Crypto-crack and gang war: Bitcoin dictator Bukele is threatened with bankruptcy

Everything will get better, it was promised by El Salvador’s President Nayib Bukele. But his pact with the powerful criminal gangs ends in a bloodbath. And now the new national currency, Bitcoin, is weakening. Some are watching the national bankruptcy knock on.

While other countries are still living in poverty and old ways of thinking, El Salvador will rise out of its misery with a golden glow because: The dynamic president has recognized the signs of the times, making the small Central American state fit for the future and a role model for others in the world. So just invest your money here in Central America! Of course, critics have no idea.

That’s pretty much the story that Head of State Nayib Bukele and his supporters have been running in public since his successful election in 2019 at the latest. On Twitter, he describes himself as “the coolest president in the world”, “the coolest dictator in the whole world”, or simply: CEO of El Salvador.

Most recently, the 40-year-old former entrepreneur presented a volcanic city with a golden model for crypto-immigrants, Bitcoin City. He received dozens of delegations and heads of state from around the world to discuss the possibilities of Bitcoin and cryptocurrencies. Bukele invited them because there is no doubt that something revolutionary is going on in Central America: the cryptocurrency Bitcoin has been an official means of payment in El Salvador for about a year, in addition to the US dollar. The experiment is underway, but it is unclear what impact it will have on the countryside and its 6.5 million people in the medium to long term.

The experiment is now becoming extremely dangerous because the value of Bitcoin has collapsed, El Salvador is plagued by a debt problem, and violence in the country is escalating. Since the introduction of the new currency, the country’s central bank has mostly bought more than 2,300 bitcoins with taxpayers’ money according to Bukele’s instructions, mostly in so-called dips, ie when the price of the extremely volatile cryptocurrencies falls. There is no official statement on cryptocurrency ownership, but it is the assessment of the Bloomberg bureau, which specializes in financial news. Bitcoin storage is currently worth about $ 67 million. It is unclear how much money El Salvador bought bitcoins and how large the exchange rate losses are. It is certain, however, that part of the state’s wealth is outside the regulated financial market.

In June, the country is due to repay about $ 40 million in debt. However, due to the market downturn from the war in Ukraine, violent global inflation and interest rate hikes by the US Federal Reserve, the unofficial cryptocurrency reserve has now fallen to half of its previous highest. Converted to dollars, El Salvador has lost tens of thousands of millions as a result. Nearly 100 percent of El Salvador’s annual economic output is in debt. Due to the difficult situation, it is already said in some places that it will not be long before a national bankruptcy and thus a possible end to the trial. When the Bitcoin price recently dropped below $ 30,000, Bukele bought back with tax money: 500 Bitcoin for a total of $ 15.5 million.

fear of oppression

Bukele is an authoritarian president. Parliament is in line, the head of the central bank only talks about “positive risks” when it comes to Bitcoin, and in the judiciary, the president not only filled the Supreme Court with allies, but also replaced a third of all judges in Land. Months ago, political scientists did not want to comment at all on ntv.de or only anonymously because they feared oppression or worse for themselves, their family and friends. “We are already in a dictatorship,” said one of them. The positions of power in the state are occupied by Bukele’s relatives and friends, and entrepreneurs can do whatever they want.

Actually, Bitcoin City should also be built with profits from crypto transactions, a tax-free new home for cryptoimmigrants from all over the world, where the digital currency should also be extracted in an environmentally friendly way with volcanic heat. However, the architectural models of the city presented last week seem like the dream of a megalomaniac dictator.

Bukele wanted to attract new investors with the futuristic plan: In November 2021, he announced a special “volcano bond” with a total amount of one billion dollars and an interest payment of 6.5 percent after five years. Half of the revenue was to be used to finance the construction of Bitcoin City. The other half would flow into Bitcoin, whose capital gains would then be used to repay it. But the bond is still not released for subscription.

A gas station in the capital El Salvador announces that it accepts Bitcoin.

(Photo: AP)

“We are waiting for the right time and for the president,” El Salvador’s finance minister said earlier this month. “It depends on the state of the market.” And that’s not good. Even current government bonds are not a hit and are traded at a fraction of the issue price. Prior to the introduction of Bitcoin last year, various rating agencies had already downgraded the country to negative creditworthiness. In addition, the question arises: Why should anyone put their money into the “volcanic bond” when they can simply buy Bitcoin themselves – only without the El Salvador risk?

