‘You are now the boss of everybody!” joked the President of El Salvador. It was a cheerful occasion, and in some ways familiar: a Latin American leader meeting with foreign financiers to slap each other’s backs and discuss the future of a nation.
This time, though, the foreigners were luminaries of the cryptocurrency community, gathered in a public Twitter audio chat room with nearly 23,000 listeners by venture capitalist Nic Carter (the “boss”).
Together with El Salvador’s millennial premier Nayib Bukele, they celebrated as 62 out of 84 legislators voted to make it the first country to adopt Bitcoin as legal tender.
“You guys demonstrated that this is not something for rich people only; this is for everybody,” said Bukele. “Now we’re going to demonstrate it on a countrywide scale.”
He described how the move will boost tourism and investment, promote development and slash fees on remittances from expats. “We have to do a lot of explaining, but I’m sure it’s going to be good for everybody.”
Experts in cybercrime are not so sure. With its long history as a hotbed of organised drug and sex trafficking, El Salvador’s embrace of Bitcoin could open the door to ransomware hackers, money launderers and international criminals hoping to cash out.
Gonzalo Vila at the Association of Certified Financial Crime Specialists (ACFCS) says: “The social and security situation in El Salvador has improved lately, but there are still enormous risks and vulnerabilities… Legal and legitimate companies could be used to move dirty funds [from elsewhere] through the financial system.”
Analysts have suggested the scheme could jeopardise El Salvador’s negotiations with the IMF for a $1bn (£723m) loan. Nevertheless, the crypto payment tracking firm Chainalysis estimates that El Salvador’s share of Bitcoin payments under $1,000 flowing into Central America rose from 1.9pc in February to 4.7pc in May, suggesting it is already being used for remittances.
In principle El Salvador has much to gain from crypto, with a history of harsh inflation, a huge “unbanked” population and remittances accounting for 26pc of its GDP. The new law puts Bitcoin on par with US dollar, which has been the official currency since 2001.
Crypto is actually a double-edged sword for crooks. Though its decentralised nature lets it bypass traditional banking controls, all transactions are irrevocably recorded on a public blockchain, and cashing it out requires “off-ramps” such as banks and exchanges.
Men buy snacks at a store where bitcoins are accepted at El Zonte Beach in Chiltiupan, El Salvador
Gangsters are vulnerable if their transactions can be traced back to a regulated institution that verifies customer identities, so they flock to lax exchanges and transaction-scrambling “mixer” services in shady jurisdictions.
Amanda Wick, head of legal at Chainalysis, says: “As former law enforcement, I can tell you that if you’re asking me to track suitcases of cash or go through shell companies and banks, versus seeing everything on a public ledger, there’s no question which we would choose.”
Ari Redbord, a former US prosecutor now at TRM Labs, a rival firm, says: “Crypto can be far safer than cash and El Salvador presents a hopeful use case.”
They and others agree that El Salvador must invest seriously in new anti-money-laundering and terrorist finance controls. There is little evidence that the country is doing so. The new law proceeded at lightning speed. Despite the 90-day deadline there has been scant information about regulations.
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Activists have described it as a publicity stunt designed to distract from Bukele’s recent mass sacking of critical judges, or a stealthy way of printing money without the US Federal Reserve.
Richard Sanders, at CipherBlade, spells out what could go wrong. “Let’s say that I’m a drug kingpin and I have $10m in Bitcoin that I need to wash,” he says. “Can I go to El Salvador with my Bitcoin – to an art dealership, a car dealership, a bullion dealer?”
In fact, Bukele is proposing permanent residency for anyone who spends at least three Bitcoins (about £80,000) on anything from office furniture to houses and cars. Sanders argues that failing to analyse such transactions would court disaster, and yet analysing all of them would be intrusive or prohibitive for businesses.
In his Twitter chat, Bukele dismissed the idea that Bitcoin was more risky than other assets. “This is going to be as free as it gets, but that does not mean we’re inviting criminals. It just means that it’s going to be free.”