The Laser Eyes that have become a signature MEME of crypto enthusiasts are gone from El Salvador President Nayib Bukele’s Twitter profile—a likely acknowledgement of Bitcoin’s recent price slump. The image-conscious leader is wrestling with his country’s massive Bitcoin investment as he tweets about Bitcoin’s future value, hosts global conferences on cryptocurrency, and tries to stave off the International Monetary Fund’s entreaties against his pro-Bitcoin stances.
But he should also take a hard look at his own government’s increasingly authoritarian monetary policy as the root cause of his problems, not the volatile digital asset’s recent price slump. His best move would be to open the country’s monetary policy completely to all crypto and allow competition to thrive.
Mr. Bukele’s Bitcoin foray placed him on the crypto map when El Salvador declared Bitcoin legal tender last summer, along with grand promises of modernizing the economy, decreasing dependence on the U.S. dollar, and lowering transaction fees from the U.S.-based relatives. The promises invited a clash between a government controlling citizens’ monetary future and Bitcoin’s decentralized, individual-empowered ethos.
The biggest rift concerns Chivo, the digital wallet Salvadorians are strongly incentivized to use. Although privately designed, a state-owned company controls the wallet and users’ private access keys. It is also funded by a public trust.
Chivo is, in effect, a state-controlled chokepoint with the potential power to cut off anyone’s funds or perhaps even dictate spending. Thus, it differs only by degree, not kind, to the dystopian nightmare China is imposing with its central bank digital currency (e-CNY). There, party apparatchiks have gleefully described e-CNY as a means for economic control and to enforce party discipline.
Salvadorians are not legally mandated to use Chivo but signees receive a $30 sign up bonus, and compatibility with competing commercial wallets is reportedly difficult. The wallet as an exercise in bureaucracy has been plagued with technical glitches and poor customer service. The country’s chamber of commerce reports 86percent of businesses surveyed had never conducted a Bitcoin transaction.
Problems don’t end there. One native software programmer who criticized Chivo found himself detained, his phones confiscated and investigated for financial fraud.
This creates an untenable mix: an authoritarian government trying to ensure its citizens a more prosperous future whilst maintaining economic control. While, as in Venezuela, there may be prosperity with high prices—Bitcoin or oil—future prospects remain clouded.
El Salvador should continue opening its monetary system to all forms of currency, including U.S. dollar-pegged stablecoins. (The U.S. dollar is already legal tender.) This would allow further competition and the greatest degree of financial stability if Salvadorians can pick between the most stable or potentially most promising forms of currency.
Another benefit to this policy for Salvadorians is that it may also invite crypto-dollarization. Dollarization essentially exports monetary policy to the U.S., which at least for now, provides more stable money to people outside the U.S. Crypto-dollarization via stablecoins could provide the benefits of dollarization without the confiscatory policies that plagued previous dollarization periods in Latin America. As Mr. Bukele’s Bitcoin foray seems motivated at least in part by anti-U.S. animus, he seems unlikely to welcome it. But excluding non-Bitcoin forms of digital currency puts Salvadorians at the mercy of international markets for a famously volatile asset.
If El Salvador’s experiment does fail, the fault will lie with Mr. Bukele and not Bitcoin. Whatever volatility the digital asset undergoes, its fundamentals are solid. Bitcoin is sound, hard, money. Its fixed supply is written into its code.
Further, Bitcoin has revolutionary aspects that assure long-term viability. It is the first currency form that makes its relationship with energy—the fundamental building block of civilization—explicit. As Bitcoin enthusiast Michael Saylor states, “Money is energy. Bitcoin is the first crypto monetary energy network, capable of collecting all the world’s liquid energy, storing it over time without power loss, and channeling it across space with negligible impedance.”
Despite the recent dramatic price drop, Bitcoin’s possibility for future human development and prosperity are limitless. But its sustainability as an everyday currency is an open question. It’s incompatibility with population-controlling tin-pot dictators, however, is not in doubt. As Human Rights Foundation’s Alex Gladstein remarked, Bitcoin is “nothing short of freedom money.” Attempts at harnessing its potential while maintaining state control will not end well.