June 25, 2021
On June 5, President Nayib Bukele announced his plans to make El Salvador the world’s first country to accept Bitcoin, a popular digital cryptocurrency, as a form of legal tender. The nation’s legislative assembly, under the majority control of Bukele’s New Ideas party, passed the bill just three days later. Under the new legislation, Bitcoin must be accepted as payment by all private firms and by the nation’s tax authorities. The move puts El Salvador into uncharted territory, posing serious risks that likely outweigh any potential benefits. However, prudent economic policy does not seem to be the purpose of the decision. Instead, Bitcoinization has in part been a successful publicity stunt, expanding the massive online following that President Bukele himself acknowledges is vital to his political power.
Elected in 2019, Bukele frames himself as an opponent of the traditional Salvadoran elite. He maintains an approval rating of roughly 90 percent, in large part by attributing a recent drop in the homicide rate (which began before he took office) to his harsh anti-crime policies. Another key to his popularity is his highly active presence on Twitter. Bukele, who previously worked at his father’s public relations firm, uses his Twitter profile to share news, memes, and posts supportive of his leadership with his 2.7 million followers — one of the largest Twitter followings of any national head of state when weighted by population.
Bukele’s carefully crafted public image, bolstered by paid trolls and lobbyists defending him, allows him to obscure the ways in which his rule has been similar to the corrupt Salvadoran elites he claims to oppose. In 2020, when the legislature objected to his proposal for a loan that would fund further police militarization, he sent soldiers to Congress to intimidate the lawmakers. This May, immediately after his party won a supermajority of the legislature’s seats, he replaced the attorney general and five judges on the Supreme Court in a move that the court itself declared unconstitutional. Most have recognized the move as a power grab; Bukele has termed it a “house cleaning.” While he claims these moves are necessary for fighting entrenched corruption, the US State Department has accused a number of Bukele’s close associates of being corrupt.
Enter Bitcoin. Advocates of the popular online asset argue that its digital and decentralized nature make it an ideal alternative to traditional currencies like the US dollar (USD). El Salvador, which uses the USD as its primary currency, will now serve as a case study in whether the cryptocurrency can live up to its promise.
Despite Bukele’s claim that the plan “looks bulletproof,” there are several reasons to doubt the wisdom of Bitcoinization as an economic policy. While one argument in support has been that this new payment method could expand remittances from Salvadorans working abroad — a financial flow that makes up a fifth of the Salvadoran economy — the benefits may be overstated. According to a survey by the national Chamber of Commerce and Industry, 82.5 percent of Salvadorans say they have no interest in receiving remittances through Bitcoin. Small Bitcoin transfers to the country did jump after the law’s introduction, but El Salvador’s limited Internet access and low remittance prices suggest they’ll continue to struggle to compete with USD transfers. Bitcoin ATMs, meant to help solve this issue, can charge fees which make them no better than regular banks to many Salvadorans.
Others argue that the law could grant the Salvadoran economy more autonomy from the USD by introducing a secondary currency, allowing the government more room for independent policy-making. But, despite the term “cryptocurrency,” studies suggest Bitcoin “does not work as a currency due to its excess volatility” — often 10 times higher than major exchange rates. Indeed, the use of Bitcoin to dodge capital controls may even weaken the Salvadoran government’s options in deciding economic policy.
The risks, on the other hand, are significant. The law obligates the government to provide “automatic and instant convertibility from Bitcoin to USD,” meaning they must provide USD in exchange for Bitcoin out of their own currency reserves. Bitcoin is too unstable to function as a reserve asset, so each swap will appear on the books as a reduction in the nation’s reserves. The IMF has raised some concerns amid their negotiations with El Salvador for a new loan agreement; more worryingly, this system may also tie the nation’s macroeconomic stability to the value of Bitcoin. In addition, cryptocurrency has the potential to massively accelerate money laundering (a problem that Bukele is allegedly familiar with).
