🔒 El Salvador’s $300 million Bitcoin ‘revolution’ is failing miserably

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By Zeke Faux

(Bloomberg Businessweek) — On an estuary along the coast of El Salvador, a few miles west of the Conchagua volcano, about 70 families live in a settlement called Flor de Mangle. It’s named for a mangrove forest where residents pluck oysters and crabs by hand from the brackish water. The first group of inhabitants came about 20 years ago, some of them former soldiers and guerrillas displaced by a brutal civil war. Harvesting shellfish, herding cattle and growing mangoes and corn, they earned enough to raise families and build houses, first of tin and wood, then of concrete.

Earlier this year, government workers visited the forest and marked some of the trees with letters and numbers in orange paint. Elmer Martínez, a mango farmer who leads the local cooperative, says they told him the markings indicated where farms would be razed for a development project backed by Nayib Bukele, El Salvador’s president. “We can’t leave, because we don’t have anywhere to go,” Martínez told me, flashing a decorative gold front tooth. He sat in the shade of a giant mango tree he’d planted 15 years before. Next to him were buckets holding grafts from nine of his trees, to bring with him if he was forced off his land. “We’re poor people who survive from nature, from the field,” he said.

Bukele, a 41-year-old former public-relations executive who has 4 million followers on Twitter and sometimes describes himself as the country’s CEO, has said he’ll turn the impoverished area around Conchagua into a futuristic metropolis like Dubai. The president calls his development Bitcoin City. El Salvador’s infrastructure budget would barely cover a single skyscraper, but he says the country can earn the money to pay for it by investing in the cryptocurrency and harnessing the volcano’s power in order to mine Bitcoin. Construction is supposed to begin next year on the city’s airport, which will have a doughnut-shaped terminal with a silver scaled roof. Maps show that Flor de Mangle is on the path of a runway.

Everyone knows someone who cashed in a retirement account or stimulus check to buy crypto. Bukele did it with El Salvador’s treasury. In September 2021 the country became the first to declare Bitcoin a legal currency. Bukele gave $30 in Bitcoin to each citizen, plunked down Bitcoin ATMs in every town plaza and told businesses to accept Bitcoin as payment. He also used government funds to buy $100 million worth, mostly when prices were peaking, then trolled critics by tweeting that he’d done it on his phone, in the bathroom, naked. And with the country on the edge of a debt crisis, Bukele told off international creditors, saying he’d solve El Salvador’s financial problems with Bitcoin instead. “#Bitcoin is FU money!” he tweeted.

A year in, it’s clear the move is failing. Almost no one in the country is using Bitcoin, and the few who bought after Bukele made it legal tender would’ve lost big: Bitcoin has dropped 61% since September 2021. In a country where many live on less than $10 a day, he spent hundreds of millions of dollars to turn himself into a crypto influencer just in time for the crypto crash. Behind the debacle was a small group of evangelists from wealthier countries—startup CEOs, influencers, grifters. They enlisted an entire country in a publicity stunt and cheered on Bukele even as he ordered mass arrests and packed the Supreme Court, which subsequently ruled he could run for reelection despite a constitutional ban. Salvadorans are still dealing with the consequences.

 “It’s volcano energy, yeah!” yelled Stacy Herbert, a pink-haired former TV producer, as she flexed her biceps on a YouTube show and podcast celebrating a Bitcoin law passed in El Salvador last year. Max Keiser, her co-host, chimed in: “Cheap and clean volcano energy from the balls of the Mother Earth’s own testicles, exploding in a jism of free power that’s going to make us all f—ing rich down here!”

The husband-and-wife team are Bukele’s most prominent, if unpaid and unofficial, Bitcoin advisers. A few years ago they produced a conspiracy-theory-heavy news show on Russia’s state-owned RT network. Now they eat at El Salvador’s best restaurants and fly in military helicopters to tour government crypto projects. In March they had dinner with Bukele, who credits Keiser with inspiring some of his Bitcoin financing ideas, and in June they were given seats of honor when the president addressed the national legislature. “The guy is a super genius-like mathematician,” Herbert said when I met her at a cafe in an upscale San Salvador mall.

The couple describe El Salvador’s problems as the fault of evil Western bankers who’ve conspired to exploit the country. It’s an explanation Bukele uses, too. At the time he made his Bitcoin play, the government was in talks with the International Monetary Fund for a low-cost loan to fill its budget gap. But the IMF was demanding spending cuts that would’ve been painful. So instead, in June 2021, Bukele had Jack Mallers, a 28-year-old startup founder from the Chicago area, announce to the world—in English, at a Bitcoin conference in Miami—that El Salvador would be adopting a new national currency.

