A review of the controversial El Salvador Bitcoin bill of 2021

The acceptance of Bitcoin in El Salvador has been one of the biggest stories in the crypto industry in 2021.

At the “Bitcoin Conference 2021: Miami” held in June this year, El Salvador’s President Nayib Bukele announced that it will soon accept Bitcoin as legal tender. The news received warm applause from the Miami attendees, and also attracted high praise on Twitter from Bitcoin supporters such as Michael Sayler and Peter McCormack. However, this event that sparked global heated debate was not so smooth. Some international organizations and economists, including many people living in El Salvador, were not so enthusiastic. 

After months of controversy, El Salvador’s Bitcoin law came into effect on September 7. 

Bitcoin lands in El Salvador

Since its birth more than ten years ago, Bitcoin has been widely regarded as a financial alternative to excessive government intervention and privacy violations by existing financial institutions. 

But in El Salvador, Bitcoin has undergone an unprecedented transformation-becoming the legal tender of a country. 

President Buckler stated in a video submitted to the Bitcoin Conference 2021: “Next week, I will submit a bill to Congress to make Bitcoin a legal tender.”

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Despite an unprecedented move, Buckler’s move actually borrowed from Bitcoin’s development “script” and was designed as a national inflation hedge for El Salvador. El Salvador is one of the few countries that use the U.S. dollar as its legal tender. Like many Bitcoin supporters, Buckler regrets the fact that the U.S. dollar is prone to inflation. Worse, if the United States pursues inflationary economic policies, Salvadorans can only watch their assets decrease. Given that Bitcoin is considered a hedge against inflation, it has become the new legal tender of El Salvador.

In addition, many Salvadoran residents rely heavily on remittances from diasporas, which account for 20% of the country’s gross domestic product (GDP). There are more than 2 million Salvadorans living outside the country’s territory, but they have always maintained close ties with their hometown, and the amount of money sent to the country exceeds 4 billion U.S. dollars each year.

Diasporas usually remit money domestically through a bank or other financial service provider, but these intermediaries can push up the cost of cross-border remittances. For example, if someone remits $1,000 from the United States back to El Salvador, even under the banner of “zero handling fee” in the exchange rate, the customer may actually face charges on both sides of the bank.

One advantage of Bitcoin or any cryptocurrency is that it does not rely on any intermediary. Therefore, Bitcoin may be more attractive to El Salvador, a poorer country and individuals who wish to avoid such fees. 

Encryption technology can promote financial inclusion on a large scale and has also been proven in El Salvador. Less than 30% of Salvadorans have a bank account, but within a few weeks after the Bitcoin Act came into effect and the Chivo Wallet was launched, more people had a Bitcoin wallet than a bank account.

Strike, one of the world’s leading Bitcoin wallets and one of the earliest developers of the Lightning Network, expressed his appreciation for El Salvador’s actions. CEO Jack Mallers said on the same day that Buckler announced the news: “Today, the world To become better, human beings have made leaps in terms of freedom and financial inclusion.”

Attract global attention

When Buckler first announced that he would support Bitcoin, he was actually just arousing discussion among passionate Bitcoin supporters in the crypto community. However, other organizations are not so enthusiastic about the economics of using Bitcoin as a legal tender.

In June, the International Monetary Fund stated that El Salvador’s decision to adopt Bitcoin as legal tender has triggered several “macroeconomic, financial and legal issues that require very careful analysis”. 

In the same month, the World Bank announced that it would not help El Salvador establish Bitcoin as a legal tender due to concerns about the lack of transparency of cryptocurrencies and documented environmental damage, and refused to donate and provide technical assistance to the country. 

The investment bank JPMorgan Chase believes that the move is not worth celebrating: “This is obviously of great significance to the country, but it is difficult to see any tangible economic benefits related to the adoption of Bitcoin as the second form of legal tender.”

The Strike wallet, which was launched in El Salvador in March and is widely used, is also controversial. Money transmitter is a term with special legal significance. In the United States, money transmission services must be licensed in each state within the scope of operation. However, Zap, the parent company behind the wallet, failed to do this. According to the investigation, Zap did not obtain a license to operate in most states of the United States, and only obtained a currency transfer license in 17 states, which means that many encrypted transfers sent to El Salvador using Strike may be illegal.

