A rough year for El Salvador calls for us to look at where global financial trends and autocratic politics intersect. Mass arrests and a tanking crypto economy are all part of a bigger picture.
When El Salvador’s president came to power in 2019, many didn’t care that the ensuing calm might have resulted from Nayib Bukele’s backroom arrangements with local gangs. The country of six million, terrorized for years in part by US MS-13 gang members offloaded to Central America, had high hopes of better days under the authoritarian millennial in office.
But in March of this year, those arrangements fell apart. After 87 killings in one weekend, most considered gang-related, Bukele kicked off a state of emergency, which gave him full license to arrest anyone officials claimed to be involved in criminal activity. As of October, around 55,000 people have been arrested—most simply young poor men, leaving families in the lurch—and at least 80 have died in prison.
And yet, El Salvador also showed up in Western media this year for another reason: because Bukele, the self-proclaimed “coolest dictator in the world”, was also a laser-eyed “crypto bro”, who in 2021 made Bitcoin legal tender in the country. At the time, this was part of his promise for a better El Salvador. Bukele argued that crypto would make family support transfers from abroad easier, and help the underbanked. The government even offered every citizen $30US in bitcoin through an electronic wallet called Chivo, to get them started.
This year, though, cryptocurrencies across the board took a massive nosedive, from the fall of the “stablecoin” Terra sending crypto markets into a loss spiral of $400 billion in market value, to FTX recently filing for bankruptcy after grand promises to reform the industry. For El Salvador, which had its Fitch rating downgraded from “B-” to “CCC” in February and holds debts on par with its GDP, this has been devastating. Default scenarios loomed. Already precarious growth projects hung in the lurch.
And the stark devaluation of the local economy offered significant explanation for Bukele tightening his dictatorial reign over an increasingly desperate population.
More recently, it’s emerged that Bukele lost $67 million USD of his own money in crypto markets, down from an initial investment of $107 million. This hasn’t deterred him from announcing a run for re-election in flagrant defiance of the El Salvadorean constitution, but it has changed his online brand, to something far quieter on crypto futures.
It’s no wonder, then, that Bukele has also offered the country’s future up to China, which his vice-president claimed this month had promised to pay off outstanding debts. International players were surprised by this claim, because if true it would mark a more sizable regional investment by a leading sovereign creditor than the world has seen for forty years.
And that already has Western actors spooked, despite Bukele’s government walking back the earlier remark, after Chinese officials claimed they were not aware of the offer. The idea didn’t emerge from the ether, after all. El Salvador, along with Panamá and Nicaragua, have been making themselves friendlier to China in the past few years, and China invested in a new national library for El Salvador this year. In trying to bail itself out of this latest crypto crisis, the country offering itself to willing international bidders is a coherent next step.
Whether China will eventually step in, or Bukele will eat sufficient humble pie to get El Salvador reconsidered by the International Monetary Fund (IMF) as a viable site of investment, a bigger question remains:
How did we get here, and how do we reckon with the forces that made so many individuals and their governments susceptible to such long and messy cons?
Cryptocurrency runs on blockchain technology, which is a kind of record-keeping for transactions that offers two critical features: a history of every transaction to date, to verify provenance and anonymity (more or less) for the people involved in those transactions. Both aspects come with obvious downsides, and not just in the ways we saw play out with crypto exchange FTX, after a string of failed online confidence games.
As transactional histories grow in these crypto chains, they take up more digital space, and digital technology doesn’t exist in a vacuum. It has real-world infrastructure. It uses energy. And blockchain databases for cryptocurrency like Bitcoin require enough energy to be a serious problem for our climate.
The anonymity side is also an obvious concern, because it means that all kinds of criminal activity can take place undetected. This could be done before, of course, with hard cash exchanges, but when similar takes place in the digital realm, then we’re talking global-level covert operations. Human and drug trafficking rings, in particular, are a serious issue.
And yet, what are the alternatives? The global financial system does not favor many still-rising and impoverished countries. Struggling nations are expected to adhere to the rules set out by the IMF and other major financial operators helmed by the West and other global powers, if they’re to receive any investment loans to alleviate regional crises caused in large part by long histories of Western exploitation and interference with local resources, economies, and governments. It’s a painful everyday reality for many especially in Central America, South America, and Africa.
