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The price that Bukele is willing to pay to 'bitcoinize' El Salvador

2021-06-14T00:22:14.051Z

An announcement in English at a conference in Miami and the express approval of the cryptocurrency have made Bukele a geeky hero. But volatility and cybercrime worry security experts



President Nayib Bukele has taken his personality as the disruptive millennial who goes where no one else dares to new heights and to the ultimate consequences.

Although no one knows very well what the consequences may be: El Salvador will be the first country in the world to adopt Bitcoin as its official currency, a decision announced in English and expressly approved by a Parliament controlled by its party, without giving many explanations to Salvadorans.

The moment could not be more delicate.

Around the world,

ransomware

attacks

- malicious programs used by cybercriminals to block access to a system or hijack its data - are on the rise, crippling entire economic sectors, and are enabled by hackers' currency of choice: Bitcoin.

MORE INFORMATION

  • Bukele's diplomacy: the United States, China and the rude game

  • Bukele seeks that bitcoin can be used in El Salvador

  • The IMF will meet with Bukele to discuss a loan and legislation for the use of bitcoin

"This will create jobs and help provide financial inclusion to thousands of people who are outside the formal economy," Bukele announced to applause last Saturday when announcing his proposal, in a video presented at a conference on cryptocurrency held in Miami The message, in English, was intended for an audience of lovers of technology and cryptocurrencies. But that was also the first time that a large part of Salvadorans heard about the new currency that will soon be in their lives. Bukele was introduced by Jack Mallers, the director of the Strike payment platform, a 27-year-old who spent three months in El Salvador.

In the video of the event, Mallers is seen excitedly telling how on his trip he met Yusef, one of the president's younger brothers. "If you fix the money problem, you can fix the world's problems," says the young man - public ovations - before stressing that, with cryptocurrency, Salvadorans living in the United States could send money to their families without having to pay high fees. commissions. Then he gives way to the president, who appears on a screen: "In the medium and long term we hope that this small decision will help us to push humanity, at least minimally, in the right direction," said Bukele - public ovations - , without specifying how. Shortly after, on Twitter, the 39-year-old president answered some questions and estimated that if 1% of the current capitalization of Bitcoin were to be invested in his country,it can boost gross domestic product by 25%.

"The people applauded him like a telepreacher," El Faro journalist Nelson Rauda, ​​who has followed the legislative approval of the measure, tells EL PAÍS.

“From there it started and did not stop.

He put this laser beam thing in his eyes [in his Twitter profile picture, a symbol of Bitcoins lovers] and many officials followed suit;

he started tweeting in English and went back to being that Nayib Bukele who seduced international people at the beginning of his tenure. "

Three days after that mega-event in Miami, on Tuesday, the law reached the Legislative Assembly, where the president's party, New Ideas, which has a majority, bypassed the usual procedures to process the law.

The rule was approved expressly in just five hours and with little debate.

Go back to being 'cool'

Although Bitcoins will be the official currency in El Salvador in less than 90 days, Rauda assures that Bukele has not explained the decision in any press conference. He has only done it through social networks and mostly in English. In addition, while the parliamentarians were discussing the rule in the Legislative Assembly, the president was in the Twitter audio debate forum - Spaces - explaining the law with his brother Karim before an English-speaking audience. "I started to listen and said: 'It makes no sense to continue listening to the bill, which is two pages long, and the deputies are talking about pure things that have no relevance,'" says Rauda. "In Spaces they gave many details of the law that they were not giving in plenary session. There were very absurd things,as in the Assembly they were saying that the use of Bitcoins was not going to be mandatory and they asked the president and he said yes ".

I have sent the blueprint of the #LeyBitcoin to the @AsntaciónSV.

pic.twitter.com/9vFztvvryG

- Nayib Bukele 🇸🇻 (@nayibbukele) June 9, 2021

This decision to implement Bitcoins in his country and focus on the international public is interpreted by Eduardo Escobar, director of the NGO Acción Ciudadana, as a "smokescreen" to divert attention from the problems for which his Government and a way to "change its image internationally" at a time when the country is moving away from the United States and international organizations and toward China.