Mallers, elfin and curly haired, paced the stage in an oversize hoodie and a baseball cap, giggling and cursing as he described a spring he’d spent in El Zonte, a beach community about 30 miles south of San Salvador. A surfer from San Diego was helping the poor there by teaching them to use Bitcoin. Mallers came to help. One of Bukele’s brothers somehow learned he was visiting, then messaged him on Twitter and asked to meet. Before long, Mallers was advising the government on how to use Bitcoin to help the 70% of Salvadorans who don’t have a bank account.

As Mallers told this unlikely story, he started to cry. He said Bitcoin would let Salvadorans in the US send money home for free, saving them hundreds of millions of dollars in money transfer fees. And with Bitcoin powering the economy, he asserted, El Salvador’s youth “won’t have to resort to crime or violence,” and the country “won’t have immigration problems.

“I’m not launching in Europe, I’ll be there. We die on this hill. I will f—ing die on this f—ing hill!” Mallers said, wiping away tears. “Today, humanity takes a tremendous leap forward in re-instilling human freedom.”

Ten months later, after it was clear the leap had landed somewhere short of tremendous, Mallers gave a talk at another Bitcoin conference in Miami. He spoke about using the cryptocurrency for small payments, but instead of discussing the country he’d been so enthusiastic about, he showed a video of himself using Bitcoin to buy a six-pack of Bud Light at a grocery store in Chicago.

When I caught up with him later and asked if he’d been to El Salvador to see how its Bitcoin project was going, he said he couldn’t remember the last time he visited. “It’s very important to know that it’s not my project, you know,” he said.

In August, I went to El Zonte. There, chickens hop down rutted dirt roads, and many residents live in houses made of corrugated metal, on the same streets as $300-a-night hotels. The area has been swarmed by Bitcoin influencers, travel bloggers and TV crews, who’ve dubbed it Bitcoin Beach. Fans were excited there was finally a place in the physical world where Bitcoin could buy stuff, which they saw as an important step toward global adoption. “OK, guys, we are about to order here at Minutas Mario, and we can pay with Bitcoin,” a German Bitcoin YouTuber says in a video from January. Standing at a rusty-wheeled pushcart, he gets a minuta—a fruit-flavored shaved ice, sometimes mixed with condensed milk or tamarind jelly—and spends more than three minutes scanning QR codes to transfer 13,418 hundred-millionths of a Bitcoin (about $5 at the time) to the vendor’s digital wallet.

Right away during my visit, there were signs the locals didn’t find slow, complicated electronic payment apps as thrilling as Bitcoiners did. At the first store I entered, when I mentioned Bitcoin, the clerk snatched the bottle of water I was trying to pay for out of my hands. “Trash,” he said. “I will never use it.” My hotel wouldn’t accept it either, and a beachfront restaurant next door displayed a handmade sign saying, “No Bitcoin.” Its owner, Julio Martínez, told me he got sick of telling visitors he didn’t want to handle such a volatile currency. “The tourists think everybody accepts Bitcoin,” he said.

On the black-sand beach, as surfers cut through the waves and two buff influencers posed for pictures with their baby, I spotted the pushcart where the German Bitcoiner had filmed his video. The proprietor, Mario García, was one of the first merchants in town to accept Bitcoin. He was wearing a fuzzy white cap, an Adidas fanny pack and a dirt-streaked orange polo shirt. His “Acceptamos Bitcoin” sign was so faded I could barely see the B logo. Nearby, his wife was stirring a giant pot of potatoes to make dumplings. García didn’t have much to say about Bitcoin. It was a way of drawing in tourists, he said. He converted their payments to dollars as quickly as possible.

García at El Zonte beach. Photographer: Jose Cabezas for Bloomberg Businessweek

García did have a story to tell about a different Bukele initiative, though. In March, after 62 people were murdered in El Salvador in one day, the president declared a state of emergency, suspended due process rights and started tweeting photos of shirtless, tattooed men in handcuffs. The arrests have been indiscriminate, and many are still being held without charges. According to officials, more than 55,000 people have been detained—about 1 in 100 Salvadorans.

