El Salvador, Part II – The Unbanked Become the Digi-Banked
In Part I of the El Salvador story, Riding High on Crypto’s Gateway Drug, we looked at some of the favourable aspects of Bitcoin being adopted as legal tender including reductions in remittance costs, improvement of quality of life for impoverished families, attracting foreign talent and investors into the country, innovation development, ‘clean’ Bitcoin mining potential, and cleaning up the cartel scene – helping more people to live well in El Salvador.
In Part II, we’re looking at the role of the U.S. in Bukele’s Bitcoin adoption, tax and privacy implications for Salvadorans of using the Strike wallet, other countries following suit, and the further question of The Tokenisation of Everything.
While many remain sceptical of whether or not Bukele is eventually planning to decouple from the USD, Eric Phillips, in the Money Today Show, reminds us that none of this could have happened without a backstage U.S. handshake, given the two countries’ shared history and the ways in which one basically controls the other:
“And any of you who think that El Salvador ‘decided’ one day to start taking Bitcoin without consulting anyone; that they were going to make it legal tender, you really haven’t studied the history of Central and South America. They’re basically colonies. You could call them corporate colonies, or colonies of the West – but they don’t really make their own decisions. They’re puppets. They’re put into place.”
Bukele, the somewhat hip 39-year-young crypto-savvy leader, conversed openly in a Twitter chat about how Bitcoin would be helpful to El Salvador’s economy. It feels like you’re listening to the easy reasoning of a well-versed Gen Y than the crusty politician fear-speak we’re so used to hearing – a narrative intent on clinging to the vestiges of dated legacy regimes (with a decided no-bias).
Bukele has rocked the global status of marginalised poorer economies.
The initiatives taken this month in El Salvador are likely to butterfly their way across other short-changed countries with Panama, Mexico, Venezuela, Brazil, Nicaragua, Argentina and Malta also signalling interest by looking favourably upon Bukele’s announcement. Younger legislators seem keen on the El Salvador experiment, watching for mistakes and ready to legislate their own states. Given the potential for economic growth and (limited) independence for marginalised nations (largely shunned by the global monetary system to date), we can expect to see more countries adopting Bitcoin.
Contrary to media-flavoured popular (mis)understanding, Bitcoin as a network, connected to custodial wallets, lends itself to highly efficient digital governmental scrutiny. This gives the El Salvadoran government a gaping opportunity to get its taxation tele lens focussed directly on the 70% of Salvadorans who don’t currently have bank accounts, and who are surviving monetarily in the informal economy. And it creates the ultimate looking glass for Uncle Sam.
Bukele has offered to assist the people of El Salvador by providing a government-backed crypto wallet created by Strike. Strike CEO Jack Mallers has helped stimulate a Bitcoin circular economy at ‘Bitcoin Beach’ in El Zonte, El Salvador.
Merchants can accept Bitcoin using the Strike wallet (built on the Lightning network; it alleviates Bitcoin network wait times in heavy traffic along with hefty fees), or any wallet of their choice. Bitcoin payments transferred to Strike wallets will be processed back-end providing instant USD-cash-for-Bitcoin using the $150M USD trust fund the government plans to set up at the Development Bank of El Salvador. Merchants’ risk is mitigated therefore since the trust fund will pay ‘cash’ immediately, if preferred.
Most El Salvadorans in the informal economy need cash to feed their families, not the accumulation of a volatile (yet promising) long-term store of value like Bitcoin. How useful will payment in Bitcoin, or a USD stablecoin, be, if people can’t eat?
With only roughly 34% of the population having access to the internet, it stands to reason that many Salvadoran merchants and customers won’t yet have the necessary education in downloading and accessing the phone apps and electronic wallets associated with the exchange of Bitcoin, nor will many understand how to use this technology, let alone the storage and safe-keeping of private keys. Although Bukele says this training will be rolled out across the country, it’s unlikely users will appreciate the important differences in custodial vs. non-custodial wallets, for example.
While people apparently have a choice of wallets and are not obliged to use Strike, think on this:
“Forcing everyone to accept it [Bitcoin] and then standardising Strike is a bit weird though. Strike is essentially a custodial solution [meaning some other entity holds the seed phrases or keys to your wallet] pretending to be non-custodial – “Not your keys, not your Bitcoin”].
“The official stance is that businesses won’t be forced to use Strike, but because it’s custodial and only maintains Lightning channels with a few other custodial wallet providers, users have a very small list of custodial wallets to choose from if they want to transact with a business using Strike. Only having a few custodial wallets to choose from feels an awful lot like banks to me.
“So, because they need to use those custodial wallets, everyone they interact with will need to use them as well. Until everyone is using neo-bank denominations in Bitcoin instead of using Bitcoin.”
~ Kieran Mesquita, Crypto Developer
The adoption of Bitcoin is seen by many as a radical and modern move by El Salvador. Others in the cryptoverse see this initiative as a chess move towards the Tokenisation of Everything, projected into reality as a USD stablecoin, launched via the Bitcoin infrastructure. The exact opposite of what the early cypherpunk libertarians saw as Bitcoin’s noble role in restoring the sovereignty of humankind by cutting out the banks, governments and other big players, giving people more freedom.
“I think this decade is going to see the explosion of the US dollar as the Reserve Currency of the world, and it’ll be the digital currency that’ll be on every iPhone and every Android phone and every country, Africa and Asia and South America. And it’ll move on Bitcoin rails. The Bitcoin open monetary protocol is what allows the USD to spread to billions of people.”
~ Michael Saylor, CEO of MicroStrategy
We’re yet to see how this will all play out. El Salvador’s move has certainly stimulated varied conversations across the globe. That it sparks new beginnings for El Salvador is undeniable. It could be Bukele’s moment to change the narrative and the face, and future, of his country. The question remains whether this adoption ultimately leads to more flexibility and freedom for humans or points to more control wielded over the individual by governments and banks.
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To read Part I of the El Salvador story, Riding High on Crypto’s Gateway Drug, click here.
~ Abheeti Kathryn Pass