“There was a coup, on May 1, led by Bukele and supported by the Legislative Assembly, where they removed the magistrates and the prosecutor. Last week we learned that the Government expelled the CICIES (the International Commission against Impunity in El Salvador) because it investigated 12 cases of corruption of the current Government, ”says Escobar, who compares the adoption of cryptocurrency with the country's dollarization in 2001 , made "in an unconsulted way, behind the backs of the population and in an early morning."

“We came from a series of things that have undermined his image and with this he has become the

cool

Nayib again

, the admired, bold, revolutionary Nayib”, agrees Rauda.

"It's like a return to that

back to basics

for him."

While at home Bukele maintains popularity levels above 70%, the decision to adopt Bitcoin and the subsequent order to generate a plan so that in the country the cryptocurrency can be mined with volcanic energy have earned him new followers among lovers of technology.

A virtual 'old west'

Beyond the geek world, doubts and uncertainty dominate the analysis of this decision by experts and the most critical sectors in their country. "The cybersecurity risks associated with integrating cryptocurrency into the nation's financial system are myriad," says Steven Silberstein, CEO of FS-ISAC, a global cyber intelligence exchange organization focused on financial services. Governments have worked for decades to ensure that banks and financial institutions are safe, which is why today they are considered "crucial infrastructure," explains the specialist."Substantial resources have been invested to ensure that the billions of people who depend on a stable financial system can spend their days without worrying about a catastrophic financial collapse from a large-scale cyberattack."

A small restaurant on El Zonte beach, in Chiltiupan (El Salvador), that accepts bitcoins in a June 8 photo.JOSE CABEZAS / Reuters

Silberstein recalls a devastating episode in 2014, when a cryptocurrency exchange in Japan called Mt Gox was hacked and hundreds of thousands of Bitcoins were stolen (trading today at about $ 36,000 each, so the damage was in the many millions).

What was stolen was never recovered, in part because, unlike money deposited in a bank account, it is very difficult to track whoever owns crypto.

These types of currencies are not backed by people, by organizations or by trust in a bank, but by a secret mathematical language called cryptography.

A month ago, US President Joe Biden offered a special message on television to talk about the cyberattack that paralyzed a gas pipeline, in which hackers extorted authorities and asked to be paid in Bitcoin in exchange for freeing the system. It was the first time that a president in that country addressed the problem of

ransomware

, a type of cyber attack in which criminals often ask for a payment in exchange for releasing a computer system. Senator Elizabeth Warren posted a message Thursday referring to cryptocurrencies as "the old west" and calling for strict regulation to protect investors and undermine cybercrime.

"The use of cryptocurrencies has certainly enabled

ransomware

attacks,

" Silberstein analyzes. According to Chainalysis, an analytics company on the subject, this practice caused $ 350 million in losses last year, an increase of 311% compared to 2019, which coincides with an exponential jump in the demand and price of cryptocurrencies worldwide. . From the US to Ukraine, attacks of this type have paralyzed financial markets, government ministries and even nuclear plants.

In the case of El Salvador, the fact that Bitcoin coexists with the US dollar as the official currency makes the proposal even more risky, since the legalization of Bitcoin as a national currency facilitates the conversion of the profits of illegal exploits (such as is the

ransomware

) in fiat currency.

"Given that El Salvador is dollarized, will this make the country the go-to alternative for converting the proceeds of

ransomware

or other types of digital extortion into cash?" Silberstein asks.

'De-dollarization'

"President Bukele likes to put on a good show and this proposal raises his image as the disruptive millennial who is shaking things up in El Salvador," says Risa Grais-Targow, analyst for Central America at Eurasia Group, on the phone from New York. "He is proposing it as a way to create dynamism in the economy but, when studying the context, in which there are accusations of corruption against people close to him, the economic policy feels quite improvised."

