Thread by @gladstein

1/ My latest essay "The Village and the Strongman: the Unlikely Story of Bitcoin and El Salvador" is now live.

How did the smallest country in Central America—most known for its civil war and gang violence—become ground zero for a monetary revolution? 🧵

bitcoinmagazine.com/culture/the-po…

2/ It all started in the seaside village of El Zonte. With a population of just a few thousand, dirt roads, tarp and sheet metal roofs, and no supermarket, most residents don't even have bank accounts. Historically, it was a place where residents were caretakers or fishermen.

3/ Twenty years ago, no one would have thought such a place could change the world. But two young men in town received a gift—the ability to dream—from a social worker, who taught them how to hope for a better future. @jorgebitcoinES and @romanmartinezc began to build.

4/ The road was tough. There were few opportunities and a lot of violence. But Jorge and Chimbera and friends started providing mentorship and giving new families to kids who had lost their fathers. Eventually, they started working with a man from California.

5/ Mike Peterson had come down from San Diego and started spending time in El Zonte in 2004. 10 years later he was working with Jorge and Chimbera and a small group of leaders on community building. Their inspirational work helped the town get through a dark time.

6/ In 1979, a horrific civil war broke out in El Salvador, with conflict rising out of the century-old conflict over land consolidation. Foreign powers and corporations and local oligarchs farmed the country's resources for export. The majority of the population was impoverished.

7/ It was the peak of the Cold War and the US govt backed the Salvadoran military regime, while the USSR and its allies backed the leftist guerillas. Tiny El Salvador was the third-largest recipient of US military and economic aid in the early 1980s, only behind Egypt and Israel.

8/ The Salvadoran regime was unspeakably brutal. Its forces—many trained in the US—committed a range of atrocities including the largest massacre in modern Latin American history at El Mozote, where more than 900 men, women, and children were killed.

newyorker.com/magazine/1993/…

9/ Ultimately, 75,000 were killed, and more than a million displaced. Defenders of U.S. involvement justify the bloodshed by saying that if the Americans had not intervened, the country would have fallen the way of communist Cuba. But so many lives was a heavy price to pay.

10/ The economy was destroyed, with living standards set back decades. By 1998 the purchasing power of urban Salvadorans was 1/3 what it was in 1980. For a war fought over wealth and land distribution, the tragedy was that inequality and real wages were worse after than before.

11/ More than 500,000 Salvadorans fled during the 1980s, establishing a strong flow of migrants to the U.S. But after the civil war ended in 1992, President Clinton allowed special rules for Salvadoran migrants to expire. Tens of thousands were sent back home empty handed.

12/ Many of these young men formed and joined gangs, for example, MS-13, which was founded in Los Angeles and only pushed to El Salvador by Clinton’s decision.

13/ Between 2000 and 2017, ~2.5 million were murdered in Latin America, Central America, and the Caribbean, compared to 900,000 killed in wars in Syria, Iraq, and Afghanistan over that same time. El Salvador was at the center of this violence.

14/ By 2015, El Salvador was considered the most dangerous country in the world not at war. And in El Zonte, the community felt it just as much as anyone. Small business owners had to pay protection money to gangs just to operate. Non-compliance could be deadly.

15/ In 2016, the night Trump was elected president in the US, Mike Peterson was watching the election results come in at home in El Zonte. He heard a bunch of loud noises outside, and went to investigate, but couldn't see anything.

16/ In the morning, though, he went outside on the street and saw his neighbor's body being carried out of his home, riddled by 40 bullets. It was the third murder on his block and was part of what Mike called the "crescendo of violence"

17/ Between 2016 and 2019, El Salvador's murder rate fell from a world-worst ~110 per 100,000 to 40. Life and business in the El Zonte recovered, as well. But Mike, Jorge, and Chimbera were still looking for a way to expand their social programs.

18/ In the spring of 2019, Mike was put in touch with an anonymous donor who wanted to make a gift. The person wanted to give Bitcoin to support El Zonte's community projects, but wanted to ensure the currency would circulate in the town, and not be sold off for cash right away.

19/ The donor wanted Bitcoin to become part of the community's philosophy. Mike, Jorge, and Chimbera agreed to give it a try. They began @Bitcoinbeach by issuing BTC rewards to young people and students for community work.

