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Salvadoran President Nayib Bukele’s experiment in making Bitcoin an official national currency alongside the US dollar, which has been the currency since 2001, has not gone well. But when a con man’s scam begins to crumble, he knows how to move quickly to the next one. The same goes for quick presidents.
Over 91% of Salvadorans want dollars, not bitcoins. Chivo’s official payment system was unreliable when it launched in September – the kiss of death for a new system. Users signed up for the $ 30 signup bonus, spent or cashed it, and then stopped using Chivo. The system did not check the photos of new users at all, relying only on their national identity card number and date of birth; massive identity fraud to steal signup bonuses followed. Bitcoin’s ridiculously volatile price has only been appreciated by aspiring day traders. Large street protests against the mandatory Bitcoin implementation continued until October. The government has stopped promoting Chivo on radio, television and social media. Chivo buses and vans were seen with plastic stuck to the company’s logo.
Bukele’s financial problems persist. El Salvador cannot print its own dollars, so Bukele urgently needs to fund its large deficit spending. The International Monetary Fund has not loaned the country the billion dollars requested by Bukele and has expressed serious concerns about the Bitcoin program.
Salvadoran President Nayib Bukele’s experiment in making Bitcoin an official national currency alongside the US dollar, which has been the currency since 2001, has not gone well. But when a con man’s scam begins to crumble, he knows how to move quickly to the next one. The same goes for quick presidents.
Over 91% of Salvadorans want dollars, not bitcoins. Chivo’s official payment system was unreliable when it launched in September – the kiss of death for a new system. Users signed up for the $ 30 signup bonus, spent or cashed it, and then stopped using Chivo. The system did not check the photos of new users at all, relying only on their national identity card number and date of birth; massive identity fraud to steal signup bonuses followed. Bitcoin’s ridiculously volatile price has only been appreciated by aspiring day traders. Large street protests against the mandatory Bitcoin implementation continued until October. The government has stopped promoting Chivo on radio, television and social media. Chivo buses and vans were seen with plastic stuck to the company’s logo.
Bukele’s financial problems persist. El Salvador cannot print its own dollars, so Bukele urgently needs to fund its large deficit spending. The International Monetary Fund has not loaned the country the billion dollars requested by Bukele and has expressed serious concerns about the Bitcoin program.
So Bukele, known for his half-aspiring dictator, half-Elon Musk populism, once again announced his national policy from the stage: at the Latin American Bitcoin and Blockchain conference on November 20, Bukele took the stage. for an animation of beaming from a flying saucer and described his plans for Bitcoin City: a new charter city to build from the ground up, focused on bitcoin mining and powered by a volcano.
Bitcoin City would be paid for by issuing $ 1 billion in “volcanic bondsâ€, starting in mid-2022. The 10-year volcano bonds would pay 6.5% annual interest. $ 500 million of bond income would be used to buy bitcoin. The bitcoins would be blocked for five years, then sold to recover the purchase price of $ 500 million; any profit on the sale would be paid out as an additional dividend. Holding $ 100,000 of volcanic bonds for five years would qualify investors for Salvadoran citizenship.
U.S. services firm Bitcoin Blockstream first offered Volcanic Bonds in Bukele in July. The bonds will be issued as tokenized securities on Blockstream’s proprietary Liquid blockchain. Blockstream’s Samson Mow insured Bloomberg that all the numbers would work, under Mow’s optimistic assumption that the price of a Bitcoin would hit $ 1 million within five years.
Holders of El Salvador’s existing sovereign debt were not impressed. Volcanic bonds would be a strictly worse investment than buying the country’s existing bonds and hedging them with bitcoins. Existing bonds fell from 75 cents on the dollar to a record high of 63.4 cents after the volcano bond was announced.
The bonds are expected to be issued through Bitfinex Securities, a new unit of iFinex, which manages the cryptocurrency exchange Bitfinex and Tether stablecoin. iFinex is the company that was fined $ 18.5 million by New York State in February and $ 41 million by the US Commodities and Futures Trading Commission in October, for repeated misrepresentation and misrepresentation. administration for several years regarding the reserves that would have supported Tether’s stablecoin. El Salvador and iFinex reportedly draft new securities laws to allow Bitfinex Securities to administer volcanic bonds.
