Bukele’s Secrecy Clouds El Salvador’s Bitcoin Projects

President Bukele announced last November the project to build a Bitcoin City, near Conchagua, in the department of La Union. Photo: the Salvadoran Presidency

By Edgardo Ayala (IPS)

HAVANA TIMES – El Salvador’s president Nayib Bukele appears determined to barrel ahead with his plan for Bitcoin acceptance, not only in the internal economy but also in his related projects, including cryptocurrency mining and the construction of a so-called “Bitcoin City” in the east of this Central American country. However, things aren’t moving along with the speed and certainty he’d like.

In addition, the latter initiatives have been kept under thick wraps, and little or nothing is known about them, aside from a few isolated statistics Bukele has included in his Tweets – the 40-year-old leader’s preferred platform for announcing his decisions.

Regarding Bitcoin City, the government has only said it will be situated in the area around Conchagua, a city in El Salvador’s eastern department of La Union, and will be a futuristic mega-city, built in circular form, where the preferred currency will be cryptocurrency.

There’ll be hotels, shopping centers, plazas and many other structures. Investors who bring their money there will pay no taxes, except for the country’s value added tax and some municipal taxes.

“We don’t even know exactly where Bitcoin City will be built,” the head of La Union’s Agency for Local Economic Development told the IPS news service. The Agency is in charge of various different programs in the zone.

Everything is “kind of in the air,” he added.

Nonetheless, just the idea that a city like that could be constructed there has greatly increased property values. “The news has been like a boom, and is raising a lot of expectations. Real estate prices have shot up; a lot of people are going around buying up property right now,” the agency director indicated.

“The problem, he noted, is that “these are rural people, and they’re selling off their means of support. Of course, they’re going to invest in other things, but they’re giving up a concrete asset,” in return for a bubble.

The recent market performance of Bitcoin hasn’t gone at all well for the government either, adding to the problem that people haven’t fully assimilated it after five months of its implementation.

A container installed at the Planta Geotermica de Berlín, in the department of Usulutan, east of El Salvador. The government says it contains 300 processors with which it has begun to mine bitcoins with the energy produced at the installation. It uses steam generated underground by the Tecapa volcano. Photo: Presidencia de El Salvador

Tiny trickles of information

On September 7, 2021, El Salvador became the first country in the world to adopt Bitcoin as its legal currency. In 2001, the Salvadoran economy was dollarized; currently, U.S. dollars also continue circulating. In order to promote the use of cryptocurrency, the government gave $30 dollars to everyone who registered for the State-sponsored electronic wallet, called Chivo Wallet, since “chivo” in local lingo means “cool”. The program was intended to motivate people to realize their transactions in Bitcoin and learn to use it.

Nonetheless, after the first enthusiastic rush to collect those 30 dollars, the general population continues resisting the widespread use of cryptocurrency.  A survey of public opinion published at the beginning of January by the “Jose Simeon Cañas” branch of the Central American University revealed that 70% of respondents were little interested in the use of Bitcoin.

“This experiment has had a high dose of improvisation and murkiness,” economist Ricardo Castañeda from the Guatemala-based Central American Institute for Fiscal Studies explained.  There’s no public information, the Salvadoran expert added, nor any technical studies to give an idea of the benefits and costs, nor enough data to carry out a well-founded evaluation of the process.

In addition, the government continues receiving criticism and calls from the International Monetary Fund (IMF) to scrap the Bitcoin project. The IMF has said it poses significant risks to the Salvadoran economy.

The government is engaged in a kind of love-hate relationship with the Fund. On the one hand, it has refused to yield on the Bitcoin issue; on the other, it’s negotiating an agreement for a monetary injection of 1.3 million dollars, needed to alleviate the country’s fiscal hole and other urgent necessities.  That agreement with the IMF has been stalled since March 2021, but is vital at a moment when El Salvador is having serious problems financing its debts.

“Beyond the fact that at the close of 2021 the public debt represented over 86% of the GNP, he faces complications in obtaining further financing,” Castañeda continued.  Last year the country didn’t issue bonds, because their risk profile had increased significantly.

This can be explained, the economist stated, by the political noise Bukele has made in the country, alienating half the world with his authoritarian style of government, “but also by adopting Bitcoin,” as legal tender.