Bitcoin does not matter in everyday life

Some see the country’s poor credit rating as the reason Bukele started the cryptocurrency experiment in the first place: El Salvador needs money. The International Monetary Fund (IMF) would have helped El Salvador with $ 1.3 billion, but put the loan on hold due to the Bitcoin adventure earlier this year. For the organization, cryptocurrencies are too insecure and not transparent. If the country wants the loan, the currency must be deprived of its official status, the IMF requires.

The risks of the unregulated crypto market are a path for the country. El Salvador has the most uncertain foreign debt (“distressed sovereign debt”) in the world, US economist Steve Hanke was quoted as saying in the US magazine “Fortune” earlier this year. And that’s because of Bitcoin: “Market players think Bukele has gone crazy, and he is.” Since that assessment, El Salvador’s credit rating has deteriorated further, for example, rating agency Fitch sees it at CCC junk level. So it’s getting harder and harder for Bukele to get money.

Bitcoin does not play a major role in the everyday life of Salvadorans, which in addition to the sharp price fluctuations is also due to the fact that the Internet is not available everywhere, lack of technology and an inadequate power supply. At launch, citizens received $ 30 in bitcoin, which they could access with their own Chivo (“cool”) app. But according to a preliminary study, most people have never used the cryptocurrency since then. “There is no experiment in which a currency with such strong incentives was introduced and still failed,” the magazine “Rest of World” quoted one of the study’s authors as saying. When it was introduced, Bukele announced that it would simplify payment transactions for the population and allow the poorer to pay without cash.

In fact, international attention to El Salvador brings money into the country, but only indirectly into the treasury. The national tourist authority states that the number of foreign visitors has increased significantly recently. However, this is likely to have something to do with the smaller and smaller public presence of the corona pandemic and a greater desire to travel. El Salvador, however, has a bad reputation due to poverty, corruption and crime. And at the moment, the country is not necessarily attractive to travelers.

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The security forces arrested tens of thousands of people during the weeks of the state of emergency.

(Photo: AP)

The official state of emergency has been in place since late March. Freedom of assembly is suspended, the police can detain anyone for up to two weeks for no reason and monitor telecommunications without legal order. Since then, the security forces have acted with this license and with all rigor and have put more than 30,000 people in jail. The trigger was a bloody weekend in which members of criminal gangs committed 87 murders – more than in the entire month of February. On the following day alone, security forces arrested more than 600 members. In prisons, prisoners were no longer given access to their cells, and privileges were abolished.

Bought restraint of criminal gangs

The outbreak of violence and the wave of arrests are believed to be the result of a broken alliance between the government and the so-called Pandillas, which control many areas of the capital San Salvador. Prior to his election, Bukele had entered into a pact with the Pandillas to gain power. According to the investigative media “El Faro” and the US government, he and later members of the government bribed the two most influential gangs, MS-13 aka Maras, and Barrio 18. For the money, Pandillas helped with the election campaign, among other things, and stuck to their criminal activities, such as murder. Gang bosses in prisons were given privileges, such as smartphones, and were allowed to receive visits from sex workers.

Bukele was mayor of the city before running for president. The U.S. Treasury Department imposed sanctions on two government officials in connection with the deal. When El Salvador’s Advocate General announced that he would investigate the case, Bukele dismissed him. Investigative journalists and active civil rights activists were illegally interrogated.

The president has always boasted of his successful fight against crime and the lower homicide rate. In a regional comparison, Bukele is still extremely popular with the population, and a majority also support the state of emergency. But the brutal aftermath could put Bukele in trouble.

Last month, the Folketing passed a new media law. It is now forbidden to send messages from Pandillas. The question is why the pact broke up in the first place. One thesis is that Bukele simply lacked the money to pay the Pandillas for their continued support. This in turn may also have something to do with the falling Bitcoin price. As always, of course, he could recover. There is still time for that. Next January, the indebted country will repay $ 800 million in one fell swoop. If it goes bankrupt, Bukele would have played away at the expense of millions of people.

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