20/ The first vendor to accept Bitcoin was Jorge's mother, Mama Rosa, who started taking the new currency in exchange for meals at her pupusería. More and more businesses started accepting Bitcoin, and more and more residents learned about how to use the new currency.

21/ At the end of 2019, Mike met @PeterMcCormack at a conference in Uruguay, and went on his podcast, What Bitcoin Did. The interview, covering the background of Bitcoin Beach and the community work in El Zonte, helped put the project on the map for the global Bitcoin community.

22/ In early 2020 the pandemic hit El Zonte especially hard, as the tourism industry dried up. @Bitcoinbeach began a UBI-style program, providing a series of $40 payments in BTC to families to help them through a tough time. Usage and familiarity with Bitcoin continued to grow.

23/ That summer, Forbes ran a story on El Zonte, detailing how Bitcoin had become part of the town's social fabric. President Bukele noticed the article, as did others inside the government, and they began thinking about how Bitcoin could play a role in the country's future.

24/ In the coming months a variety of Bitcoin entrepreneurs and innovators would visit El Zonte, including @jackmallers, @milessuter, and @nicolasburtey. By the spring of 2021, the Galoy-powered Bitcoin Beach wallet and Strike became popular apps for the community.

25/ What began as a circular economy pilot in a small village started to have wider implications. Close to 25% of El Salvador's GDP derives from remittances, mainly flowing from more than 2 million Salvadorans who live in the United States.

26/ For many Salvadorans today, receiving these vital remittances involves getting on a bus, going to a Western Union physical location, waiting in a long line, going through an intensive KYC process, dealing with bureaucratic delays and then paying high fees.

27/ The amount of time, energy, and money wasted or sucked out by middlemen is tragic. Sending money instantly from anywhere on earth using Bitcoin, directly to a Salvadoran's phone, where it is held in BTC or auto-converted to dollars in an app like Strike, is revolutionary.

28/ This humanitarian upgrade for remittances is what the Salvadoran government used as a main argument when it shocked the world in early June of this year by announcing it would make Bitcoin legal tender.

29/ Here is where the contradictions begin. What started as an organic, grassroots, community-led Bitcoin effort in El Zonte, became a top-down, government-enforced law for more than 6 million Salvadorans.

30/ Paradoxically, at the same time as he is becoming the first leader in history to make FOSS, debasement-proof money legal tender, Bukele is becoming increasingly authoritarian and is seeking more control over Salvadoran society.

31/ Bukele is one of the most popular elected leaders in the world, with an approval rating hovering around 90%. However, like many populist leaders before him, he is now abusing that power to dismantle democratic institutions in El Salvador.

32/ This past spring, once his party gained a supermajority in parliament, Bukele fired the attorney general, who was investigating government corruption, and sacked 5 of 15 supreme court justices, replacing them with his supporters.

33/ This month, the new Supreme Court ruled that Bukele would be able to run for another presidential term in 2024, something that is explicitly forbidden in the country's constitution. The administration is also trying to remove a clause that forbids one-party rule.

34/ At the same time, Bukele is purging the country's justice system. Any judge over the age of 60 or in office for more than 30 years faces "compulsory retirement" -- including judges who are investigating war crimes from the 1980s, including the massacre at El Mozote.

35/ For context, in Venezuela in the 2000s, it took Hugo Chávez five years to get control over Venezuela’s Supreme Court, seven years to conduct a mass judicial purge, and 10 years to bypass electoral limits. It took Bukele just two years to do all three.

36/ Bukele's authoritarian actions are part of the reason the Bitcoin Law is the most unpopular thing he has done since taking office.

According to polls, 95% of Salvadorans think Bitcoin adoption should not be mandatory.

37/ Polling also reveals how little Salvadorans know about Bitcoin, with 43% saying that they thought it was a physical currency, and 20% saying that 1 BTC was worth a dollar or less.

38/ Most Salvadorans oppose the Bitcoin Bill for legitimate reasons. The population generally knows nothing about the new technology, the central government has been corrupt for decades, and past monetary changes impacted many people in a negative way.

39/ 20 years ago El Salvador was dollarized in dramatic fashion. President Francisco Flores announced the transition in November 2000, and implementation occurred on January 1, 2001, just 39 days later. The country was 98% dollarized in only 18 months.

