On June 5, El Salvador President Nayib Bukele declared that bitcoin, the first cryptocurrency, would become legal tender in El Salvador. A few days later, the Bitcoin Law was passed, to take effect Sept. 7. Businesses would be required to accept bitcoin for all payments.

Bitcoin was originally created to be a form of money outside government control. Using bitcoin as a government-endorsed currency had a number of obvious issues: Cryptocurrency has a stupendous money-laundering problem, the price of bitcoin is incredibly volatile, and cryptocurrencies remain difficult and unwieldy to use.

Building a payment system that users trust takes time. You need to run pilot programs and fix the sort of problems that only show up in production. Deploying a system from scratch at national scale in just three months with no testing is a recipe for disaster—especially when that system is an electronic payments system in an economy that still largely ran on physical cash (U.S. dollar notes) and held widespread distrust of banks and a strong memory of the rushed dollarization of 2001.

On June 5, El Salvador President Nayib Bukele declared that bitcoin, the first cryptocurrency, would become legal tender in El Salvador. A few days later, the Bitcoin Law was passed, to take effect Sept. 7. Businesses would be required to accept bitcoin for all payments.

Bitcoin was originally created to be a form of money outside government control. Using bitcoin as a government-endorsed currency had a number of obvious issues: Cryptocurrency has a stupendous money-laundering problem, the price of bitcoin is incredibly volatile, and cryptocurrencies remain difficult and unwieldy to use.

Building a payment system that users trust takes time. You need to run pilot programs and fix the sort of problems that only show up in production. Deploying a system from scratch at national scale in just three months with no testing is a recipe for disaster—especially when that system is an electronic payments system in an economy that still largely ran on physical cash (U.S. dollar notes) and held widespread distrust of banks and a strong memory of the rushed dollarization of 2001.

But in an echo of the Silicon Valley model—“Move fast and break things”—the government tried to sell speed and totality as an advantage. One government figure said: “We can do this slowly, or we can just put it on the people and people will learn. If they’re forced to do it, they’ll learn and they’ll learn quickly.”

Salvadorean government figures claimed a number of times that accepting bitcoin would be entirely optional, and a number of other times that it would be mandatory. Article 7 of the Bitcoin Law, which makes bitcoin acceptance mandatory, stayed in place.

In a July survey, 849 percent of respondents were unsure how the bitcoin project would go; 29 percent were afraid. 76 percent had some sort of Internet access, but that included low-cap data plans; other surveys showed reliable Internet was available to 45 percent of the populace, and under 10 percent in rural areas.

Bukele announced an official bitcoin wallet, Chivo—Salvadoran slang for “cool.” This would work like PayPal—you would have a balance in dollars and a balance in bitcoins, held at Chivo. New users would get a signup bonus of $30 in bitcoin. 200 Chivo ATMs were deployed, and 50 staffed Chivo kiosks were constructed around the country.

The Chivo app would be available internationally for remittances—dollars go into Chivo, the government subsidizes transmission costs and keeps the actual dollars, and the recipient gets virtual “dollars” that are numbers displayed in the Chivo app.

Bukele announced the name “Chivo” in late June, but the corporation operating the network, Chivo SA de CV, was not put together until Aug. 24, two weeks before launch. Chivo SA de CV is a private company, so it is not subject to freedom of information laws as a government department would be, despite being funded with $60 million of public money. The plan for Chivo was promoted by the president and his brothers Karim, Ibrajim, and Yusef Bukele Ortez, who are thought to be the main bitcoin advocates in the president’s circle. The president’s chief of staff, Carolina Recinos, is on the U.S. State Department’s Engel List of corrupt officials, and is a director of Chivo SA de CV.

Bukele’s team recruited people it considered politically trustworthy, but not necessarily people who could do the job. The Chivo project is led by a Venezuelan team, part of a long-standing “shadow cabinet” of unofficial advisers known to work with the Venezuelan opposition. Shadow cabinet leader Sara Hanna and cryptocurrency promoter Lorenzo Rey designed the Chivo network. Rey’s payments experience was promoting an alternate cryptocurrency, Dash, as a payment and remittances channel in Venezuela—but many of the Venezuelan merchants listed as accepting Dash could not even be verified as existing.

In the run-up to the launch of the Bitcoin Law, it remained wildly unpopular. One public critic of the law, software developer Mario Gómez, was arrested without charge on Sept. 1 and held for five hours before public outcry secured his release—though he still doesn’t know why he was detained.

