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El Salvador - Three scenarios for Bitcoin
With Bitcoin becoming an official currency in El Salvador today, I lay out three scenarios for what could happen in El Salvador moving forward. As I write in the conclusion, the scenarios aren’t necessarily mutually exclusive. It’s possible that the country sprints towards one scenario and stays there, but it is also possible that the country slowly transitions from bad to good in the years to come.
The Bad Scenario
Who benefits: Nayib Bukele
Internationally, Bitcoin is the big story. Domestically, it’s the erosion of the country’s democracy. In recent months, Bukele has used his overwhelming popularity to begin to dismantle the checks against his power. He removed the Attorney General, replaced key members of the Supreme Court, forced the retirement of many judges, dropped a surprise proposal to rewrite the constitution, and over last weekend, received a favorable court ruling that may allow him to run for reelection.
Given all the other institutional changes, it’s a heck of a time to also change the country’s official currency, something that was done after only five hours of debate in the rubber stamp Congress. A short bill of about a dozen pages with few details passed Congress followed by 25 pages of more detailed regulations issued by the presidency.
Corruption is an issue and should be a concern to the Bitcoin community. Convincing the population to trust and use cryptocurrency requires a level of transparency that is unlikely to be seen when the government is not open about how the infrastructure of the system is being built and contracted. The current rejection of Bitcoin seen in the polls will be maintained if the government does not do more to build trust.
In this scenario, there is a big risk of the international Bitcoin community becoming 21st century “useful idiots” in terms of blindly supporting an authoritarian regime because it is friendly to their one issue. On the other hand, it’s also possible that some of the big institutional players who can facilitate a successful cryptocurrency program will avoid working in the country due to concerns over corruption, sanctions or other compliance issues. In either case, a failure due to other factors in El Salvador’s political situation has the potential to not just harm El Salvador, but do damage to other efforts to use cryptocurrencies elsewhere in the developing world.
The Neutral Scenario
Who benefits: Foreign tech companies and cryptocurrency investors
It’s possible that El Salvador’s cryptocurrency experiment pushes forward but with limited participation of the Salvadoran population and a government that quickly loses interest. Tuesday is just another day for most Salvadorans, most of whom won’t use Bitcoin. Many may download the wallet to quickly get their $30 bonus and then leave the program inactive on their phone for months to come.
Scared by volatility, both consumers and businesses find ways to quickly turn any Bitcoin they hold back to USD. Banks and businesses find legal ways to limit their exposure and pressure the government to avoid enforcing laws that demand they accept cryptocurrency payments. In this scenario, the Bukele government, distracted by other things, doesn’t push the experiment further and also doesn’t do much to promote it, but keeps it going.
This is a scenario where foreigners who are focused on technology and the cryptocurrency ecosystem get an amazing real world sandbox to play in, but the average Salvadoran sees little results or even impact from Bitcoin. It becomes a non-story and many consumers and businesses forget it even exists.
The Good Scenario
Who benefits: El Salvador’s citizens.
In the positive scenario, after a period of skepticism, El Salvador’s experiment with Bitcoin sees a surge of public interest and usage by the average citizen and business owner. There are major benefits to electronic payments and cheap money transfers that could really help the poor, but only if they choose voluntarily to embrace the new technology.
This scenario is most likely if the government uses carrots over sticks to encourage Bitcoin usage. The initial $30 boost for Salvadorans who download the wallet is a good start and could see follow-on incentives like discounts on taxes and fees or simplified welfare payments. This scenario also becomes more likely if other governments in Latin America adopt or at least ease the usage of cryptocurrencies, something being considered in several countries, allowing for greater cross border financial transactions.
This scenario would include increased remittances from the United States sent via Bitcoin that would generate further usage in the country, a positive cycle for the cryptocurrency’s adoption. Salvadoran citizens would benefit from reduced international fees on remittances.
Even in this good scenario, there are going to be serious challenges. Criminal groups are going to enter the market and try to take advantage of the legal BTC to USD trade. The difference between a good and bad scenario (and a key signal to monitor) is that in a positive scenario, the Salvadoran government makes an effort to block criminal money transfers. In a bad scenario there are corrupt actors in the government that attempt to profit from it, something that would harm the country’s overall economy and security in the long term.
So what happens?
The scenarios aren’t mutually exclusive. They may end up occurring in the order I describe above. I think the initial few months of Bitcoin are the bad scenario in which the implementation gets caught up in the negative backlash of Bukele’s shift to authoritarianism. In a worst case outcome, a corruption or human rights scandal undermines the whole project. But assuming the country pushes through that bad moment, then there will be a lull in which the neutral scenario occurs. Bitcoin is a non-issue for the average Salvadoran citizen while the tech community continues to build infrastructure. Then several years down the line, the country’s early move into cryptocurrency starts to become a net positive for Salvadorans as they adopt in greater numbers and begin to benefit from the technology.
Like so many other issues in Latin America including democracy and security, negative scenarios will occur when a single individual tries to manipulate a situation to grasp on to wealth or power. Positive scenarios for cryptocurrency adoption occur when citizens and institutions are invested in the solutions. I think there is potentially a positive role for cryptocurrencies and blockchain technology to play in Latin America’s future, but there are also reasons to have serious doubts when the initiative is being pushed by a charismatic leader with a clear ulterior motive of consolidating power.
Quite simply, while El Salvador’s current president may eventually get credit for a daring initiative, Bitcoin in El Salvador won’t succeed because of Nayib Bukele. In fact, he is the biggest risk to the issue. Benefits for the most Salvadorans won’t come until the Bitcoin project is separated from the president’s personal and political agendas.
Thanks for reading
Though it is not a major focus in the newsletter, Hxagon is spending time researching and writing about fintech and cryptocurrencies in Latin America for clients. Do you want to hire us? Do you want to partner with us? Are you just a nerd who wants to chat about cross border payments, AML and Bitcoin in emerging markets? Feel free to reach out and we’ll schedule a time to talk.
Also, the Latin America Risk Report will be hosting a webinar on September 16th at 10:00am EDT as a chance to hold an open Q&A about recent developments in the Western Hemisphere. I’ll talk about bitcoin adoption in El Salvador, Argentina’s midterms, and anything else you want to discuss. The event will be open to paying subscribers, and a link to join will be sent out next week.
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