackle migration. But Biden’s remedy to the Central American predicament replicates policies that endorse extractive and exploitive practices conducted by many American corporations. American crypto enthusiasts have followed a similar script: making El Salvador a new digital banana republic in which Bitcoin enthusiasts manipulate a poor country’s strong man to extract resources without accountability back home.
It is not gratuitous philanthropy that Max Keiser – a U.S.-born pro-Kremlin crypto influencer- and Michael Peterson – a San Diego native- are the faces of crypto colonialism that wants to subvert the weak Salvadoran economy by building colonizing “bubbles” in which ex-pats trade Bitcoin exclusively. Crypto in El Salvador is a reverse Robin Hood: wealth transfer via public money to an affluent crypto community.
The U.S. must toughen up its regulations to protect remittances from the rapacious hands of crypto companies. A new version of the Accountability for Cryptocurrency in El Salvador (ACES) ACT- currently in study at the House of Representatives after approval by a Senate committee- must go beyond strengthening money laundering oversight to address how U.S. citizens who trade crypto avoid taxes in American soil.
Comparisons between El Salvador and Anarchapulco- the failed anarcho-capitalist colony established in Acapulco in late 2010- have blossomed on social media. However, as HBO’s documentary “The Anarchists” shows, the anarcho-capitalist colonization of the Mexican coast was small and had limited influence on local politics. El Salvador is Anarchapulco on steroids. What started as a Bukele’s dream to transform El Salvador into Singapore- a small sovereign state with a booming economy- could end as a crypto dystopia. El Salvador can be an example of how crypto take money from the poor to give it to the new rich.