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El Salvador bitcoin math does not add up: Analyst

By Daniel Tyson

23:22, 24 January 2022

Protestors in El Salvador march against bitcoin
Sources say adoption of bitcoin by El Salvador does not make sense - Photo: Shutterstock

When El Salvador became the first country to recognize bitcoin as legal currency in September, the world watched the “great experiment,” questioning if it was sound fiscal policy.

Since its adoption, the currency has hit highs and is currently at a low around $36,000 a bitcoin. Meanwhile, the country’s president still is boasting about what a wise decision it was while continuing to stake the country’s monetary future on the volatile currency.

Six months later the adoption, small cracks in this façade are appearing. The most recent came on Monday. Shortly after heavy criticism of the country purchasing another 410 bitcoin valued at $15m, President Nayib Bukele dropping the F-bomb in a Tweet telling critics to “invest a piece of your McDonald’s paycheque” in the cryptocurrency, a clear sign the Latin America country is watching its bitcoin investment closely.

Since September 2021, the Bukele administration has purchased approximately 1,800 bitcoins, according to his tweets.

Little accountability

It’s hard to know how the El Salvadorian government’s multi-million-dollar investment is going – how much was made or lost, actual amount spent purchasing bitcoin, who it is buying bitcoin from and where are the funds being held? Observers are left piecing together information from company press releases, government tweets and first-hand accounts.

For its part, the country has not released much information beyond what is on Bukele’s Twitter account. Instead of answering questions about its fuzzy math, the government attacks sceptics. Look no further than the president’s Twitter account, when he told critics to “go back to flip more burgers you lazy (expletive).”

There is no government watchdog agency to examine the purchase of bitcoin in the country, as the legislature dissolved the ethics and oversight units within its finance ministry under the direction of Bukele last year.

Bukele is seen as an evangelist of the cryptocurrency movement.

However, according to Marc Falzon, an economic documentarian who focusses on cryptocurrency, El Salvador's approach to bitcoin is breaking the spirit of crypto’s purpose.

“The whole tenet of bitcoin is that you don’t trust, you verify. That’s because with bitcoin everything is on a public ledger,” he said. The benefit of such a ledger is that “you don’t need to trust anyone; you can just check.”

Falzon told Capital.com that, from the beginning, questionable actions were taken.

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Quick roll out

From the start, hundreds of thousands of dollars in transactions were lost, there were problems with the bitcoin app crashing and many other technical issues have persisted.

Even the roll out left more questions than answers. “Part of the poor roll out was because it was a rush job,” said Falzon, who was in El Salvador at the time.

The new monetary system was “pieced together” from other technology, not geared specifically towards the system El Salvador adopted.

Within a few months, El Salvador went from accepting only the US dollar as legal tender to adding bitcoin. At a summertime 2021 cryptocurrency convention in Miami, Florida, Bukele made the announcement his country would accept the cryptocurrency as a national currency and by September the legislature rubber-stamped legislation that forced merchants to accept bitcoin as payments among other requirements.

Help from Venezuela

El Salvador hired a Venezuelan to help with the government owned app, called Chivo Wallet, which Salvadorans use to make bitcoin transactions. The man admitted to filing false financial documents in his native country while setting up several cryptocurrency businesses, including one titled Dash.

Meanwhile, a portion of the nation's finances are most likely held outside its borders. The infrastructure of the program is a hodge podge. There’s Bitso, which provides technical security for the Chivo wallet, (chivo in Spanish is goat). Bitso serves as the core service provider. Silvergate Bank works with Bitso on transactions involving US dollars. Nearly a fourth of El Salvador’s Gross Domestic Product and 70% of its population is dependent on remittance, often made in US dollars. Koibank is the financial infrastructure company that leverages Algorand, which serves as the official blockchain provider, Falzon said.

Meanwhile, El Salvador’s millions of dollars in bitcoins probably aren’t being held inside the country, but outside by Bitso, Binance and Coinbase. Falzon said these exchanges fail to provide internal securities and public oversight to protect El Salvador's taxpayer funded purchases.

Fuzzy math

Given the lack of transparency provided by the Bukele administration, questions are abundant about the country’s finances. Recent talks with the International Monetary Fund have stalled, US-El Salvador diplomatic relations have become lukewarm and rating agencies have strongly signalled to the country the continued acceptance of bitcoin could end with lower scores, making obtaining loans harder and costlier. In December, Moody’s warned bitcoin could pose a “significant risk for potential investors.”

Yet, the country still pushes ahead with plans for a $1bn bitcoin bond and to construct Bitcoin City, a cryptocurrency metropolitan built near a volcano that will provide power. In tweets, Bukele said he will continue to purchase bitcoin, especially now that they are in freefall.