Just last month, the Bank of England also expressed its concerns about El Salvador. The governor of the Bank of England, Andrew Bailey, said that what made him “worry most” about El Salvador’s embrace of Bitcoin was “whether citizens of the country understand the nature and volatility of Bitcoin”.

However, based on the performance of the past seven months, the residents of El Salvador do understand Bitcoin, but do not want to impose it on them as legal tender.

Domestic dispute

In El Salvador, the introduction of the Bitcoin Act and its official wallet Chivo was far from smooth. With the adoption of Bitcoin, Buckler put his country at the center of “global discussions about the future of currencies.”

Chivo Wallet is a national digital wallet issued by the government of El Salvador on September 7 to implement the Bitcoin Act. To this end, El Salvador promised that users who download and authenticate Chivo Wallet will receive a $30 Bitcoin reward. This move allowed the official wallet of El Salvador to exceed 2 million users in one month.

In a previous article titled “Hackers Targeted $30 Bitcoin Wool in El Salvador”, Bai Ze reported that some hackers stole the identity information of Salvadoran residents and activated wallets associated with their identities to obtain $30. Bitcoin rewards. According to the description of Chivo Wallet’s official website, registering a wallet account requires scanning the front and back of an individual’s car driver’s license, and then performing face recognition to verify the identity of the registrant. However, a Youtube user in El Salvador verified on-site that only using a “movie poster” or a water glass deceived facial recognition and successfully registered the account, which proved that the system was flawed.

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Just this month, a Twitter user with the pseudonym El Comisonado stated that he has collected more than 50 examples of bitcoins lost from Chivo wallets. He said: “I don’t think the Chivo wallet is safe. No one can verify it because the code is not open source. Few people use Chivo today because many people don’t know how it works.”

However, more Salvadorans’ complaints have nothing to do with technology, but on the premise that the state mandates the use of Bitcoin. Buckler stated in August that if Salvadorans are unwilling, then they don’t have to use Bitcoin. “What if someone doesn’t want to use Bitcoin? Well, nothing, don’t download the [Chivo] wallet and continue your normal life.”

But this is not the case, because it contradicts Article 7 of the Bitcoin Act, which reads: “When anyone who obtains goods or services pays a merchant in bitcoin, every economic entity (merchant) must accept the bitcoin Currency as payment.” So Bitcoin is hardly optional for local merchants.

In this context, representatives of some unions, businesses, and students have repeatedly taken to the streets to protest and demand that the Bitcoin bill be revoked. Some people held placards that read “We don’t want Bitcoin.” Extreme protesters even set fire to Bitcoin ATMs.

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In addition, several surveys have shown that the vast majority of Salvadorans believe that the Bitcoin Act is a bad idea. According to a study commissioned by the Citizen Research Center (CEC) of the University of Francisco Gavidia (UFG), three-quarters (77%) of college students at the local university in the capital of El Salvador believe that Buckler’s adoption of Bitcoin is “not very Only 12.9% of people called it “wise” or “not at all wise”, and 6.5% called it “very wise”. 

So far, these efforts have not had much impact: the Bitcoin flag waved by Buckler has not been shaken.

Proposed “Bitcoin City”

Last month, Buckler announced that El Salvador would build a “Bitcoin City.” He compared the “Bitcoin City” to a city created by Alexander the Great in the Kingdom of Macedonia, which will be exempt from income tax, property tax and capital gains tax.

The world’s first “Bitcoin City” will be round, like a coin, located between the two cities in El Salvador-La Union and Conchagua, the capital of the province of La Union (Conchagua).

There is a volcano of the same name in Conchagua. Both main peaks of the volcano have active fumarole areas, but there is no confirmed eruption history. According to Buckler’s description, the government plans to build a power plant next to the volcano to provide energy for the “Bitcoin City” and the mining of Bitcoin. The mining of Bitcoin and other cryptocurrencies requires the use of large-scale computer equipment, not only The cost is high, the difficulty is great, and a lot of energy is needed.

The city will become a mature metropolis with residential, commercial areas, restaurants, airports, and port and rail services. It is estimated that the cost of public infrastructure will be around 300,000 bitcoins (approximately US$17.7 billion). The city is exempt from other taxes such as income tax, property tax, and the only tax will be 10% value-added tax. Part of the value-added tax will fund the bonds issued for the construction of the city, and the other part will be used for city construction and services.

