Bitcoin Is National Currency in El Salvador. Now Who's Going to Get Rich?
Bitcoin Is National Currency in El Salvador. Now Who’s Going to Get Rich?
EL ZONTE, El Salvador — The premise of El Salvador’s “Bitcoin Beach” sounds equal parts audacious and altruistic. Around two years ago, an anonymous donor gifted this sleepy surf town of about 3,000 people over six figures worth of bitcoin, enough to create the world’s first fully-functioning, self-sustaining cryptocurrency economy.
With the funds entrusted to an expat surfer from San Diego and a small team of enthusiastic locals, the project began paying a sort of universal basic income in bitcoin. Some of the money went to community development, like training lifeguards and incentivizing kids to stay out of gangs. Business owners were persuaded to accept digital payments, and almost overnight El Zonte residents who never had bank accounts found themselves pulling out their cellphones and using apps to make routine purchases, withdrawing cash from the town’s new bitcoin ATM, and monitoring the ballooning value of their virtual wallets.
Advertisement But the reality of Bitcoin Beach is much more complicated. It involves the country’s autocratic 39-year-old president, Nayib Bukele, teaming up with an American crypto entrepreneur in what appears to be a gambit to tap into El Salvador’s $4.5 billion-a-year remittance market.
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On June 5, Bukele appeared via video chat at an annual bitcoin extravaganza in Miami to announce that El Salvador would become the world’s first country to make bitcoin legal tender . Bukele promptly introduced a two-page bill to turn his decree into law, which was then rubber-stamped by the Congress he controls. By early September, most businesses will be required to accept bitcoin and citizens will be able to digitally pay their taxes and other bills using a system that will have “automatic and instant convertibility” to U.S. dollars.
President Nayib Bukele speaks during the inauguration of the ISA World Surfing Games 2021 on May 29, 2021 in La Libertad, El Salvador. (Photo by Rolan Barrientos/APHOTOGRAFIA/Getty Images)
The law was drafted in part by Jack Mallers, the 27-year-old founder and CEO of Zap, the company that owns an app called Strike. Strike just so happens to instantly convert bitcoin to dollars using the Lightning Network , a payment system for bitcoin transactions built on top of the blockchain. The app debuted in El Salvador about three months ago, offering citizens the ability to make digital purchases or payments using either dollars or bitcoin, a first in the country outside of El Zonte. Mallers is a frequent visitor to Bitcoin Beach, and he was onstage in Miami to help Bukele drop the bitcoin bombshell.
In a recent interview with VICE News, Mallers recalled how he got teary-eyed during Bukele’s speech. “I was happy, overwhelmed, excited, scared—everything that's involved in what I think of as being part of one of the bigger developments in human history,” he said, appearing on a video chat in a hoodie with his shaggy blonde hair tucked beneath a bitcoin-branded ballcap.
Advertisement Mallers said that after the announcement, Strike hit a peak of registering 20,000 new users per day in El Salvador, and is now “well into the hundreds of thousands and rapidly approaching the millions of Salvadorans on the platform.”
Jack Mallers, founder of Zap, listens during the Bitcoin 2021 conference in Miami, Florida. (Photo by Eva Marie Uzcategui/Bloomberg via Getty Images.)
Bukele has touted ideas like using volcanic energy to mine for bitcoin , part of a PR blitz conducted largely in English to his 2.7 million followers on Twitter, where he changed his profile pic to the bitcoin laser eyes meme. Many of the biggest names in bitcoin have now made pilgrimages to El Zonte, and it’s clear the president wants to woo foreign investment while basking in the international spotlight. In the days after El Salvador made bitcoin legal tender, videos of people in the country using Strike and the Bitcoin Beach wallet went viral , an example of what evangelists say will become commonplace in the future.
“Once we had a couple of hundred people in the community that were earning their salaries in bitcoin and wanting to spend in bitcoin, the stores started coming to us.”
Asked about Strike’s long-term plans for El Salvador and how he came to be Bukele’s bitcoin wingman, Mallers grew cagey. “I'm really trying to walk some fine lines here,” he said, explaining that the partnership has been long in development but was unveiled sooner than expected.