But a closer examination of public documents and comments made by the president about the value and purchases of bitcoin just don’t add up, Falzon said.

By examining Bukele’s tweets, Falzon said that El Salvador has purchased at least 1,020 bitcoins since September, spending more than $55m. When an interview was conducted last week, bitcoin was selling at $46,000, totalling only $47m and has lost more than $8m for one of the poorest counties in Latin America. Since the interview bitcoin has lost about $10,000 per coin in value.

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Trust fund for fees

That loss doesn’t include the $150m trust fund the government set up to offset fees associated with merchants accepting bitcoin, or the free $30 worth of bitcoin given to every citizen as incentives to use their government’s app.

There is no way of knowing the number of citizens who use Chivo, given the government will not release those numbers. However, the president tweeted a few weeks after the roll out that 3 million citizens used the app. That would equal another $90m. If every citizen eligible used Chivo, it would cost just less than $355m.

Then last week, Bukele tweeted that more than 4 million of the 6.5 million citizens used the app. That tweet also caused arched eyebrows, given that the 6.5 million includes citizens under the age of 18 who aren't allowed to use the app. The US Central Intelligence Agency's Country Factbook shows nearly 25% of Salvadorans are under the age of 14.

Given that the government isn't releasing how many citizens took advantage of the free $30 in bitcoin, beyond Bukele's tweets, it’s hard to see where taxpayer funds went. If nobody in El Salvador claimed their $30, for El Salvador to break even, bitcoin would need to be worth $155,588, to cover start-up costs and the trust fund. If 100% of citizens used their $30, for the country to break even, every bitcoin owned by the country would need a value of $350,000.

For bitcoin to reach those numbers, a market cap of $3.2trn to $7.3trn, respectively, would be needed, Falzon said. Currently, the global cryptocurrency market cap is $2trn.

“The entire crypto market would need to double and need to be 100% invested in bitcoin to get the price up to the point where if zero people claimed the free $30 bitcoin in El Salvador they would break even,” Falzon said. “If there’s anything we learned about crypto is that anything is possible.”

The incentive to use bitcoin's app also is costing the government millions. Within 26 days, three million users signed up to receive the $30 in free bitcoin. To cover the cost, the government needed 2,003 bitcoins, but it purchased nowhere near that. Chivo’s consolidation wallet showed it only moved 295 bitcoins. To understand the attraction of a free $30, a lunch in El Salvador can be had for less than US$1.

So, what does this mean? Mario Gomez, founder of Hackerspace San Salvador and an IT specialist who closely follows El Salvador’s bitcoin laws, Tweeted in early January that this means three things show government dishonesty:

· The amount of Bitcoin purchased is inaccurate;

· User adoption according to what the government is saying is untrue; and

· There is an unidentified influx of BTC, which means there is more bitcoin for purchase, without publicity it is unclear that the market is being flooded.

Gomez was jailed in 2021 for his criticism of Bukele’s bitcoin policy, but no charges were filed, and he was later released. Local media reported police told Gomez’s lawyers that the computer specialist was arrested for possible bank fraud, when explaining why the police confiscated his phones and attempted to confiscate a computer.

Small protests have been reported in downtown San Salvador, the capital, with people demanding more transparency in the financing of bitcoin purchases. Meanwhile, Bukele hasn’t given a public address in El Salvador for several weeks, but recently travelled to Turkey. His spokesperson told the local press his absence was a way to bypass Covid, but critics say it’s to avoid public backlash.

Panama and Uruguay

On New Year’s Day, Bukele tweeted he predicts two more countries will follow El Salvador’s example by adopting bitcoin as a legal currency. Shortly after, news broke that Panama and Uruguay are considering bitcoin.

However, since last week when the cryptocurrency hit new lows, neither country has said much. A smart move, Falzon believes. Why would those countries want to see their money vaporise?

After visiting El Salvador, Falzon said he was optimistic about El Salvador’s “great experiment” despite the tough roll out. He believed bitcoin would help Salvadorians start saving money, giving them a great future.

“Today that story has become more complicated,” he said.

Country drowning in debt

El Salvador apparently is drowning in debt, so handing over taxpayers’ funds to private companies with little or no oversight to control the nation’s finances probably isn't a solution to rescue the economy.

“I don’t know where things will go in the next month, next six months. The next year, ten years…” Falzon said.

Numerous phone calls and emails from Capital.com to El Salvador’s finance minister and LinkedIn requests to its president’s press office went unreturned over a two-week period.

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