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Bitcoin Bunkum, Free Markets, and the Cost of Transmitting Remittances

Bitcoin ATMs burn in El Salvador in protest of a new law requiring merchants to accept Bitcoin.
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Burning Bitcoin ATMs

On June 5, El Salvador President Nayib Bukele declared that bitcoin would become legal tender in El Salvador.

Starting September 7, anew  law required businesses to accept it for all transactions. 

However, Salvadorans, for the most part, want no part of it. They prefer to use the US dollar in transactions. A protest is now underway with Bitcoin ATMs burning.

El Salvador’s Bitcoin Law Is a Farce

Foreign Policy reports El Salvador’s Bitcoin Law Is a Farce

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.

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.

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.

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.

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. 

Bukele’s Bitcoin Bunkum

Steve Hanke, writing for the National Review discusses Bukele’s Bitcoin Bunkum.

Following El Salvador’s disastrous Bitcoin rollout on September 7, President Nayib Bukele, feeling the heat, has recycled one of his favorite Bitcoin sermons. He claims that Bitcoin will result in a dramatic reduction in the cost of transmitting remittances to Salvadorans. This sermon, if true, would be a big-ticket item for Salvadorans. Remittances make up 24 percent of El Salvador’s gross domestic product, the highest percentage of any country in the Western Hemisphere. But there’s just a little problem with the sermon. It’s not based on the facts.

Traditionally, remittances are sent and received via money-transfer services provided by private companies. According to the World Bank, in the first quarter of 2021, these companies (Western Union, MoneyGram, Ria, and Remitly) charged between 0 to 4 percent in fees for a $200 remittance, depending on the transfer method. El Salvador has the sixth-​lowest remittance costs of the 104 countries monitored by the World Bank, and the lowest of any country in the Latin American‐​Caribbean region, with the average transaction fee for sending a remittance at 2.85 percent.

What about Bitcoin remittances? Well, for one thing, most Salvadorans are not interested in Bitcoin. They don’t want to use it. They prefer the U.S. dollar, which has been El Salvador’s legal tender since 2001, when El Salvador mothballed the colón and put it in a museum. Indeed, according to a recent survey by the Central American University, nine out of ten Salvadorans have little or no knowledge of what Bitcoin is.

Just what are the total costs associated with Bitcoin remittances? For a typical Bitcoin-remittance transaction, senders must convert their U.S. dollars to Bitcoin. Using Coinbase for example, the U.S.’s largest crypto exchange, this costs anywhere from 2.0 to 4.5 percent, depending on the payment method. Then the Bitcoin remittance is sent to El Salvador. For recipients to exchange Bitcoin for the dollars they actually want, they must do so at a Bitcoin ATM. Athena Bitcoin Global plans to install 1,500 Bitcoin ATMs in El Salvador. But exchanging Bitcoin for dollars at an Athena ATM will cost you a 5 percent minimum fee. And that 5 percent is just Athena’s cut — it does not include the network fee to execute the transaction. These network fees vary, but the more you pay, the faster your transaction executes (if at all). Athena even recommends to “err on the side of higher fees.” So, the typical Bitcoin-remittance transaction will have a minimum sticker price in the range of 7.0 to 9.5 percent.

Free Markets

Bitcoin is a free market construct. Telling businesses they have to accept it isn't.

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Nonetheless, the Bitcoin fans generally cheered Bukele mandate while repeating lies about east of transfer.

Yep, it's easy to transfer bitcoin at low cost. The cost is converting dollars to Bitcoin and back if someone wants to hold dollars.

Moreover, Salvadorans rightfully do not trust what the government might do to the Chivo wallet and payment system.

Merchants don't want to accept it because of volatility and conversion costs

What Bitcoin Is and Isn't

  • Bitcoin is a free market construct, a nice vehicle for speculation, and the currency of choice for money laundering and fraud. 
  • Bitcoin is not a good payment system due to volatility and conversion costs. 
  • Bitcoin is not blockchain but is based on it.

Bitcoin HODLers do not give a damn about the volatility or conversion costs. The average person and the average merchant does. 

Blockchain holds a lot of promise, so far unrealized. 

Many Bitcoin advocates claim Blockchain and Bitcoin are inseparable. While it's true that Bitcoin requires Blockchain by design, it is not true that blockchain requires Bitcoin or any crypto in general.

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