In the West, the cryptocurrency trend has strong links to another kind of dissident activity: supporting the rise of white neofascism. This is an extreme endpoint on a spectrum of predominantly white men leaping into a movement that promises to make them rich if they follow the counsel of crypto influencers like Roger Ver (Bitcoin, the Kraken exchange, Ripple crypto business solutions), Elon Musk (Dogecoin), Vitalik Buterin (Ethereum), and Andreas Antonopoulos (DeFi peer-to-peer financial services, NFTs).
The complicating factor here, then, is that when Westerners think of crypto, we most often think of white male speculators, the environmental impact of blockchains, and far-right radicalism. It’s easier, in this context, to scoff at crypto’s downfall.
Meanwhile, many hustling crypto speculators exist in other parts of the world, and when they come from more marginalized regions, they have no patience for an industrialized West more concerned about, say, environmental consequences when blockchain could be a way out of poverty. They’re just trying to catch up in a global financial system heavily stacked against them. The struggle is often life or death.
During crypto crashes earlier in the year, Western influencers got many crypto speculators doubly burned by advising them to “buy the dip”, to the great amusement of many Western bystanders. But when folks in less affluent nations also take extreme hits by investing even more when the prices had tanked? Then this crypto crisis ceases to be a laughing matter, and more a sobering picture of desperation worldwide.
The dream founders in El Salvador
Bukele was motivated at least in part by individual ambition when he centered Bitcoin in El Salvador. He’s always worked hard to cultivate a stylish persona, and his grand plans to reshape the economy around crypto resorts via “Bitcoin City” were part of the lifestyle. His plan to use geothermal wells to power this crypto empire, by upping operations around nearby volcanoes (backed by “volcano bonds”), also raised key international concerns that he breezed past in pursuit of his vision.
But there was also some genuine interest in trying to uplift a struggling nation: to hustle with a whole new form of tourist attraction to bring in the world(’s wallets) to El Salvador’s doorstep, and to shake off the country’s bitterly violent reputation.
Which is why it’s even more devastating that these crypto initiatives played out so poorly. Bukele took the advice of Jack Mallers, CEO of the payments app Strike, when distributing those first digital wallets to all citizens. Unfortunately, a follow-up study from the University of Chicago found that many citizens found the wallet difficult to access, and most who managed it simply cashed out their $30US and never used it again.
Likewise, for all that bitcoin was promoted as a way to streamline transactions, Salvadorans found the exchange fees, error-ridden app, and overall process prohibitive for everyday interactions. Cash is far simpler, and still more widely accepted by local businesses, especially in a majority-informal economy with 70 percent unbanked citizens, and 50 percent who deal in paper and coin alone.
Chivo’s complexity made it difficult for bitcoin to replace cash as the primary “unit of account”, one of legal tender’s primary functions, because few average citizens understood its discrete value. If you have X amount in your digital wallet, but have to pay mysterious transaction fees to use it, how much do you really have?
The (few and far between) alternatives
Bukele took an even larger gamble by leaning into cryptocurrency, though, because El Salvador was still seeking one billion in IMF financing this year, while the IMF has strongly recommended that the country drop bitcoin if it wants to receive future loans. There is good reason for IMF’s concerns, too, because the money for its loans is procured through lenders demanding higher interest rates when dealing with volatile currencies.
Still, the whole impasse also exists under a heavy cloud of history that’s left so much in the hands of countries and organizations that played huge roles in regional instability in the first place. If the IMF won’t help El Salvador in its current state, why shouldn’t the long-suffering Central American country keep trying to dig its way out from global financial dependency?
Are there any outs to this political and economic bottleneck? In the short term, Bukele’s government has been seeking the help of regional banks to defray debts coming due, and it’s looking to buy back a series of bonds in 2023 (on its own, if no one else will step in). These are feasible gambles, because surrounding countries certainly understand that instability in a neighbouring nation has a tendency to spill over into their own. And yet it’s not clear what, if anything, will be enough to allay El Salvador’s current problems.
When a whole country has gone “all in” on a financial trend that many in the West have made look so effortless as a get-rich-quick scheme, the real challenge is creating the cultural capital to allow people to walk back from egregious and even ruinous missteps, so that they can make better choices going forward.
It’s easy to draw a tight circle around El Salvador’s current crisis as an internal affair: to call Bukele a “crypto bro” with too much power, and leave the issue there.
But cryptocurrency is more than the volatile site of smug Western financial speculators convinced they’ll all make a fortune. If anything, the rise and sometimes spectacular fall of its various byproducts is a canary in the coalmine. Ideally, it should remind us that when existing financial products and international systems fail to serve the whole of society, dissatisfied people from a range of backgrounds will simply latch on to the next great thing—whatever deeper mess of a product that might be.