Bukele has argued, “If 1% of [Bitcoin’s market cap] is invested in El Salvador, that would increase our GDP by 25%.” However, this would only be the case if 1 percent of Bitcoin’s value were invested in the country without any increase in the country’s Bitcoin production, an extremely energy-intensive process. On the day Bukele made this argument, shifting just 1 percent of Bitcoin’s energy costs to El Salvador would increase the country’s 2019 energy use by over 17 percent. Bukele plans to meet this new demand through the country’s state-owned geothermal power company. Though he claims at least one new well has already been dug for the task, the scale of new energy demand prompted by new Bitcoin production raises the prospect that higher energy prices may ultimately be shifted on to the public.
Only about 10 percent of adults in El Salvador are on Twitter, but Salvadoran journalists have noted that the country’s non-digital media often amplifies Bukele’s statements and spreads them widely among the population. As Bukele himself put it: “You put it on Twitter, and then media takes it from there…” This makes his Twitter account a powerful platform for him to communicate to voters, translating a stronger presence online into greater media coverage. Regardless of Bukele’s intentions behind Bitcoinization, the effect on his social media presence is undeniable. In the week following the Bitcoin law’s introduction, Bukele gained over 120,000 new Twitter followers — more than he had gained over the prior 10 weeks combined.
In the four days between the law’s announcement and its passage, Bukele Tweeted or Retweeted over 160 posts referencing his decision, many of which were praise for him from Bitcoin fans. One Retweeted user called him “the smartest president in existence right now.” After Retweeting a popular Bitcoin blogger who suggested that Bukele add laser eyes to his profile picture (a meme signifying that a user is a fan of Bitcoin), he did so, twice; the President of the Legislative Assembly joined in as well. Alongside the more substantial effects that may result from Bitcoinization, it has brought a major new wave of positive publicity to Bukele’s presidency.
The content of the social media response was at least as important as the scale: Bitcoinization strengthens Bukele’s attempts to sell El Salvador as a tax haven for wealthy foreign investors. Justin Sun, a Bitcoin multi-millionaire with 2.9 million followers, Tweeted that “Crypto investors and entrepreneur [sic] will start to move to El Salvador!” Bukele responded to Sun with a list of what he considers some of the country’s main draws: “Great weather, world class surfing beaches, beach front properties for sale,” “no property tax,” the new law’s exemption of Bitcoin profits from capital gains taxes, and “immediate permanent residence for crypto entrepreneurs” — the second time that day he offered to provide “help” to cryptocurrency investors seeking residency. Sun replied: “Amazing! Packing Now!”
Reading the language used in some of the posts that Bukele chose to share on his Twitter is revealing: “If I could buy stock in a country, I am buying El Salvador,” “Entrepreneurs and investors will be on the next flights to El Salvador,” “This is how a country is sold. This is how foreign investment is attracted,” and so on. One Retweet showed off a spike in Google searches for “El Salvador Real Estate.” US conservative commentator Avik Roy, whom Bukele Retweeted multiple times, argued,“if [Bukele] is successful, El Salvador may become best known as a destination of emigrants *from* the United States.” Perhaps the most interesting Retweet didn’t explicitly praise the move: “Doesn’t this El Salvador News also create a tax haven…[?]”
Bitcoin’s large and dedicated online following is perfect for generating press coverage — a fact likely known to a tech-savvy former publicist like Bukele. Even better, the fact that much of the community identifies as self-styled entrepreneurs and investors supports a narrative of Bukele being the first world leader to tap a new market for foreign investment, strengthening the image of his party as a source of “New Ideas.”
Of course, the Bitcoin law is unlikely to attract a large new wave of foreign investment, which is generally driven by factors unrelated to online fads and nice beaches. Even if it were successful, this investors-first model tends to do little to address the fundamentals of economic development: basic social services, employment opportunities, the distribution of national income, and investments that help shift production from lower to higher productivity activities. But if there’s one thing a Twitter-era head of state understands, it’s to not let truth stand in the way of a good story.