In addition, El Salvador will start financing in 2022 and issue the world’s first Bitcoin sovereign bonds-“volcano bonds.”

Samson Mow, chief strategy officer of blockchain technology provider Blockstream, stated that the first 10-year “volcano bond” will be worth 1 billion U.S. dollars and will be backed by Bitcoin with a coupon rate of 6.5 %. After the five-year lock-up period, El Salvador will begin to sell some bitcoins used to finance bonds, providing investors with “extra coupons”, so that it can be concluded that the value of bitcoin will continue to rise strongly. At the same time, Samson believes that these plans will make El Salvador a “world financial center” and “Latin America’s Singapore”, hoping that other countries will follow suit.

Is law enforcement opaque causing controversy?

In September, the Salvadoran police arrested the famous Bitcoin critic Mario Gomez (Mario Gomez) without a warrant. 

Gomez is the founder of Hackerspace, a technology incubation company, and one of the Salvadorans who publicly opposed the implementation of the Bitcoin Act. Gomez has participated in a number of forums and video conferences, introducing in detail what he believes is the flaws and risks of the El Salvador Bitcoin Act. Gomez is also known for leaking key details of the Chivo wallet. He pointed out that several design features of the Chivo wallet worries him, including that the operating costs of the “zero-fee service” will be paid by taxes.

According to a report by the local media La Prensa Grafica, the police of the Salvadoran Combat Tactics Section (equivalent to the Special Police) tried to confiscate Gomez’s computer during the arrest. Soon after his arrest, Gomez was transferred to the Special Crimes Section of the National Central Investigation Department. The police stated that Gomez is under investigation because of “fake e-mails sent to various bank users whose accounts have been stolen.” The Salvadoran authorities are trying to access Gomez’s cell phone and computer.

According to a statement from Gomez’s lawyer Otto Flores, the police released him a few hours later. “He was’arrested’ without a judicial order and it is not clear why he was handcuffed.” 

Another critic, Jose Miguel Vivanco, said mercilessly on Twitter: “What’s next? If we use Venezuela’s history as a guide: news censorship, civil society Restrictions on human rights violations, total impunity for human rights violations, arrests of opponents, election fraud.”

Buying Bitcoin on a large scale, but not transparent

As of this writing, Buckler has purchased more than 1,100 BTC.

What is the President’s Bitcoin buying strategy? That is more than once through “buy on dips” in response to the decline in the price of Bitcoin. For example, Buckler bought 150 BTC, 420 BTC, and 100 BTC in September, October, and November, respectively. 

But this is another area that raises questions about transparency. So far, Buckler has not disclosed who controls the private keys of the government’s Bitcoin wallets-considering the fact that El Salvador’s Bitcoins were added to the Ministry of Finance, this would be a serious problem. 

Nolvia Serrano, head of the decentralized bank BlockBank’s business in El Salvador, believes: “There are many things that have not been disclosed. For example, who holds the private keys of these bitcoins? In addition, the criteria for buying bitcoins What it is, we don’t know. There is no room for error in transparency. We need to be transparent because the crypto community cares about these principles.”

Summarize

For the Salvadoran government and local economic activity participants, this Bitcoin experiment is not easy. There are still many problems waiting to be solved. The success of Bitcoin in El Salvador remains to be seen. At the same time, other countries in Latin America are paying close attention to the situation in El Salvador, and politicians have begun to promote their own Bitcoin/cryptocurrency bills. After all, they all have one thing in common: too far from God and too close to the United States.

However, the fact that El Salvador accepts Bitcoin as an official payment method is indeed the beginning of a massive march of blockchain technology and encryption technology. The barriers to use have been lowered and real use cases have been realized. The increasing frequency of residents of El Salvador using the Lightning Network also confirms the current scale of the Lightning Network from the side. Looking to the future, Lightning Network technology is expected to take a step forward in real-time communication, protection of fund security, privacy, etc., thereby bringing more usage scenarios to Bitcoin.

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Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/a-review-of-the-controversial-el-salvador-bitcoin-bill-of-2021/
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