The remaining $ 500 million raised from the bond sale will theoretically be used to start construction of Bitcoin City, a chartered city in a Special Economic Zone. Bitcoin City would have no income, property, contract, or tourist tax. The only tax would be the value added tax, or VAT, of which half of the proceeds would be used to finance the city and the other to repay bonds.
(The original Blockstream Volcano Bonds proposal suggests spending the second $ 500 million on bitcoin mining equipment, rather than a city, and it calculates a price of $ 50,000 per bitcoin.)
The intended location for Bitcoin City is in the La Unión department on the Gulf of Fonseca, at the southern end of El Salvador, where the country meets Honduras and Nicaragua. The region has a history of ambitious but failed development projects.
In 2017, Óscar Ortiz, then Vice President of El Salvador, proposed a chartered city in a Special Economic Zone in La Unión. The city, which was never built, was to be inspired by “model cities” of Honduras, founded with the help of American libertarians, like the city which has just been proposed in the Honduran municipality of Amapala – which is not built either.
In 2018, then Salvadoran President Sánchez Cerén attempted to strike a deal with China, which was spending a lot in Central America at the time, to create 14% of the country’s land area and about half of its land area. coastline, as a special economic zone. . This would include a Chinese-operated port in the Gulf of Fonseca and, again, a charter town in La Unión. This plan did not go beyond the Legislative Assembly of El Salvador. Bukele, then in opposition, tweeted at the time it was “the most neoliberal project proposed by a government in the history of our country.” … Just like that, privatize a territory. Unbelievable.”
Parts of the Chinese charter city plan were recycled for the Bitcoin City slides that played behind Bukele’s Bitcoin conference speech. The slides showed a perfectly flat and circular city, with the central square as the cross bitcoin B logo. A piece would be cut from the side of the circle for the Conchagua volcano – which luckily has not erupted in recent times, although there is considerable seismic activity and both cones have active openings to vent gas and steam.
Bukele promised that Conchagua’s clean geothermal power would power the whole town. There is no geothermal power plant in Conchagua yet, although El Salvador has considerable experience in harnessing geothermal energy.
Shortly after Bukele announced in June that Bitcoin would be legal tender in El Salvador, he tweeted that the country would mine its own bitcoin through the existing LaGeo factory in Berlin, Usulután, and a 95-megawatt well that had just been opened. A bitcoin mining rig shipping container was installed at the Berlin plant on September 29.
The problem is, mining bitcoin in El Salvador doesn’t make economic sense. Bitcoin mining is a process of wasting electricity competitively to guess a winning number every 10 minutes or so. Your business entrance is electricity; the miners are therefore in direct competition with every other miner in the world and go where reliable electricity is cheapest and the government is willing to turn a blind eye to the whole enterprise – an urgent issue since China kicked out cryptocurrency miners in May.
The global average price for bitcoin mining is around five cents per kilowatt hour; but industrial tariffs in El Salvador are 13 to 15 cents per kilowatt hour. Over a four-day period, the Berlin operation mined $ 269 from Bitcoin and reportedly spent at least $ 4,672 on electricity to do so.
El Salvador also has much better uses for geothermal energy. In December 2019, the country imported around 20% of its electricity. New national geothermal companies would reduce this percentage and reduce electricity prices by reducing reliance on fuel oil generators.
The bitcoin mining and Bitcoin City proposals are ultimately only more glaring distractions from Bukele’s economic woes. Bukele announced several large projects on tight deadlines that ended months or years behind schedule and drastically reduced press releases; Bitcoin City will be disastrous in direct proportion to the extent to which Bukele pushes the project, even if the ground is broken for it.
Volcanic bonds will likely end up in the hands of Bitcoin holders who will buy them as participatory ‘meme stocks’ rather than a normal investment. The everyday Salvadoran has little use for bitcoin; Volcano Bonds are therefore Bukele’s means of getting Bitcoin holders’ money into the Salvadoran economy and counting it as dollars.
Bukele will brazen all of this for as long as he can, periodically throwing new plans on the table as a distraction. If he manages to retain power, Bitcoin users will find out that he has taken their money. If he can’t hold onto power, his successor won’t like his failed Bitcoin plans.
Both scenarios end with many disappointed Bitcoin users, as a national economy truly cannot function with volatile and manipulated speculative commodity that is unusable as currency.
Bitcoin and Bukele users seem to think the other is a sucker they’ll take for whatever they have. It is possible that both will lose. Like, of course, the real victims: 6.5 million Salvadorans.
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