García was among them. One morning in April, four soldiers and two police officers approached him on the beach as he started work. He was ordered, at gunpoint, to strip to his underwear. García, who’s 47, only later learned he’d been accused of being part of the Chiltiupanecos Locos clique of MS-13, the country’s largest gang. He told me he spent almost a month in prison, where he was beaten and pepper-sprayed. He pulled up his shirt to reveal a V-shaped scar and a bruise. Other prisoners fared worse—he recalled seeing five inmates die. “They arrested half the world so they could have a number and say, ‘We arrested so many people,’ regardless of whether the person committed any crime,” García said. (A Salvadoran government spokeswoman didn’t respond to emailed questions about García’s detention.)

He asked if I could share the QR code on his sign, in hopes of getting donations so he could pay his electric bill and bank loans. When I went to buy shaved ice using Bitcoin myself, the code didn’t work.

Bukele’s approval rating still hovers around 90%. Salvadorans tend to blame his predecessors for the country’s problems and to credit his crackdown for a major decline in gang violence. El Salvador had the world’s highest homicide rate in 2017, but the figure has since dropped below those of neighboring Mexico and Honduras; leaked government documents and recordings published by the newspaper El Faro show that Bukele cut a deal with gang leaders to reduce the violence. The president rarely gives interviews and declined to comment for this story, but he’s accused the human rights advocates who criticize him of being in league with the gangs. And he justified his embrace of Bitcoin in a recent article titled “ Stop Drinking the Elite’s Kool-Aid,” for Bitcoin Magazine, writing that the mainstream media is too biased against crypto to admit the project’s success. “El Salvador is the epicenter of Bitcoin adoption,” he said, “and thus, economic freedom, financial sovereignty, censorship resistance, unconfiscatable wealth.”

One legislator from Bukele’s Nuevas Ideas party, William Soriano, insisted to me the project was working, though he provided no concrete examples. “Our president is a brave visionary,” he said via WhatsApp. “El Salvador now leads the monetary revolution that will transform the world as we know it. Not just economically, but culturally as well.”

It was strange to hear. I was seeing even less Bitcoin use elsewhere in El Salvador than I’d seen in the revolution’s birthplace, El Zonte. In downtown San Salvador, I spent an afternoon walking through a market looking for someone who accepted Bitcoin. I saw soldiers holding rifles or shotguns on street corners, a wall spray-painted with anti-Bitcoin graffiti and even stands hawking white prison uniforms, which family members have to buy for the incarcerated. I didn’t find anyone who said they used Bitcoin. “Sometimes it’s up, sometimes it’s down. For me it doesn’t work,” said a man running a small pharmacy. Even at upscale restaurants catering to tourists, cashiers accepted Bitcoin only reluctantly, often going to a backroom to look for a device loaded with a Bitcoin app, the way a waiter at a French restaurant might pull a dusty bottle of ketchup out from under the counter to humor an ignorant American.

El Salvador’s Bitcoin project is centered on a smartphone app the government runs called Chivo, slang for “cool.” It allows users to send each other dollars or Bitcoin and convert funds from one to the other. A user can scan a QR code to buy a $1 pupusa, and Chivo will send $1 worth of Bitcoin at the current exchange rate. The fees are minimal. People can also withdraw US dollars from their digital wallets at the country’s 200 Chivo ATMs. Each machine is in a blue-roofed hut with a desk for two staffers to assist users. Soldiers stand guard around the clock.

The government released Chivo in September 2021, three months after Mallers’s teary announcement. Those who signed up got $30 in free Bitcoin, about an average day’s wages in El Salvador. More than half the country’s 6.5 million citizens did. What they found was an app that barely worked. Users reported that it crashed regularly and that payments often failed or took hours to process. Others said they couldn’t sign up because someone had stolen their identity and their bonus. A week after the app was released, thousands of protesters marched through the streets holding signs saying, “No to Bitcoin” and “No to Dictatorship.” Some set fire to a Bitcoin ATM. To troll everyone, Bukele changed his Twitter bio to read, “The coolest dictator in the world.”

Bukele had delegated responsibility for the Bitcoin project to his three brothers and his Venezuelan campaign adviser, none of whom hold official positions with the government. The country awarded the contract to develop the app to Athena Bitcoin Global, a tiny Bitcoin ATM company in a Chicago suburb. It was the only company that said it could meet the government’s deadline, according to a spokeswoman for Athena. Corporate filings show that El Salvador paid it about $4 million to develop the app. Initially, enthusiastic day traders sent Athena’s stock soaring as high as $33, briefly making its founder, Eric Gravengaard, worth $10 billion on paper. (It has since crashed below $1.)