“I spent three months working with the government and the Bitcoin Beach folks for that moment,” Mallers said. “We had this giant, grand, five-year plan and ended up narrowing it down to what made sense, and it all culminated in that moment. It was planned out, it wasn't like a shotgun experience. I knew what I was doing and I was instructed very accurately on what to do.”
Bitcoin Beach member Roman MartÃnez (right) speaks with members of El Salvador’s bitcoin-funded national surf team. (Photo by Keegan Hamilton/VICE News)
The basic goal, Mallers said, is “unlocking a market of micropayment remittances,” where Salvadorans in the U.S. can send home payments of $50 or less instantly and with no fees. Such a system would truly be a game-changer, since wire transfer companies currently charge fees of 5-30 percent, taking cash out of the pockets of Salvadorans and stifling the economy in one of Central America’s poorest nations.
But the scheme has many skeptics, including the World Bank, which cited “transparency shortcomings” while rebuffing Bukele’s request to provide technical assistance in making bitcoin legal tender. The International Monetary Fund, which was already in talks to provide $1 billion in economic relief to El Salvador, also declined to play along.
Advertisement “Adoption of bitcoin as legal tender raises a number of macroeconomic, financial, and legal issues that require very careful analysis,” IMF spokesperson Gerry Rice told reporters . “We are following developments closely, and we'll continue our consultations with the authorities.”
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In the cryptocurrency world, some experts say Strike’s payment system is actually a bitcoin mirage. David Gerard, who has written extensively about blockchain technology, explained in a Foreign Policy op-ed how Mallers converts dollars to bitcoins in El Salvador using Tether, a much-hyped cryptocurrency designed to be pegged directly to the U.S. dollar , in part to mitigate the extreme volatility of cryptocurrency. Tether and other ” stablecoins ” have their backers, but they’ve also had problems over the years. Gerard called Tether “a dollar-substitute crypto token supposedly backed one-to-one by actual dollars, though seemingly nobody in finance can find the evidence that should exist to back this.”
For a payment to El Salvador, “the recipient would get a dubious alleged crypto dollar in their Strike app, rather than the genuine dollar notes they would normally withdraw,” Gerard wrote. “If you wanted to withdraw your tethers as dollars, Mallers posited that you could buy bitcoin with the tethers, then cash the bitcoin out at any bitcoin ATM!”
Advertisement The opacity of the system didn’t seem to bother people in El Zonte. Nobody could articulate exactly how it worked, but the general vibe was that the details don’t really matter so long as the apps can be used to make purchases and the digital currency can be converted to cash.
But some of the companies tangentially involved in the system have already run afoul of U.S. regulators. In February, New York’s attorney general reached an $18.5 million settlement with Tether and a related company called Bitfinex over “fraudulent and deceptive” business practices, which included alleged efforts to cover up massive losses and overstate their cash-backed holdings. The companies did not admit or deny the New York AG’s findings.
Mallers recently announced that Strike would phase out the use of Tether, saying it was “no longer a part of anything” the company does in El Salvador.
El Zonte is located about an hour’s drive southwest of the capital along a lush and rugged stretch of the Pacific coast. Surfers have flocked to the rocky beaches for years, chasing world-class waves that roll off the point break. One of them was Michael Peterson, a 47-year-old American who came with his family in 2005 and never really left.
Peterson is the godfather of the Bitcoin Beach project. When the anonymous donor came forward in 2019 with the funds to bankroll the project, he stepped up as the administrator. He hired a team of locals and went about creating the necessary infrastructure, including a Bitcoin Beach virtual wallet, which, like Strike, uses the Lightning Network. Users simply scan a QR code, enter a dollar amount, and the transaction is processed within seconds.
“Once it got rolling and once we had a couple of hundred people in the community that were earning their salaries in bitcoin and wanting to spend in bitcoin, the stores started coming to us because they said, ‘Hey, I'm losing customers here,’” Peterson said.
