El Salvador’s Bitcoin experiment resembles a government digital currency, ex-central banker says
Andrés Arauz does not fit the bill of a typical former central bank governor. Just 37 years old, the Ecuadorian economist and politician is a member of the left-wing Progressive International party and recently joined the privacy infrastructure company Nym as a special adviser – returning to the private sector after coming within a few hundred thousand votes of the Ecuadorian. presidency in 2021.
While his colleagues at central banks around the world worry about the rise of digital currencies, Arauz has long been an advocate. During the 2009 global financial crisis, he helped design a state-controlled digital money system for the dollarized economy in case access to capital disappeared, as well as spur massive financial inclusion – a precursor to what are now called Central Bank Digital Currencies (CBDC).
While Arauz continues to support digital payment systems, especially for what he calls “low hierarchy” countries like Ecuador that do not have internationally powerful currencies, he is also wary of how they fit into the growing surveillance capacity of governments.
The future of money
This clash of interests has come to a head in El Salvador, which a year ago became the first country to adopt Bitcoin as legal tender. While the experiment was ostensibly centered around the cryptocurrency, Arauz pointed out that it has actually functioned as a CBDC. The administration of President Nayib Bukele created a digital wallet known as the Chivo wallet, which Arauz said has more domestically created “accounting Bitcoins” than actual on-chain Bitcoins.
In other words – considering the Bukele administration gave $30 in Bitcoin to the estimated 4 million Salvadorans who signed up for a Chivo wallet – there are likely more Bitcoin “certificates” within the Chivo ecosystem than the 2,400 or so actual Bitcoins which the government claims to hold in reserve.
“In that sense, Bukele’s Chivo wallet is similar to a CBDC or government-issued digital cash because it is actually government-managed on a central ledger, not on the blockchain,” Arauz said Fortune.
Given Bukele’s autocratic tendencies, such centralized control could be problematic. While Arauz acknowledged the risks, he argued they pale in comparison to more powerful countries and bodies.
“The surveillance system is in the entire financial system – how surveillance is present in our credit card movements, in the monitoring of SWIFT transactions, and increasingly the US government’s ability to monitor electronic addresses, even on the blockchain,” he said. “The monitoring of payment systems is not in this tiny little thing called the Chivo wallet.”
The question Arauz struggles with is how to balance privacy and human rights with economic inclusion. Historically, cash has served as a hedge to avoid surveillance. Cryptocurrency was touted as the next opportunity, but, as Arauz pointed out, regulation and “know-your-customer” requirements — as well as blockchain analytics — significantly reduced its privacy appeal.
Acknowledging the drawbacks, Arauz also noted how El Salvador’s Chivo wallet still brings people into the banking system through electronic payments — a goal supported by institutions like the International Monetary Fund, despite the warnings of the Bukele administration.
With Nym, Arauz hopes to help design CBDCs that guarantee privacy controls, including the incorporation of open and anti-surveillance standards for digital currencies and payments. As shown by El Salvador, this is a particularly urgent need for countries lacking economic autonomy.
“In general, developing countries are much less privacy conscious, both society and government,” Arauz said Fortune. “This is an opportunity for something like Nym to create this awareness for practitioners, for government officials and for people in civil society to put this on the agenda.”
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