The supposed method in the crypto madness of El Salvador

Millions of investors who keep crypto-assets are stuck. After brutal six months, in which more than $ 1 trillion were extinguished in value, some of the losers are big names, such as Vitalik Buterin, the Creator of Ethereum, and Mike Novogratz, the hedge fund coryphaee, the digital coin supported now collapsed. Others are Tiddler. But one of the most interesting is the government of El Salvador.

About a year ago, Nayib Bukele, the country's populist president, announced plans to be the first nation to introduce Bitcoin as a legal means of payment in addition to the US dollar. IMF officials and western central bankers condemned the idea as something that could only accept a president with a shaky understanding of the economy. Bukele did not help his cause when he tweeted: "#bitcoin has a market capitalization of $ 680 billion. If 1 % of them were invested in El Salvador, our GDP would increase it by 25 %", which seemed to have fundamentally misunderstood the functionality of Bitcoin and Bip.

bukele defiantly bought a bunch of Bitcoin (and, according to my colleague Robin Wigglesworth, previously spent more than $ 100 million) and asked his citizens to download digital wallets, which did more than half of the 6.5 million inhabitants. Since then, however, this crypto storage has lost about a third of its value, which gave the country's paper loss of $ 40 million. This is a painful blow for a nation that is already in a bad budget.

Is El Salvador ready to avoid his hugs of cryptocurrencies? Last week I talked to Suecy Calleja, a former ballerina and lawyer, who is now both Minister of Culture and the incumbent chair of the National Congress. Her message was a defiant "no".

Callejas told me that Bitcoin looks different from the perspective of a emerging country politician than Western critics - or traditional economists. In these restless geopolitical times, their points are worth mentioning, even if they disagree.

Your first point concerns poverty. Around 70 percent of El Salvador's population currently has no access to the banking system. But more than half have cell phones, albeit with incomplete internet service. The offering of the government can "promote financial inclusion", according to the government's argument.

A second problem, said Callejas, is that the EL Salvador economy is dependent on transfers from foreign workers, which corresponds to a quarter of the country's entire gross domestic product. At the moment, people “lose almost 20 percent” of this money due to the high transfer fees that companies such as Moneygram and Western Union are raised. The use of digital wallets for transfers may be much cheaper.

In addition, the citizens of the country have experienced so much volatility that they are less shocked by currency fluctuations. "We know that money always fluctuates," she said. "Now Bitcoin loses 25 percent of its value, but Bitcoin may recover in a few weeks."

After all, there is still the question of geopolitics. El Salvador hates to be exposed to Washington's moods. And not only because the country, like many other emerging countries, suffers sharply when the dollar interest fluctuates.

Westler must understand that the resentment against the dollar-based system in the non-western world

The western wave of sanctions against Russia has fueled the fear that the United States will increasingly use the dollar as a political weapon. "We are a small country and we are vulnerable," said Callejas. "We try to be more independent and sovereign."

Western finance officers and the powerful IMF would reply that Bitcoin is the wrong “solution” for these problems. You may be right. Crypto technology is so chunky that there is hardly any evidence that it is widespread to pay things. And the concern about cyber theft and energy consumption, which is required to dig digital currencies, continues for good reasons.

But what Westler also have to understand is that the resentment against the dollar-based system in the non-Western world is increasing. In fact, Bukele is not the only leader who is curious about crypto. Last week, his government held a conference on her experience in her so-called Bitcoin beach zone, and finance officials came from dozens of other emerging countries. According to a study by the cryptoanalysis group Chainalysis, the highest per capita use of crypto is mainly taking place in emerging countries.

That makes sense. As Hyun Song Shin, business consultant at the Bank for international payment compensation, has found together with colleagues, these "costs" (i.e. the risk) in regions seem to be relatively low in regions with weak trust in the Fiat currency, while the frictionally connected friction of Westerners appear excessively high.

Maybe El Salvador's experiment ends in tears. It definitely looks risky. But the West must recognize that it would also be risky to ignore the feeling of economic despair-and frustration about the dollar-based world order-which triggered this step. Especially at a time when economic hardship spreads and becomes the new topic of time.

Follow Gillian on Twitter @Gilliantt gillian.tet@ft.com

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