The code Athena produced was riddled with bugs, according to a deposition given in August by Shaun Overton, president of Accruvia, a software development company Athena hired to fix Chivo. (The deposition was part of a payment dispute with Athena; Overton declined to comment for this story.) Not even 150 people had signed up before the software designed to check their identities crashed, Overton said. Rather than slow the rollout, the government decided to turn off all safeguards. Anyone could sign up with a false identity and withdraw $30 worth of free, untraceable Bitcoin. Some users submitted photos of potted plants as proof of their identity instead of selfies. Overton estimated that as many as 20% of the app’s 4 million sign-ups were fake. “There was literally no supervision whatsoever,” he said.

At one point, Overton said, a programmer introduced a bug into the code that allowed users to buy Bitcoin, then trading at about $60,000, at a rate of $1 instead. By the time the error was caught a few hours later and the transactions reversed, Chivo users had accumulated $10 billion worth. Even when the price was accurate, the software was designed to update it only once per minute, allowing users to make easy money by waiting for the live price of Bitcoin to go up, then buying it on Chivo at the old, lower price. Overton said one trader exploited the bug for $400,000. “We had pretty much the entire country turn into day traders,” he said. “They could buy and sell risk-free.”

The Chivo app has worked better since El Salvador replaced Athena with AlphaPoint Corp., a crypto software company in New York. The Athena spokeswoman said that the company continues to work with the government but that a confidentiality agreement prevents it from saying more.

Even though Chivo allows for free transfers from abroad, few people are using the app for them. It accounted for only 2% of remittances in the first five months of 2022, according to El Salvador’s central bank. And after the initial wave of sign-ups, usage plummeted generally, according to the National Bureau of Economic Research in Cambridge, Massachusetts, which surveyed a sample of 1,800 households and found almost none had downloaded the app this year. Salvadorans say they “do not understand it, they do not trust it, it is not accepted by businesses, it is very volatile,” the researchers wrote.

Bitcoin City emerged following the Chivo fiasco. Bukele announced it at a November 2021 crypto conference near El Zonte, with full fanfare: a fusillade of fireworks, a fog machine, AC/DC blasting and a giant animation of Bitcoin erupting from a volcano. Comparing Bitcoin City to one of the ancient outposts built by Alexander the Great, the president unveiled a design from a high-profile Mexican architect. Bukele said the city would be circular, with a central plaza shaped like the Bitcoin logo, so large it could be seen from space. And of course there would be a geothermal plant, using heat from the Conchagua volcano to power the city and a giant server farm to mine Bitcoin, a notoriously energy-intensive process.

To explain the financial details, Bukele called the plan’s primary champion to the stage: Samson Mow, a video game developer turned Bitcoin evangelist from British Columbia who’s in his early 40s. Mow’s plan assumed that the price of Bitcoin would keep going up. First, El Salvador would raise billions of US dollars by selling “Bitcoin bonds” to the crypto faithful. Then the country could spend half the money on infrastructure and invest the other half in Bitcoin. Once Bitcoin went up enough, it could use the profits to repay the bonds. If the price of a single Bitcoin hit $1 million—“and I think it will,” Mow said—the bonds would more or less pay for themselves.

“Sounds good to me,” Bukele said. “I’m not the financial guy.”

Mow said the bond offering would be facilitated by the crypto exchange Bitfinex, which doesn’t do business in the US. It had agreed to an outright ban in New York earlier that year as part of a settlement with the state’s attorney general, who said it was “operated by unlicensed and unregulated individuals and entities dealing in the darkest corners of the financial system.” A few months after the Bitcoin City announcement, Mow and Giancarlo Devasini, the de facto boss of Bitfinex, were photographed meeting with members of Bukele’s party. A Bitfinex executive told El Faro the company was helping the Bukele administration shape the laws that would permit the bond offering. (A spokesman for Bitfinex declined to comment for this story.)

I spoke with Mow via Zoom in April. Bitcoin was down 32% since November. Still, he argued that because only 21 million Bitcoin will ever be created, their value would be sure to rise against the dollar as the Federal Reserve printed more and more cash. “Think of Bitcoin like a ruler. There’s 21 million units on the Bitcoin ruler,” Mow said, pulling out an actual ruler. “Unless money printing stops, Bitcoin will go up.” Of course, just because the supply of something is limited doesn’t make it valuable—only 21 million VHS tapes of Pixar’s Toy Story were ever made, and you can get one on EBay for $3. Since my conversation with Mow, Bitcoin has dropped an additional 52%. El Salvador has yet to sell any Bitcoin bonds.

