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Crime, Cryptocurrency, and El Salvador’s Big Bet on Bitcoin

Crime, Cryptocurrency, and El Salvador’s Big Bet on Bitcoin
11th June 2021 Dr. Alexis Henshaw
In Insights

This week, El Salvador made headlines as the first country to adopt bitcoin as a form of legal tender. Although El Salvador is not the first state to make a foray into digital currency, it is the first to specifically adopt bitcoin at this level. Appearing in Miami last week, Nayib Bukele, the current President of El Salvador, discussed the proposal to introduce bitcoin alongside El Salvador’s official currency (the US dollar) promising the move would “generate jobs” and “provide financial inclusion,” especially for those working outside the formal economy.

In some ways, the move is not surprising. Cryptocurrency boosters have come to regard Latin America as a potential site for cryptocurrency mainstreaming and, more problematically, as something of a laboratory for new interventions in financial technology. In Latin America, cryptocurrency encounters something like a perfect storm. On the one hand, the volatility of some traditional currencies can minimize the perceived risks associated with adopting alternatives like bitcoin. Traditional financial institutions have also failed to serve much of the population, with 2017 data from the G20 Financial Inclusion Indicators showing that just 30% of Salvadorans have a traditional bank account, while 24% had used some form of mobile payment system in the past year. At the same time, the culture surrounding cryptocurrency holds out a promise of independence and liberation. In a region where the informal economy is a substantial force and where populations have suffered from corruption, inequality, and the predatory and/or extractive practices of banks and multinational corporations, investment in crypto may appeal to a young population as a way for individuals to take back some power over their wealth. The perennial promise of cryptocurrencies to substantially lower the cost of remittances—something of a white whale for developers—undoubtedly also has popular appeal.

Yet Bukele’s big bet on bitcoin—part of a longer-term effort to re-brand El Salvador from the top down as a young, tech-savvy, and extremely online nation—masks the potential for problems. Already, analysts warn that Latin America has a crypto-crime problem. In 2019, Brazilian investigators tracking a drug trafficking ring were surprised to discover an underground bitcoin mining operation with ties to China. This followed the disruption in 2018 of a transnational money laundering scheme based in bitcoin and involving drug traffickers in Spain and Colombia. In Mexico, both drug cartels and human traffickers have been implicated in money laundering through cryptocurrency, often using practices meant to evade reporting requirements imposed on cryptocurrency exchanges.

Could attempts to mainstream cryptocurrency exacerbate issues of violence and crime in the region? In the past, criminal syndicates and extremists alike have shown themselves willing—but not always competent—at adopting technology. In a previous Insight, I discussed how attempts by some groups to leverage social media backfired due to actors’ limited understanding of the technology. Dr. Robert Bunker, in another previous Insight, identified the comfort zone of Mexican drug cartels in “mashups” between low- and high-technology—effectively, relying on old tactics amplified by new tech. As in Mexico, Central American gangs also leveraged technologies in piecemeal ways. In both Guatemala and El Salvador, gangs have exploited communications technology and mobile payment programs in support of extortion operations. To date, such experiments seem to supplement rather than replace other means of conducting extortion. However, El Salvador’s legal recognition of bitcoin places it at odds with its neighbours, like Mexico, who have made efforts in recent years to further control and regulate cryptocurrency use. In a part of the world where both national economies and security threats are intertwined, El Salvador’s actions may have far-reaching implications.

There is also the matter of public response to this move. Studies already suggest that concerns over crime and security are major obstacles to adoption and trust in technology in Latin America, and in Central America more specifically. A 2020 report by the GSM Association revealed that Latin America was the only region in which individuals cited “Safety and Security” among the top barriers to both mobile phone ownership and mobile Internet use. While El Salvador was not included in this survey, more than one quarter of men and women in Guatemala expressed concerns over information security and contact by strangers as a barrier to mobile phone use. Just over one-third of women and 43% of men indicated that “personal safety” was a salient concern. Latin America was the only region where men rated concerns about safety and security as a more salient barrier to mobile access than did women. Making efforts to build trust and ensure user safety, then, seems an important precursor to broadening the use of cryptocurrency in the region. In its most recent data (from 2020), the Inclusive Internet Index notes that the government of El Salvador lacks a digital inclusion strategy and that digital literacy training, while rated as strong, largely occurs through primary schools and teacher training programs—presumably leaving out many older adults. El Salvador’s law promises that the state “will promote the necessary training and mechanisms” to facilitate bitcoin adoption, but offers no specifics as to what this might look like. Building trust in technology should be accomplished not merely through slick branding and social media campaigns, but with intentional effort to promote technological literacy and curb criminal exploitation of new technologies. While the appeal of cryptocurrency in the region is obvious, ethical adoption calls for both regulators and developers to make the new economy more inclusive and safer than in the past.