Chivo launched just after midnight on Sept. 7. The system started failing at three a.m. Server capacity was increased, and app installations were not re-enabled until 11:30 a.m. Transactions failed through the day; customer service lines were jammed; Chivo ATMs ran out of cash.

Shortly after ten a.m., the price of bitcoin crashed by $10,000 in three minutes. Chivo users watched their $30 in bitcoin drop below $25 in real time—a strong practical education in bitcoin’s volatility. Bukele blamed the crash on the International Monetary Fund, though it was more likely due to leaked news of crypto exchange Coinbase receiving a warning from the U.S. Securities and Exchange Commission. Bukele had purchased $20.6 million in bitcoins for the national treasury the day before.

After protests on Sept. 6, more than 1,000 people marched on the Legislative Assembly on Sept. 7, jumping barriers placed early that morning to keep them out. One group of protestors set some tires on fire. Opposition politicians attended the day’s session in “No Bitcoin” shirts.

The protests were not against bitcoin itself. People protested the forced acceptance, the complete lack of transparency from the government, and the dysfunctional Chivo payment system—“people are against how things are being done in the name of bitcoin,” local businessman Patrick Murray said.

The problems go beyond use on the ground. Bukele is genuinely very popular, because he spends heavily on public services. Since El Salvador’s currency is the U.S. dollar, Bukele can’t print money; so he needs to borrow—or use the Bitcoin Law to skim the remittances sent from abroad. But the Bitcoin Law, and the disastrous launch of Chivo, has frightened the bond markets; El Salvador’s sovereign debt dropped almost five cents in a single day, ending Sept. 7 trading at 87.6 cents on the dollar. The World Bank and the International Monetary Fund are already reluctant to supply further funding because of the Bitcoin Law.

Chivo’s problems continue. To sign up for Chivo and get their $30 of bitcoin, Salvadorans ostensibly need a photo of their national ID card, a photo of themselves, their ID card number, and their date of birth. But Chivo’s identity verification functionality didn’t even check the photos—you could register with only a DUI number and a matching date of birth. Some users discovered their DUI number had already been used. Others tested the system with publicly known DUIs. Residents who hadn’t installed the app received verification codes via SMS. Salvadorans in the United States who wanted to send remittances home had trouble registering.

Traders were reluctant to accept bitcoin. “I’d rather lose the sale,” one trader told La Prensa Grafica. Others didn’t trust money they couldn’t hold in their hands. Street vendors may not even have phones. Many of their customers are illiterate. Some government offices didn’t accept bitcoin payments. Transfers from Chivo to bank accounts were not reliable. The Chivo ATMs didn’t work well—one machine had a reported three successful cash withdrawals in a day. Even transfer of bitcoins in and out of Chivo had problems. Tweets from @chivowallet gathered aggrieved responses from people.

Using Chivo is not mandatory—some are installing the Bitcoin Beach or Muun wallets. But interoperability is spotty, and transaction fees on Bitcoin Beach or Muun are not subsidized by the government.

Sept. 15 was a public holiday to celebrate 200 years of independence from Spain. An estimated 15,000 people came out onto the streets for massive demonstrations, by far the largest of Bukele’s presidency—not just against bitcoin, but against Bukele’s removal of troublesome judges, which secured a Supreme Court ruling allowing him to run for president again and a swath of changes to the constitution.

One Chivo kiosk was set on fire and spray-painted with anti-Bukele graffiti—but this appears to have been a very obvious false flag: The vandals were wearing T-shirts that had been distributed to them from a government-owned vehicle previously been used to distribute pandemic relief packages.

Bukele is pressing ahead with the Chivo project—his plans need those remittance dollars, and he still hopes for an influx of foreign bitcoins. Fears of criminals bringing in dirty bitcoins and exchanging them for clean dollars, draining the $150 million trust that was set up as a buffer between bitcoins and dollars, have not come to pass—because Chivo doesn’t work well enough.

It’s not clear if or when the Chivo network will be fully functional. The identity verification system simply doesn’t work and has left behind a huge mess to clean up. Chivo customer service staff are being funded on a month-to-month basis.

An electronic payment system could be of vast benefit to El Salvador if it were designed to gain the public’s trust. But if Bukele wanted Salvadorans to hate everything about bitcoin, and electronic payment systems in general, Chivo has been a worked example of how to get there.

(Excerpt) Read more Here | 2021-09-17 11:39:47
Image credit: source

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