Foreign investors and bitcoin enthusiasts were taken on February 19th to see the surroundings of Conchagua, in the east of the country. Here, besides the building of Bitcoin City, there is a project to develop geothermal wells and increase the capacity of the Central American nation that already generates 25% of its energy needs with the steam from volcanoes. Likewise, the government hopes to increase its capability to mine cryptocurrency. Photo: Alcaldía de Conchagua / FB

Bitcoin’s value rises and falls

Currently, the cryptocurrency’s drop in value signals a step backwards from the euphoria reached in October, when it broke the barrier of US $60,000 dollars. By the beginning of March 2022, however, the value had plummeted to around 43,000 dollars.

When the price was at its height, Bukele appeared to rub it in the face of the opponents, claiming that his maneuver had been astute and was producing dividends. However, when the cryptocurrency’s value began to drop, things changed.

Russia’s invasion of Ukraine on February 24 depressed the price of cryptocurrency still further. Bitcoin fell below $35,000, although it subsequently rose slowly again, until it reached the March 1 price of $43,914.

To date, it’s known that El Salvador has bought 1391 Bitcoins, in eight separate transactions, for an amount over US $70 million dollars. However, information regarding these transactions isn’t public but depends exclusively on what the president chooses to say.

“We don’t know how much the country has lost or gained (due to the price fluctuations). It’s unknown, because when information is requested (of the respective authorities) no one responds,” stressed Castañeda.

The concept of loss in that world of constant fluctuations must be viewed in its true context, explained Carlos Jovel, Information Technology department head at the Central American University. If the government holds on to the Bitcoins it says it has, they could recover from the slump and even yield earnings again when the price rises, he pointed out.

On January 24, Bukele responded with sarcasm to those who have insisted that the country could lose a lot of money due to the volatility of cryptocurrency, and that it’s a mistake to invest public money in something so unstable.

“Most people go in [to buy] when the price is up, but the safest and most profitable moment to buy is when the price is down. It’s not rocket science. So, invest some of your McDonald’s paycheck in Bitcoin,” Bukele tweeted in English.

In an effort to solve their problems with the financial markets, the government, in urgent need of money, took another daring step.

The same day that Bukele announced the construction of Bitcoin City in a beachfront area of the Salvadoran Pacific Coast, he also announced the government’s intention to issue sovereign bonds in Bitcoin to the world. He hopes to obtain a billion dollars from this ploy.

The bonds will be issued for a ten-year period, with a 6.5% rate of return, Bukele assured.

Part of those funds will be used to build the announced megacity, and others to broaden the country’s geothermal possibilities for Bitcoin mining. The bond initiative is foreseen for the first months of 2022.

With the grandiose style typical of this “millennial” ruler, who since June 2019 has led the tiny country of 6.7 million inhabitants, Bukele now speaks of El Salvador’s becoming the Central American Singapore.

Bitcoin mining and a megalopolis

As he proclaimed with fife and drums the idea of launching cryptocurrency mining in the country and of constructing Bitcoin City, the leader sold the idea that these projects are solid from head to toe.

However, once again, little is really known about them.

“I’m speculating, because I’m not in the president’s head – nor does anyone else know what he thinks – but I believe it’s a marketing strategy,” stated Jovel. He believes it’s aimed at attracting cryptocurrency enthusiasts to invest in the country.

The information technology specialist doubted the government has really installed the 300 processers or “rings” for Bitcoin mining that the government says they finished installing at the end of 2021.

Cryptocurrency mining is a process in which powerful computer processers realize extremely complex mathematical operations, “excavating” cyberspace in search of Bitcoins. These are then validated through what’s called a “blockchain”, essentially a global network that registers the findings.

Given the size of the container the president announced in a short video posted on Twitter in 2021 – the way Bukele generally informs the country of his decisions – Jovel believes that no more than 100 processors have been delivered.

The leader has been claiming that the mining of that cryptocurrency will be carried out using “100% clean” geothermal energy. El Salvador currently satisfies only a fourth of its energy needs through that renewable energy method.

“If you ask me: yes, it’s possible to pack 300 machines in there, but it wouldn’t be the best idea technically. They could do it, but that container is fairly small to hold 300,” the expert concluded.

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