El Salvador’s Crypto-Catastrophe
On the 7th of September last year, El Salvador’s new “Bitcoin Law” went into effect. This law makes Bitcoin legal tender in El Salvador, alongside the US dollar. This controversial law was introduced to the legislative assembly by President Nayib Bukele, El Salvador’s populist leader.
President Bukele is infamous for his “attempted coup” on the 9th of February 2020, where he surrounded the legislative assembly with the military to coerce the approval of a huge loan to finance “surveillance cameras, drones, helicopters, patrol cars, uniforms and bullet-proof vests among other things” to fight gang violence. He denied being interested in absolute power though, saying that if were a dictator, he “would have taken control of everything”. The following year, he more or less did exactly that, once the party he founded (Nuevas Ideas) had gained a supermajority and got rid of 5 (opposition) supreme court magistrates and the attorney general, effectively giving Bukele control of the high court and congress.
Bukele is also a massive crypto enthusiast. He’s even announced the construction of a “Bitcoin City”, which would use geothermal power to mine bitcoin. That said, there are legitimate arguments for the adoption of bitcoin. Firstly, a 5th of El Salvador’s GDP comes from Salvadorans sending money back home from overseas (remittances); so by using Bitcoin (which has lower fees), Salvadorans abroad will theoretically be able to send more money home because of the lower of transaction fees. On top of that the decentralised and digital nature of cryptocurrencies makes it far easier to set up accounts and transfer. In a country where only ~29% of the population has bank accounts, this could mean a lot.
Given that they only exist digitally, what makes cryptos work is their almost impenetrable security. Each transaction has its associated “block”, an insanely complex mathematical puzzle that verifies that transaction as legitimate. Every bitcoin transaction is registered and can be seen by the public on the blockchain. A crypto wallet, which secures your bitcoin and enables you to make transactions with it, is in its most basic form an address, and two keys. The address is like your bank number, a unique code that people use to pay you; and the keys are associated codes, a bit like your bank pin. With most wallets all of that is handled by the software and you don’t have to worry about it.
It is precisely this security which has been called into question in El Salvador. The launch of Bitcoin as legal tender went far from smoothly. The government promised to each citizen USD30 worth of bitcoin which would be deposited in the government’s official bitcoin wallet software called Chivo. Chivo, launched as part of the government campaign, has encountered a whole host of issues. Chivo by the way is Salvadoran slang for cool (but in Peruvian spanish is a homophobic slur and in Cuban spanish means a traitor/informant). The protests that erupted on the day of its launch suggest that the people of El Salvador might not feel that the name is fitting, at least not in its Salvadoran sense.
When Chivo launched, there was a feature where one could “freeze” the exchange rate so that you could know exactly how much you were paying/receiving. In practice this meant that there was a very easy way to make money: you’d “freeze” the price of bitcoin on the app, and look at its actual price next to it, if the market value rises, you buy bitcoin at Chivo’s lower, frozen price and if it goes down you sell at Chivo’s higher, frozen price. This is legal and is called scalping. Usually crypto exchanges cover losses from scalping through commission fees. However, because Chivo is free to users and underwritten by the government, with Chivo taxpayers pay for the scalping damage. Chivo has since removed the price freeze feature. However in doing so they also removed access to the exchange rate, meaning nobody really knows how much they’re paying.
If they actually manage to pay that is…
There have been hundreds of reports of incidents where, when people tried to withdraw money from their Chivo accounts, or to make purchases with it; the money would leave their accounts but not be received by anyone. Twitter user @_elcomisionado_ has compiled reports of incidents of money disappearing in various ways, visible below.
So clearly Chivo doesn’t really work, but that isn’t even the worst of it…
Even if the Chivo wallet did work, there are huge, huge problems with it. To start with, Chivo isn’t a proper crypto wallet, it’s a custodial wallet. This means that, unlike a real crypto wallet where only the keyholder has access, in the custodial wallet system, you don’t own your money, Chivo does. It also means that in effect all of the Chivo accounts collectively are only handled as a single entity (similar to the way that a bank handles transactions for your account). This is where it gets interesting though:, you can’t know what is actually going on inside Chivo’s custodial wallets. This is because the wallet’s source code, unlike a proper crypto wallet, is not open source. Therefore, for example, there isn’t any proof that the government bought all the bitcoin to set up Chivo which it said it bought. For that matter, we can’t even know if the bitcoin held in your Chivo wallet is actual Bitcoin. As it happens we can be almost certain it isn’t, because Chivo is running on Algorand, another cryptocurrency.
Just to recap:
- The government may have bought millions of bitcoins for the people of El Salvador, but none of that can be verified.
- The people of El Salvador definitely didn’t get Bitcoin any way you look at it
- We really can’t find out anything about any of this because all the source code is private.
But believe it or not, it gets worse…
Let’s delve into the creation of Chivo a bit more. So given that it is the big force behind El Salvador’s new currency, you’d expect it to be at least linked to the Central Bank, right? Well (surprise), it isn’t. Chivo is in fact, somewhat bizarrely, a private subsidiary of the state-owned Executive Hydroelectric Commission of the Lempa River (CEL). It was founded 22 years ago but in 2021 was repurposed as the holder of the custodial wallet, channelling USD60 million it received from the treasury through the El Salvador development bank, ostensibly to buy bitcoin. Just noting that the El Salvador development bank does not seem to be unimpeachable in its ethics either, having a history of disbursing funds to organisations run by family members of the president.
In effect, this means that all the bitcoin Bukele supposedly bought on behalf of the people of El Salvador is now held by a private company, which cannot be forced to comply with the Access to Information Law. Not only that but the company is not publicly listed and doesn’t have an accountable board of directors: it’s a single administrator company. One person has the power to dispose of all of those hypothetical bitcoins without any oversight. So the choice of administrator of this company turns out to be rather critical. Who is this crucial figure in the government’s revolutionary scheme? He turns out to be a member of the president’s party Nuevas Ideas by the name of Raymond Francisco Villalta Alfaro, a 28 year old who on the National Transparency Register lists his profession as “student”. We can however be reassured that he is supported in his endeavours by the expertise of his technical coordinator, Lorenzo Rey, best-known for Venezuelan crypto-fraud. To find out how much of a compounding failure all this has been, I’d recommend checking out David Gerard’s crypto blog, though he mainly talks about the logistical failures.
In summary however, we have a known crypto fraudster and a party non-entity with – and I don’t think this can be overemphasised – total access to and authority over all of the deposited cryptocurrency in the national crypto-wallets. There is no proof, and no way to obtain proof, that the crypto-currency the government claims to have purchased is in these wallets. There is no oversight whatever of what is being done with the funds deposited in the wallets. And we know for a fact that there are cases where payments from the wallets have not been honoured.
- So where’s all this public money going?
- What’s actually happening to people’s mysteriously disappearing money?
- How is Chivo even operating?
- To whom is its administrator answerable?
- Who is benefiting from it?
Using bitcoin prices and Nayib Bukele’s tweets (the only source available on El Salvador’s bitcoin transactions), the now-censored twitter account @NayibTracker estimates that El Salvador has made a net loss of 20 million USD.
Assuming all is as it seems, it looks like the Salvadoran bitcoin plans are under incompetent leadership at best. Like any currency with no inherent value, a cryptocurrency’s value relies on confidence in its security. El Salvador doesn’t seem to have made a very promising start.
