Protocol | Fintech

El Salvador’s bitcoin experiment is already going wrong — and what else could happen

President Nayib Bukele had a utopian plan to transform his country's economy in 90 days, with any number of technical, macroeconomic and marketing challenges. It didn't go well? Go find your shocked-face emoji.

Anti-bitcoin protest in El Salvador

An anti-bitcoin protest in El Salvador took to the street as the country's law making the cryptocurrency legal tender took effect Tuesday.

Photo: Roque Alvarenga/Aphotographia/Getty Images

El Salvador's brave new bitcoin world fell flat.

The country's move to make bitcoin legal tender alongside the U.S. dollar took effect Tuesday, but was met with a crash in bitcoin prices and headaches with its new digital wallet as businesses and consumers grappled with difficulty in actually using the country's new currency.

Steep drops in bitcoin's price Tuesday and Wednesday highlighted the cryptocurrency's volatility. Protests also erupted from citizens who opposed the move to bitcoin.

El Salvador's digital wallet, Chivo, designed to be the central financial app for the entire country, was not available on Apple, Google or Huawei's app stores at launch Tuesday. It eventually showed up for download, but struggled with capacity problems, with the Chivo team taking it offline to move to higher-capacity servers at one point, according to crypto news site the Block.

President Nayib Bukele tried to put a good face on the launch, saying he bought the dip by purchasing bitcoin for the government's treasury at lower prices. He retweeted videos of people paying with bitcoin at businesses such as Starbucks, Pizza Hut and McDonald's. It's unclear how many small businesses that lacked the technological resources of a multinational corporation were accepting bitcoin.

There are some potential upsides of the country's move to bitcoin, such as lower costs for remittances, which are estimated to be one-quarter of the country's GDP. But there's a wide field of technical and financial landmines El Salvador still has to navigate.

Tech bugs

The plan was passed through the country's legislature in a matter of hours and implemented in about 90 days. And since El Salvador is the first country to make bitcoin legal tender, there's no playbook for how to do this. It showed in the rollout.

  • The country has outsourced its bitcoin plan to at least five private companies, with others like OpenNode, which McDonald's is reportedly using for bitcoin payments, getting in on the action.
  • With so many players involved, there doesn't seem to be a central organization offering technical support or education. What about individuals who don't have a mobile phone, or can't access a bitcoin ATM, which seems to be the main plan to access physical cash? What if businesses need something more sophisticated than a consumer-oriented wallet app to receive payments? There were some Chivo kiosks set up at plazas across the country, but they weren't very active, the Wall Street Journal reported. At times, Bukele himself offered technical support on Twitter.

Volatility and financial stability

The crypto world has a solution for bitcoin's volatile price: stablecoins, or crypto tokens whose value is designed to stay linked to fiat currency to make them more attractive as a means of payment. El Salvador has vague plans to introduce its own stablecoin, a digital version of the colon, its pre-dollarization currency. But that's just an idea at this point, and bitcoin, with its gyrating price, is what the country has for now.

  • If the price of bitcoin falls, businesses will have to hike their prices. If it rises, then consumers lose buying power.
  • El Salvador's government seems to recognize the problem: It's still paying public workers' salaries in dollars.
  • The IMF, with which El Salvador is negotiating a debt package, believes the bitcoin plan will cause "macroeconomic instability." It could hurt financial trust in the system, given crypto's connections with illegal activity, the multinational agency said.
  • There's also the potential use of the system for money laundering or other criminal activity, given how quickly the system was set up. Protesters pointed this out, saying bitcoin would attract money laundering.
  • The views of international lenders matter a lot, because the country is in debt and relies on international loans. Moody's downgraded the country's debt because of the bitcoin moves. The World Bank said it would not help with the bitcoin plan. If the country moves full steam ahead, there is no guarantee that the IMF or others will bail out the country's financial system if it doesn't work.

El Salvador's internal politics

Bukele, who's been called an "authoritarian hipster," is staking his reputation on the bitcoin plan. If he goes, will the bitcoin law stick around?

  • Critics have argued that Bukele's bitcoin moves are just part of his consolidation of power. A ruling last week by the Supreme Court — whose makeup was changed by the country's legislature this spring to make it more friendly to the president — recently allowed Bukele's reelection.
  • But the move to a crypto economy could end up making the country less stable — and Bukele's position less secure.

There's an argument that these are all just technological teething pains, a beta test conducted in public. And the dip in bitcoin could just be a "typical" sell-on-the-news reaction, according to Ulrik K. Lykke, executive director at crypto hedge fund ARK36. But it's clear that remaking an economy in real time around cryptocurrency is easier said than done.

Protocol | Policy

Why Twitch’s 'hate raid' lawsuit isn’t just about Twitch

When is it OK for tech companies to unmask their anonymous users? And when should a violation of terms of service get someone sued?

The case Twitch is bringing against two hate raiders is hardly black and white.

Photo: Caspar Camille Rubin/Unsplash

It isn't hard to figure out who the bad guys are in Twitch's latest lawsuit against two of its users. On one side are two anonymous "hate raiders" who have been allegedly bombarding the gaming platform with abhorrent attacks on Black and LGBTQ+ users, using armies of bots to do it. On the other side is Twitch, a company that, for all the lumps it's taken for ignoring harassment on its platform, is finally standing up to protect its users against persistent violators whom it's been unable to stop any other way.

But the case Twitch is bringing against these hate raiders is hardly black and white. For starters, the plaintiff here isn't an aggrieved user suing another user for defamation on the platform. The plaintiff is the platform itself. Complicating matters more is the fact that, according to a spokesperson, at least part of Twitch's goal in the case is to "shed light on the identity of the individuals behind these attacks," raising complicated questions about when tech companies should be able to use the courts to unmask their own anonymous users and, just as critically, when they should be able to actually sue them for violating their speech policies.

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Issie Lapowsky ( @issielapowsky) is Protocol's chief correspondent, covering the intersection of technology, politics, and national affairs. She also oversees Protocol's fellowship program. Previously, she was a senior writer at Wired, where she covered the 2016 election and the Facebook beat in its aftermath. Prior to that, Issie worked as a staff writer for Inc. magazine, writing about small business and entrepreneurship. She has also worked as an on-air contributor for CBS News and taught a graduate-level course at New York University's Center for Publishing on how tech giants have affected publishing.

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