40/ A 2002 survey showed that only 2% of Salvadorans considered dollarization an achievement, while 62.2% thought it had been damaging to the nation. Another 2002 survey found that 61% of Salvadorans said dollarization had a “negative effect on their personal economic situation"

41/ Dollarization favored banks and businesses, which benefitted from new low interest rates, but at first it hurt the lower classes, who don't get formal loans from the banking sector, and who suffered from price inflation due to "rounding up" and their spending habits

42/ 21% of the population could not read and more than that had trouble with the new 8.75-1 exchange rate. Vendors began to set prices in dollars much higher than what they used to charge in colónes. For what used to be seven colónes might now be a dollar, which is 25% inflation

43/ Moreover, lower-income groups buy things at a more frequent rate throughout the week versus higher-income groups, exposing them to price inflation more often. These reasons help to explain why many Salvadorans have bad memories of dollarization.

44/ So now, today, an increasingly authoritarian government wants to change the national money system again. What doesn't help is the administration has not been transparent. The public knew close to zero about how the Chivo wallets would work, and who was building them.

45/ Everyone found out on September 7th how the state-run wallet would work and what companies were involved. The government also has announced plans for mining with geothermal energy, and bought 550 Bitcoin with public funds, but it is not clear what will happen next with either

46/ For those who understand and already use Bitcoin, the law can be a great help. Legal tender means no one has to pay capital gains tax on Bitcoin if it goes up against the dollar, and that citizens can settle debts with the banking system with the new currency.

47/ But for the vast majority who don't understand Bitcoin, it will be a rough, slow transition. There is a lot of promise: surprisingly, the Chivo wallet integrates Lightning, and can instantly connect any user on an open monetary network with any other Bitcoin user in the world

48/ For those reliant on remittances, a combination of the Chivo app, new cash points that convert Chivo balances to dollars in the US and across El Salvador, and growing use of open-source Bitcoin wallets and infrastructure could mean a big humanitarian upgrade.

49/ This is what makes the El Salvador story so hard to assess in one take. Bitcoin is a tool of freedom, and long term, it is hard to see how the people of El Salvador will not benefit, perhaps tremendously, from being the first country to adopt such a technology.

50/ But the govt overseeing the adoption process is showing alarming signs of centralizing political power. The paradox looms. As one Salvadoran told me, “Bitcoin is about taking away the power of the government to fiddle with our money and savings, not about govt intervention"

51/ In the end, why did Bukele push the bill? Was it to distract the world from his brazen consolidation of power? To — as his critics most often allege — launder money through a network that’s harder to monitor than the banking system?

52/ Or to try and get citizens into his Chivo system, where he can better surveil and control them? Was it to make a back-up plan, in case international lenders like the IMF cut him off?

53/ Perhaps — as his supporters say — it was to strike first in a digital arms race, modernize the country, and attract investment and talent? Or was it simply to put El Salvador, and his own persona, on the international map?

54/ All of these reasons probably have a grain of truth, but one thing is for sure: Bukele is a lot more internationally-famous today than he was 6 months ago, and is now the most recognizable leader in Central America.

55/ A Bukele dictatorship is not inevitable, but it looks more likely every day, unless the president changes his behavior. In the meantime, the peaceful protest and empowerment tool of Bitcoin has been associated with Bukele and his regime in many people’s minds.

56/ What can human rights activists do? Beyond traditional tactics of supporting the independent media and keeping a spotlight on government behavior, a worthy effort would be to encourage Salvadorans to use non-custodial Bitcoin wallets, and to avoid the government wallet.

57/ After all, any funds in Chivo are not real Bitcoin, just confiscatable promises to pay.

“Si no tienes las llaves, no es tu dinero” — not your keys, not your coins — could become a rallying cry.

58/ Two things seem clear. First, that without a sustained and localized effort to spread knowledge about how to use Bitcoin in a non-custodial way, where it can check the power of the government and protect individual freedom, the people may not benefit.

59/ Second, Bitcoin is not something you can sprinkle on a town and make it come to life.

Alone, it is not a sufficient tool to empower a population.

60/ Yes, it is true, and incredible, that Bitcoin helped a small village begin to change the world.

But without Jorge, without Chimbera, without Mike, without Mama Rosa, and without entrepreneurs willing to take risks, no change would have happened.

61/ As we stand on the brink of a new financial era, it would be wise to remember that a *village* started El Salvador’s Bitcoin movement, not a strongman.

To read the full essay, and learn more about the amazing story of El Zonte, click here:

bitcoinmagazine.com/culture/the-po…