Source | Decrypt, Forbes, Cryptopotato

El Salvador's adoption of Bitcoin has been one of the biggest stories in the crypto industry in 2021.

At the <Bitcoin Conference 2021: Miami> held in June this year, President Nayib Bukele of El Salvador announced that Bitcoin will soon be accepted as legal tender. The announcement was greeted with applause from Miami attendees, as well as high praise on Twitter from Bitcoin supporters such as Michael Saylor and Peter McCormack. However, this event that sparked heated discussions around the world did not go smoothly. Some international organizations and economists, including many people living in El Salvador, were not so enthusiastic.

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Bitcoin Lands in El Salvador

Since its birth more than a decade ago, Bitcoin has been widely regarded as a financial alternative to excessive government intervention and invasion of privacy by existing financial institutions.

But in El Salvador, Bitcoin has undergone an unprecedented transformation - becoming a country's legal tender.

“Next week, I will be introducing a bill to Congress to make bitcoin a legal tender,” President Buckler said in a video presentation to BitcoinCon 2021.

Despite the unprecedented move, Bukele’s move was actually designed as a nationwide hedge against inflation by El Salvador, borrowing from the bitcoin development “playbook.” El Salvador is one of the few countries that uses the U.S. dollar as its legal tender, and like many Bitcoin proponents, Bukele lamented the fact that the U.S. dollar is prone to inflation. Unfortunately, if the US pursues inflationary economic policies, Salvadorans will only see their assets dwindle. Given that bitcoin is considered a hedge against inflation, it became the new legal tender in El Salvador.

In addition, the livelihoods of many Salvadoran residents are highly dependent on diaspora remittances, which account for 20 percent of the country's gross domestic product (GDP). More than 2 million Salvadorans live outside the country's territory, but they maintain close ties to their homeland, remitting more than $4 billion annually.

Expatriates typically send money domestically through a bank or other financial service provider, but these intermediaries can drive up the cost of sending money across borders. For example, if someone remits $1,000 from the United States to El Salvador, even under the guise of a "zero-fee" exchange rate, the customer may actually face charges from the bank on both sides.

One of the advantages of Bitcoin, or any cryptocurrency, is that it does not rely on any intermediaries. Therefore, Bitcoin may be more attractive to El Salvador, a poorer country, and individuals who want to avoid such fees.

It has also been demonstrated in El Salvador that encryption technology can promote financial inclusion at scale. Fewer than 30% of Salvadorans have a bank account, but in the weeks after the Bitcoin law went into effect and the Chivo wallet launched, more people had bitcoin wallets than bank accounts.

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draw global attention

When Buckler first announced his support for Bitcoin, he actually only got the buzz among passionate Bitcoin supporters in the crypto community. Other organizations, however, are less enthusiastic about the economics of bitcoin as a fiat currency.

In June, the IMF said El Salvador’s decision to adopt bitcoin as legal tender raised several “macroeconomic, financial and legal issues that require very careful analysis.”

That same month, the World Bank said it would not help El Salvador establish bitcoin as legal tender and declined to provide donations and technical assistance to the country due to concerns about cryptocurrencies’ lack of transparency and well-documented environmental damage.

According to investment bank JPMorgan, the move is not cause for celebration: “It is clearly of great importance to the country, but it is difficult to see any tangible economic benefits associated with the adoption of bitcoin as a second form of legal tender.”

The Strike wallet, which was launched in El Salvador in March and is widely used, is also controversial. Money transmitter is a term with special legal meaning. In the United States, money transmission services need to be licensed in every state in which they operate. Yet Zap, the parent company behind the wallet, has not been able to do that. According to the investigation, Zap is not licensed to operate in most U.S. states and is only licensed to transmit money in 17 states, meaning many of the crypto transfers sent to El Salvador using Strike may have been illegal.

Just last month, the Bank of England expressed concern about El Salvador. Bank of England Governor Andrew Bailey said that what worries him "most" about El Salvador's embrace of bitcoin is "whether citizens of the country understand the nature and volatility of bitcoin".

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domestic dispute

In El Salvador, the launch of Bitcoin Bill and its official wallet, Chivo, was far from smooth. With the adoption of Bitcoin, Buckler put his country at the center of "a global discussion about the future of money."

Chivo Wallet is a national digital wallet released by the El Salvador government on September 7th to implement the Bitcoin Act. To this end, El Salvador promises that users who download and authenticate Chivo Wallet will receive a $30 bitcoin reward. The move brought the official Salvadoran wallet to more than 2 million users within a month.

In a previous article titled "Hackers Target $30 Bitcoin Wool in El Salvador," Baize reported that some hackers stole the identities of Salvadoran residents and activated wallets linked to their identities in order to obtain $30 Bitcoin rewards. According to the description on Chivo Wallet's official website, registering a wallet account requires scanning the front and back of an individual's driver's license, and then performing face recognition to check the identity of the registrant. However, a Youtube user in El Salvador verified on-site that he only used a "movie poster" or a water glass to fool the face recognition and successfully registered the account, which proved that the system was flawed.

Just this month, a Twitter user under the pseudonym El Comisonado said he had collected more than 50 instances of Bitcoin being lost from Chivo wallets. “I don’t think the Chivo wallet is safe, no one can verify it because the code is not open source. Very few people use Chivo today because many people don’t know how it works,” he said.

