el salvador made history last fall by becoming the first country to accept bitcoin as legal tender. Since then, the country’s baseball-cap-wearing president, Nayeb Bukele, has boasted of buying over 1,000 BTC for El Salvador’s treasury, and doing it all on his phone.
bukele’s great bitcoin experiment can be seen as innovative, reckless, or both; it’s too early to tell for sure. But a broader lack of transparency around the country’s cybersecurity and accounting practices may alarm both Salvadorans and foreign investors.
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put bitcoin on government books
Since no other government recognizes bitcoin as legal tender, El Salvador is in new territory when it comes to managing the digital currency. But there are best practices that governments can employ when it comes to storing and reporting on the nation’s finances.
The US Federal Reserve, for example, documents the reserve assets it owns every month. those records cover not only foreign currencies but also physical assets such as gold.
The fed’s records reveal where these assets are located, as well as assets you own that don’t technically belong to you. for example, in “gold stock,” the federal notes that gold held “in reserve” at the federal reserve banks for “foreign and international accounts” is not included in their monthly accounts.
“It’s an accounting exercise and something you can audit. It’s the central bank’s balance sheet, and the financial statements will tell you exactly what the central bank’s assets are and, in most cases, where they are,” Steve Hanke, a professor of applied economics at John Hopkins University, told decrypt. “It’s a very simple, vanilla kind of thing. there is no big secret to it.”
however, when it comes to bitcoin from el salvador, there is no such transparency or public accounting.
bukele has said that he has bought more than 1000 btc, although it is not clear where these funds are stored. bukele’s press office did not respond to multiple requests for comment for this story.
For now, Salvadorans, who in theory have a right to know what the government is doing with their collective wealth, can only guess what bukele is doing with the bitcoin he claims to be acquiring.
bitcoin holdings in el salvador
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While bukele likes the flashy Twitter announcements about buying the dip, he has refused to answer the most basic questions about his government’s management of the treasure.
“There are so many things that are not revealed. for example, who has the private keys to these bitcoins? nolva serrano, head of operations at crypto wallet provider blockbank, previously told decrypt.
“Also, what is the criteria to say, ‘oh, today, are we going to buy more bitcoin, or are we going to wait until next month’? We don’t know,” he added.
indeed, despite bukele tweeting that he buys bitcoins with his phone, even that remains a point of debate in el salvador. A recent news report suggested that while the president may brag on Twitter about buying bitcoin on his phone, he is relying on people based in the US. uu. to carry out the transactions.
This behavior and lack of transparency can be frustrating for some Salvadorans, but it can also have negative consequences for the country’s economic prospects.
foreign investors, for example, have become more reluctant to do business with the world’s first bitcoin nation. Bukele’s behavior has placed the country in a difficult position when it comes to selling bonds and accessing international credit markets.
This is a problem for a country like El Salvador as it seeks to refinance $800 million in bonds due in January 2023.
“I don’t know who’s going to buy these bonds, but it sure won’t be us,” Kevin Daly, a fund manager at Aberdeen Standard Investments, told the financial times in November last year.
Not only are investment firms concerned about the impact of bitcoin on El Salvador’s sovereign credit outlook, but so are credit rating agencies.
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In January 2022, Moody’s Jaime Reusche suggested that El Salvador’s bitcoin holdings do not yet pose a threat to the government’s financial obligations, but that may change.
“If it goes up a lot, that represents an even greater risk for the payment capacity and the fiscal profile of the issuer,” Reusche said at the time.
bukele’s black box management style means investors can only guess at the exact state of el salvador’s finances.
‘could be stealing the treasure’
The unanswered questions surrounding El Salvador’s bitcoin holdings clearly have financial or political implications, not least growing concerns about worst-case scenarios.
“He could be stealing the treasure…that’s an extreme, and there’s no evidence of that, but there’s no evidence of anything,” Hanke added, speculating on a hypothetical and disastrous scenario facing the savior.
There are also security implications arising from a lack of government transparency.
According to research from blockchain analytics platform chainalysis, crypto wallets are increasingly the target of a large number of malware attacks. such malware puts hackers in positions to drain the victim’s cryptocurrency.
At the same time, centralized exchanges, like the ones bukele likely uses to buy bitcoin, remain the primary target for hackers. while most employ elaborate security measures, some are more lax, even when it comes to protecting customers from phishing and other forms of attack.
It is of course possible to hold bitcoin securely, especially if the owner relies on so-called cold storage or specialized custodians. and bukele may well be using such measures. But given their government’s lack of transparency, Salvadorans may be right to worry that their country’s bitcoin wealth is susceptible to hacking, embezzlement, or other misfortunes.