In May, the US State Department released a list of 17 corrupt Central American officials that includes Bukele's chief of staff, Carolina Recinos, former Security Minister Rogelio Rivas, and legislator Guillermo Gallegos, leader of the Gran Alianza party. by the National Unity (GANA), which brought the president to power in 2019. Although that list has no immediate effect, this month the publication of the Engel List is expected, which may include specific sanctions on bank accounts in the US, on international transactions and visa restrictions of those indicated.

"In that context, doing anything that raises more concerns about transparency, or possible money laundering, feels like reinforcing the confrontation or perhaps stepping off the path to a constructive relationship with the US," says Eurasia's Grais-Targow. If Bukele forces citizens to use Bitcoin, this could drive a gap in the use of the dollar, in a way that undermines the future of dollarization. Therefore, this proposal could be interpreted as a step towards "de-dollarization" without being, strictly, a plan to completely get rid of the dollar.

The United States is the country with the greatest weight in the decisions of the International Monetary Fund (IMF), a multilateral one with which Bukele is negotiating a loan that is estimated to be of up to 1.3 billion dollars to boost the economic recovery due to the coronavirus crisis.

On Thursday, the IMF spokesperson said that the Fund authorities would meet with Bukele to discuss the issue and warned about the risks of cryptocurrencies, arguing that legalizing their official use raises “a series of macroeconomic, financial and legal issues that require a very careful analysis ”.

Legal and mandatory

The new law approved by the Legislative Assembly of El Salvador obliges all businesses to offer Bitcoin as a payment method, so Salvadorans must invest in the necessary technology in their businesses. The president said on social networks that he will privilege the use of the Strike application, which works as a digital wallet and will allow citizens to pay their taxes in Bitcoin. Public finances will therefore be exposed to sudden devaluations of this cryptocurrency, which has fallen by up to 22% in a single day.

The law also states that any debt can be converted to Bitcoin. "This puts the banking system at risk, because banks are obliged to receive payment in Bitcoin with all the complexities that this entails," explains Ricardo Castaneda, economist at the Central American Institute for Fiscal Studies (ICEFI) in San Salvador, " Bitcoin is a highly volatile currency and the way banks take care of currency volatility is through interest rates. So, it is possible that there could be an increase in interest rates ”, which would make the debt of Salvadorans more expensive.

The government assures that it will absorb this risk, adds Castaneda, “which is a fallacy, because the government is financed by taxes, right?

In reality, those who will have to take this risk will even be the poorest people, because in the end everything will be paid as taxes ”.

"It worries if they are going to touch the pensions, if they are going to convert them into Bitcoin," says Escobar, from Acción Ciudadana.

“The qualifier that describes us is uncertainty, ignorance and uncertainty of what the Government wants to do and the implications it is going to have.

We have no information, or what the objective is ”, he laments.

When you consider that 70% of the economy in the country is informal, it is difficult to imagine that so many citizens will be incorporated into the banking and tax system, merely because they can now use Bitcoin, adds Castaneda. And those that can, would be exposing themselves to fluctuations in price and cybersecurity risks.

"We can assume that many consumers will be relatively or completely new to cryptocurrencies and the platforms used to trade and store them," says FS-ISAC's Silberstein. “Without a massive cyber literacy campaign, consumers can easily fall prey to sophisticated cybercriminals who use phishing and other scams to gain access to their accounts. There are no endorsements with cryptocurrencies as there could be with currencies backed by the central bank, ”he adds.

For Nelson Rauda, ​​the impression is that in El Salvador, the Bitcoin is a debate of people with money, something that the “majority of the country does not have”. That is why he believes that in the mega-event in Miami in which there was talk for the first time of making cryptocurrency official, the hook for Salvadorans was that they could send remittances without commission. The money sent by citizens residing abroad represents more than 20% of the country's gross domestic product. However, the journalist warns, “it is a promise of sale. There is no public document that refers to that ”.

With the great popularity of Bukele, Escobar says for his part, the president — a publicist by profession — can sell almost anything he wants: “People don't mind that he hasn't told them anything about Bitcoin. What he says in general is a blessed word. This is how people take it. He has managed to constitute not a government, but a sect that is the object of his personality cult ”.

Source: elparis

All business articles on 2021-06-14

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