Those who once talked up crypto’s transformative potential in El Salvador now tend to justify Bukele’s gambit in terms of the startups and tourism dollars it attracted. But expats I spoke with estimated that only a few hundred crypto types have moved to the country, at most. One American Bitcoiner I met in San Salvador did tell me, semi-seriously, that he’d stimulated the economy by buying a refrigerator for the family of a stripper he was dating.

The government’s financial outlook is grim. Credit rating companies say El Salvador is likely to default on its debts in the next few years, and bailout negotiations with the IMF have stalled thanks to the Bitcoin project. Its total cost to El Salvador thus far hasn’t been disclosed, but it could be as much as $300 million, including $203 million allocated by the legislature, funding for the Chivo bonus payments, and Bukele’s trading losses. (Based on amounts Bukele tweeted he’d bought and Bitcoin prices at the time—which admittedly may not provide a full or precise picture—those losses could total about $57 million.)

Claudia Ortiz, an opposition member of the legislature, told me the Bitcoin gambit had left El Salvador short of funds for other priorities. Sitting beneath a lime tree in the private courtyard of a closed cafe, a site she chose because she’d been harassed by Bukele’s supporters, Ortiz said the government had cut funding to cities deeply. One mayor in the east couldn’t afford the rent for city hall and had to work outside in a market. “He doesn’t behave as the president of an in-debt and poor country. He behaves as a crypto influencer,” she said of Bukele. “He is gambling with public money.”

Amid the austerity measures, a public veterinary hospital with an incongruously bright and shiny facade opened in February in San Salvador. It’s called Chivo Pets, and treatment costs only 25¢ if you pay in the equivalent amount of Bitcoin. There’s an ambulance, cardiologists, surgeons and a courtyard playground where dogs can relieve their anxiety while they wait. Bukele claimed it was built with Bitcoin profits, somehow. “Bitcoin is good for pets,” he tweeted.

A medical doctor I spoke with, who asked not to be identified because he risked being fired from his public hospital, called it outrageous that Bukele was funding pet care when two of the city’s public hospitals don’t have functional laundry service. At his facility, he said, he was unable to treat varicose veins or replace knees and hips, because he didn’t have the necessary supplies. Clinics in the countryside lacked even common medicines for conditions such as diabetes. “The priorities are determined by political marketing,” he said.

A visit to Rosales National Hospital, San Salvador’s largest public hospital, confirmed the picture the doctor presented. One morning, three dozen people waited in the dark along a brick wall topped with broken glass and razor wire. They’d arrived as early as 3:30 a.m., seeking care in a facility that was run-down at best. Videos posted on social media a few months before had shown rain pouring in through the ER ceiling during a tropical storm. Bukele announced plans in 2019 to replace the hospital, but construction hasn’t started.

One woman appeared to have dressed up for her visit, with flower-shaped earrings and a Coach purse, her black hair pulled back into a tight bun. She asked not to give her name, fearing reprisal. She told me she’d brought her daughter for leukemia treatment from a village 30 miles outside the capital. They’d left at 3 a.m. to make the hour-and-a-half trip by bus, as they had every few months for the past five years. The woman’s primary source of income was the $50 a month she earned taking care of a relative. She said life was harder lately because her husband, a 51-year-old farmworker, had been detained. He’d gone to pick up their daughter at the bus stop and never arrived. The woman later learned he’d been imprisoned, despite not being involved in gang activity. She didn’t know what he’d been accused of or when he might be released. “You never expect something like this to happen,” she said.

Asked about Bitcoin, she laughed. “I don’t have any money,” she said. “How am I going to use it?”

At a plaza around the corner, past a vendor selling baggies of a roasted-corn-and-banana drink for 35¢ and homeless people sleeping in the street, I stopped by a new Chivo ATM. It was a last-ditch attempt, in the heart of the capital, to see if someone, anyone, was treating Bitcoin as a viable financial instrument. As I waited, two Humvees drove by with soldiers in the back pointing machine guns, part of a publicity stunt to promote a new bus safety initiative. Two of their comrades kept watch beside the ATM, their faces illuminated by the neon blue Chivo logo. In a half-hour, no one came to use it. 

—With Nelson Rauda Zablah