However, more Salvadoran complaints have nothing to do with the technology, but are premised on the state mandating the use of Bitcoin. Bukeler said in August that Salvadorans don’t have to use bitcoin if they don’t want to. “What if someone doesn’t want to use Bitcoin? Well, nothing, don’t download the [Chivo] wallet and carry on with your normal life.”

But this is not the case, as this contradicts Section 7 of the Bitcoin Act, which reads: "Every economic agent (merchant) Bitcoin as payment.” So Bitcoin is hardly optional for local merchants.

In this context, some trade unions, businesses, and student representatives took to the streets to protest many times, demanding the withdrawal of the Bitcoin Act. Some held placards that read "We Don't Want Bitcoin." Extreme protesters even set fire to Bitcoin ATMs.

Additionally, multiple surveys have shown that the vast majority of Salvadorans think the Bitcoin bill is a bad idea. According to a study commissioned by the Center for Citizen Studies (CEC) at the University of Francisco Gavidia (UFG), three-quarters (77%) of undergraduates at local universities in the Salvador capital believe that Bukeler’s adoption of Bitcoin is “not very wise" or "not at all wise", with only 12.9% calling it a "smart" move and 6.5% calling it a "very smart" move.

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Proposed "Bitcoin City"

Last month, Bukele announced that El Salvador would build a "Bitcoin City." He likened "Bitcoin City" to a city founded by Alexander the Great of Macedonia, which would be exempt from income, property and capital gains taxes.

The world's first "Bitcoin City" will be round, like a coin, and will be located between two cities in El Salvador - La Union, the capital of the province of La Union, and Conchagua. (Conchagua).

The city of Conchagua is home to a volcano of the same name, which has active fumarole areas on both main peaks, but has no confirmed eruption history. According to Bukeler's description, the country's government plans to build a power plant next to the volcano to provide energy for the "Bitcoin City" and bitcoin mining. Mining bitcoin and other cryptocurrencies requires the use of large-scale computer equipment, not only It is costly, difficult, and consumes a lot of energy.

The city will become a full-fledged metropolis with residences, business districts, restaurants, an airport, and port and rail services, with public infrastructure expected to cost around 300,000 bitcoins (approximately $17.7 billion). The city is exempt from other taxes such as income tax, property tax, and the only tax will be a 10% VAT. Part of the value-added tax will fund bonds issued to build the city, and another part will be used for city construction and services.

In addition, El Salvador will start financing in 2022 and issue the world's first Bitcoin sovereign bonds - "Volcano Bonds".

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Opaque law enforcement leads to controversy?

In September, police in El Salvador arrested prominent bitcoin critic Mario Gomez without a warrant.

Gomez, the founder of tech incubation company Hackerspace, is one of the Salvadorans who have spoken out against the implementation of the Bitcoin bill. Gomez has participated in multiple forums and video conferences detailing what he sees as the flaws and risks of El Salvador’s bitcoin bill. Gomez, who is also known for leaking key details of the Chivo wallet, said several design features of the wallet concerned him, including the fact that the operating costs of the "zero-fee service" would be covered by taxes.

According to reports from local media La Prensa Grafica, police from the Salvadoran Combat Tactics Section, the equivalent of special police, tried to confiscate Gomez's computer during the arrest. Shortly after his arrest, Gomez was transferred to the Special Crime Unit of the National Central Investigation Division. Police said Gomez was being investigated for "false emails sent to various bank users whose accounts had been compromised." Authorities in El Salvador are trying to access Gomez's cell phone and computer.

Police released Gomez a few hours later, according to a statement from Gomez's lawyer, Otto Flores. "He was 'arrested' without a judicial order and it is unclear why he was handcuffed".

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Buying Bitcoin in a big way, but not transparent

As of writing, Buckler has purchased more than 1,100 BTC.

What's the President's Bitcoin Buying Strategy Like? That is more than once by "buying the dip" in response to a drop in the price of Bitcoin. For example, Buckler bought 150 BTC, 420 BTC, and 100 BTC in September, October, and November, respectively.

But here's another place that calls into question transparency. So far, Bukele has not disclosed who controls the private keys to the government’s bitcoin wallets — a serious problem given the fact that El Salvador’s bitcoins are being added to the treasury.

Summarize

Summarize

For the El Salvador government and local economic participants, this Bitcoin experiment is not easy, there are still many problems to be solved, and the success of Bitcoin in El Salvador remains to be seen. Meanwhile, the rest of Latin America is closely watching the situation in El Salvador, where politicians have begun pushing for their own bitcoin/cryptocurrency bill. After all, they all have one thing in common: too far from God, too close to America.

According to the "Notice on Further Preventing and Dealing with the Risk of Hype in Virtual Currency Transactions" issued by the central bank and other departments, the content of this article is only for information sharing, and does not promote or endorse any operation and investment behavior. Participate in any illegal financial practice.

risk warning:

According to the "Notice on Further Preventing and Dealing with the Risk of Hype in Virtual Currency Transactions" issued by the central bank and other departments, the content of this article is only for information sharing, and does not promote or endorse any operation and investment behavior. Participate in any illegal financial practice.