May 2022 was a painful month for anyone heavily invested in cryptocurrency. The crypto bubble burst, and with it the notion of a technological shortcut to prosperity and economic democracy.
Over $200 billion was wiped from cryptocurrency markets in one day, with Bitcoin losing a quarter of its value since the end of April. The flagship cryptocurrency dropped to £24,000 from its 2021 peak of £51,000, and some of the larger secondary cryptocurrencies are now basically worthless.
The last month has discredited Bitcoin advocates’ claims that the cryptocurrency protects you against inflation or economic crises. The collapse of algorithmic ‘stablecoins’, combined with conditions in the ‘offline’ economy—falling stocks and the US Federal Reserve raising interest rates—caused wealthier investors to pull out in favour of safer assets and tank the crypto markets.
Those who lost out were primarily late adopters and ordinary people now being hit by the cost of living crisis. Many put their savings into crypto after being told they would become rich by buying into a ‘deflationary’ asset, having been persuaded by mathematical-sounding arguments that implied it could only increase in value in the long run.
Also out of pocket are the people of El Salvador, whose President invested over $10 million of government money into Bitcoin, in a country with a GDP roughly one percent of Britain’s and heavily indebted to the International Monetary Fund (IMF).
A Crypto Nation
Nayib Bukele is the millennial former marketing executive, current President of El Salvador, and self-proclaimed ‘coolest dictator in the world’. Last September, he passed a bill making the country the first to accept Bitcoin as legal tender. The rollout of Bitcoin, accepted alongside the US Dollar, has not gone to plan.
Government-issued Bitcoin wallets had low uptake. Those who did take the government up on their offer of a free $30 worth of Bitcoin often found they had been subject to identity fraud, and the remaining users overwhelmingly transferred it straight back into US dollars.
86 percent of small businesses surveyed by the Salvadoran Chamber of Commerce had made a total of zero sales in Bitcoin. At the same time, a major bank reported fewer than 0.01 percent of debt payments had been paid in the cryptocurrency.
The passing of the Bitcoin law prompted ratings agencies to downgrade the indebted country’s credit to ‘junk’ status, and El Salvador is now expected to default on its next debt payments in January. But Bukele’s Bitcoin plans are more ambitious than a parallel currency alongside the dollar and risk turning a cryptocurrency crisis for individuals into one on a national scale.
Bukele’s most ambitious project is ‘Bitcoin City’, a libertarian charter city built from scratch, powered by thermal energy from the Colchagua volcano it would be built upon, and paid for with $1 billion in government-backed, cryptocurrency-based ‘Volcano Bonds’.
Bitcoin City’s primary industry would be Bitcoin mining, despite the global energy crisis and Bitcoin’s plummeting value making this a much less profitable enterprise than in past years. There would be no taxes on profit, income or wealth, with the city’s upkeep being paid for by VAT.
With all public spending in the city coming from regressive consumer taxes like VAT, where a minimum wage worker pays the same amount as their CEO, this is a useful summary of the libertarian ideology baked into Bitcoin’s philosophy. Even before construction begins, details of the ‘Volcano Bonds’ paying for Bitcoin City’s construction cast further doubt on the project’s viability.
Half of the money raised from investors in Volcano Bonds is to be converted into Bitcoin and held for five years, whilst the rest will be cashed out immediately to build Bitcoin City and invest in Bitcoin mining rigs. During this time, investors will be paid a yearly 6.5 percent interest on the bond. At the end of the five years, the government will cash out its stored Bitcoin, in theory giving investors an additional dividend from the profits.
President Bukele has calculated this payout on the assumption that Bitcoin would be worth $1 million within five years, which at its current price would require roughly 3,300 percent growth, or an increase of nearly $200,000 in price every year until 2027.
This bond is not being issued by the state but by the state-owned thermal energy company La Geo. The interest payments alone are equivalent to half of La Geo’s annual revenue. When it comes time to pay back the investment, and the bond has failed to produce a profit, it’s La Geo who will foot the bill. With La Geo lacking the cash flow to pay back billions of dollars in bonds, investors would have little recourse to recovering their investments, gifting a right-wing government a convenient line to privatise another public asset.
It’s easy to dismiss the adoption of Bitcoin in El Salvador as a populist hypeman trying to ride a passing crypto-bubble. But it is worth asking why so many people around the world are willing to gamble on farfetched claims about risky assets backed by technology lacking a practical use case.
After 40 years of neoliberalism, the current financial system doesn’t work for people, and this desperation leads people to make irrational choices.
In the case of El Salvador, their primary currency is the US Dollar, meaning their democratically elected government controls very little of their monetary policy. Instead, it is decided a thousand miles away in Washington D.C.
Governments with control over their currency can respond to economic shocks by devaluing currency to make export goods more competitive or printing money for investment spending. By adopting an external currency such as the US Dollar or the Euro, a large chunk of your economic policy is limited by decisions made in Washington or Brussels, regardless of your elected government’s platform.
This lack of control is why economists like Costas Lapavistas recommended an alternative solution to the Greek debt crisis to the capitulation to Brussels in 2015, which led to vast privatisation and some of the most extreme austerity measures in Europe.
Instead, Lapavistas proposed defaulting on the debt that Greece would never be able to pay, reverting from the Euro back to the Drachma, nationalising the banks and imposing capital controls. This reassertion of the state into the economy would work alongside redistributive measures to support those hit by the economic shocks and the recovery of Greek industry powered by currency devaluation. Likewise, the answer to El Salvador’s problems is not a technological fix but monetary sovereignty alongside debt forgiveness from the Global North.
After the Crash
El Salvador may have been the first country to adopt cryptocurrency, but it also reflects a global trend. Cryptocurrency companies spent $9 million lobbying the US Congress in 2021, triple the previous year.
Closer to home, the Conservative Party are starting to look for ways to cash in on crypto. Rishi Sunak announced the Royal Mint would create a government-backed NFT to trade online, while Matt Hancock hopes the technology can ‘improve transparency’. It is unclear if these plans are still going ahead after the crash.
Cryptocurrency is an explicitly political project. Its stated aims are to remove the control of money from elected governments and place it in what they argue is a distributed and ‘trustless’ system. In practice, this means further financialisation and privatisation of public assets in a sector rife with scams, illegal activity and Ponzi schemes.
The current financial system does not benefit the majority, and it is understandable why people would want to abandon it despite the risks. The way to fix these inequalities is not a dodgy digital currency but redistributive government policy.