The Bitcoin Beach headquarters is a two-story, modern-looking building dubbed “Hope House” that is constantly buzzing with activity and slathered with Strike corporate logos. Bitcoin signs are also everywhere, including stenciled onto the trash cans and on banners hanging from a tin-roofed shack across the street that sells pizzas and snacks using the Bitcoin Beach app.
Advertisement When we visited, dozens of laborers were lined up along the block waiting to collect their wages in bitcoin. Bitcoin Beach employees kept a tally on paper as each young man stepped forward and scanned a QR code on his phone. Those who wished to cash out a portion, which seemed to be nearly everyone, headed to a window around the corner, where another Bitcoin Beach employee would exchange dollars without charging a fee.
Milton Cabrera, a construction worker in his early 20s, told us he’s earned an extra $600-700 by keeping money in his Bitcoin Beach wallet and treating it like a savings account. His said his wife, who is pregnant with their first child, remains somewhat skeptical because of the currency’s volatility. Our visit coincided with bitcoin losing nearly half of its value in the span of a week, but Cabrera was confident it would rebound eventually.
“Sooner or later it will fall, sooner or later it will climb,” Cabrera said. “Maybe it can be scary, but if you have patience and keep waiting, it could go back up and maybe you’ll make a profit.”
Bitcoin Beach also set up a system for Cabrera and others to pay their utility bills with the app, saving him a three-hour round-trip excursion to the municipal capital, where he would have to wait in a long line and was constantly worried about having his cash stolen.
Dominga Peña, who sells snow cones from a street cart near the beach, was less enthusiastic about the new system. She wasn’t set up to take Strike because of a problem with her email. She’d lost around $20—equivalent to at least a day’s worth of earnings—due to the plummeting value of bitcoin, and said fewer people have been using it recently.
Advertisement “There’s not many,” Peña said. “When we first started to use bitcoin, it was a pretty high percentage, but after that it went down.”
Dominga PeÃ±a sells snow cones in El Zonte and accepts payments in bitcoin, but her Strike app wasn’t working. (Photo by Keegan Hamilton/VICE News)
One store owner said the Bitcoin Beach system didn’t work because he was constantly having to cash out to pay for new merchandise or settle debts. We heard complaints that some in town would use bitcoin only when the price was high, switching to cash during low swings. Jorge Valenzuela, Peterson’s local deputy in the Bitcoin Beach project, who also works for Strike, acknowledged that they’ve had to counter the perception that it’s a scam.
“It’s only people who don’t like bitcoin who are pushing this narrative,” Valenzuela said. “But at the end of the day, when they add credit to their wallet, they can look at it and see it’s theirs. They see and they say, ‘That’s mine.’ Those credits are as much yours as the $10 in your billfold.”
After a few days in El Zonte, it became clear that Bitcoin Beach was targeted more at locals than tourists. Most of the hotels and pricier restaurants would only take cash or credit cards, and the set-up process to make payments on the Bitcoin Beach wallet and Strike apps took more time and effort than most visitors (other than a curious journalist) would likely be willing to spend.
In the Strike signup process, the app prompts new users from the U.S. to link a debit card or bank account, similar to Venmo. There’s a bitcoin option, but it’s not obvious, and putting credit in the Bitcoin Beach wallet ultimately felt like shifting around dollars from one app to another. Cashing out required a trip to the bitcoin ATM in the middle of town, in a little shop that also sells local artisanal soap and other bougie souvenirs. The withdrawal process took about five minutes, required an assist from the patient shopkeeper, and cost a 5 percent fee.
Advertisement The ATM is from the company Athena, which just revealed an agreement with Bukele’s government to roll out at least a thousand machines nationwide. We met one man, Jose Marel-Deras, who had come with a friend from over an hour away to withdraw cash, since El Zonte’s ATM is currently one of the few operating in El Salvador. He said he once made the trip and found the machine empty, a complaint we heard from others as well. There’s also the practical challenge of keeping the ATMs up and running in a country with regular electricity outages that can last hours.
Marel-Deras, who works as a radio control-tower operator in the shipping industry and looked to be in his 50s, said he bought his first bitcoin four years ago, long before Bitcoin Beach existed, but he lost his initial $2,500 when something went wrong with the platform he used. He recouped his losses, waving a stack of cash in his hands as proof, and he felt good about the future of bitcoin in El Salvador despite skepticism among his countrymen.
“People don’t believe in virtual money,” Marel-Deras said. “They think the worst… that the coins could go away and leave you with nothing. You have to be optimistic to just keep going.”
While bitcoin has taken hold organically among Salvadorans like Marel-Dares, critics have noted that the Bitcoin Beach system smacks of “digital colonialism,” with some press coverage pushing a white savior narrative with Peterson as El Zonte’s bitcoin gringo guru.
Advertisement Peterson said he’s tried to remain behind the scenes and “empower the local talent,” and that the project wouldn’t be successful without genuine buy-in from people in the community, including leaders like Valenzuela.
Workers line up to get paid in bitcoin at El Zonte’s “Hope House,” the headquarters of the Bitcoin Beach project. (Photo by Keegan Hamilton/VICE News)
“Here's this community in El Salvador with people, a lot of them living in shacks with dirt floors and tin walls, and now they're all transacting on their smartphones,” Peterson said. “They're zipping around payments, you know, much easier than people in the First World are. And so I think we’ve proven that bitcoin really is the money of the poor, of the people on the lowest level of the economic ladder, and can really transform their lives.”
The backstory of the anonymous donor adds to the unease around the project. Supposedly, according to one of the first stories about Bitcoin Beach published last year by Forbes , the donor is someone “with a fondness for El Zonte” who “discovered a forgotten thumb drive loaded with Bitcoin” that had been purchased when the currency was worth less than 10 cents. (One bitcoin is currently worth around $33,800.) The donor is said to be “a believer in using blockchain technology to boost inclusion for the unbanked” and decided to put their ideals to the test in El Salvador. Without knowing the person’s identity, that tale is impossible to verify.
“We’ve proven that bitcoin really is the money of the poor, of the people on the lowest level of the economic ladder can really transform their lives.”
Mallers, who was reportedly introduced to bitcoin in 2013 by his father, a wealthy Chicago futures broker, denied being the donor. Peterson backed him up, saying Mallers’ involvement came well after Bitcoin Beach was established. Another suspect is Twitter and Square Inc. founder Jack Dorsey, who donated bitcoins to fund El Salvador’s national surf team. (A Twitter spokesperson declined to comment.)
It’s possible that whoever is behind Bitcoin Beach genuinely has the best interests of the community at heart, but the fear is that the project and, more broadly, Bukele’s adoption of bitcoin as legal tender, are ultimately designed to help the rich get richer while average Salvadorans remain mired in poverty.
Stickers at Bitcoin Beach headquarters advertising the Strike app as a way to send free remittances. (Photo by Keegan Hamilton/VICE News)
Strike is backed by venture capital and not currently turning a profit, but the company will need to make money eventually. Mallers could follow the Uber playbook, hooking users with free or low-cost remittances, then hiking up the fees down the road.
The deputy leader of El Salvador's main opposition party filed a lawsuit Monday challenging the bitcoin law, claiming it’s unconstitutional and designed to “loot people’s pockets.” The opposition cited fears Bukele may somehow use the bitcoin rollout as an opportunity to enrich his family and cronies, a suspicion furthered by his recent decision to end an anti-corruption accord with the Organization of American States.
Mallers said his company has “a mission of empowering economic freedom for all,” and that there would be open competition for the Salvadoran marketplace. Peterson maintained that Bitcoin Beach is about helping improve the quality of life in El Zonte, which he believes is also Bukele’s intent nationwide.
“We're using bitcoin to increase their business opportunities, to increase their job opportunities and just make transacting on a daily basis more economical and more efficient,” Peterson said. “And so that's what's driving the government's decision, not some desire for a bunch of speculators to come in and make money.”
Jesse Seidman and Juan Carlos contributed reporting.
Follow Keegan Hamilton on Twitter: @keegan_hamilton