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Last week, the world’s largest crypto exchange, Binance, made the kind of admission that could have spelt ruin for most companies seeking new markets. But not in San Salvador.
CEO Changpeng Zhao pled guilty to violating U.S. anti-money laundering laws, stepped down, and agreed to pay $4.3 billion in fines to the U.S. government stemming from charges including operating an under-the-table crypto exchange in the country.
“The company caused illegal transactions… in sanctioned jurisdictions such as Iran, Cuba, Syria, and Russian-occupied regions of Ukraine — transactions for which Binance profited with significant fees,” said a U.S. Attorney.
It strains credulity that the Bukele administration could have been unaware of Binance’s legal troubles in August, when it granted them a local license to issue digital assets like bitcoin: The SEC had publicly accused the firm, in a separate investigation, two months earlier.
In March 2022, Bukele hosted Zhao, according to state media, to explore “joining the projects being started in Salvadoran territory.” Ambassador to the U.S. Milena Mayorga announced the following June that Binance had hired 50 “executives” in the country.
Since its inception, Bukele’s bitcoin project has stoked worries of money laundering, but the administration has not appeared overly troubled. In its haste to roll out the cryptocurrency wallet Chivo, the government removed Know-Your-Client controls, leading to theft of between $12 to $24 million in public funds, per U.S. court documents.
Binance isn’t the first company under scrutiny to receive a license in El Salvador: Bitfinex, the popular company behind the U.S. dollar-pegged stablecoin Tether, announced its own license in April. The company was barred from New York State in 2021 for allegedly deceiving users about the volume of reserve dollars backing its Tether tokens.
The same day that Binance pled guilty, Bitfinex announced it had granted access to its Tether platform to the U.S. Secret Service and plans to do the same with the FBI, in a show of its “unwavering commitment to combat illicit activities.”
Meanwhile, smaller players are emerging in the Salvadoran ecosystem. According to Forbes Centroamérica, at least seven companies have registered to operate exchanges under the Digital Assets Issuance Law approved in January by the Salvadoran legislature.
Evicted from Bitcoin Beach
From the beginning, regulation of the crypto-space in El Salvador has been marred by conflict of interest: Bitfinex was one of the companies who helped write the digital securities law that authorities have used to issue its license.
“The way bitcoin was implemented posed risks of converting the country into a fiscal paradise and facilitating money laundering,” Lourdes Molina, of the Central American Institute for Fiscal Studies (ICEFI), told El Faro English. “Those risks are still present.”
The IMF has been highly critical of the bitcoin implementation, which remains a primary obstacle in granting a debt restructuring agreement with the Salvadoran government.
The bitcoin experiment also faces low popularity and usage in El Salvador. The government declared related state spending a secret, and the Treasury Ministry claims to not know the amount invested in buying bitcoin, but estimates reach at least $121 million.
At the same time, key promises made to the public have not come to fruition, like financial inclusion, a rise in employment, or attraction of foreign investment, according to Molina.
“The adoption of bitcoin was clearly not a public policy designed to improve the wellbeing of the population,” she said. “If we add to this the legal problems facing these digital assets businesses with licenses to operate here, the question becomes even more relevant: Why does the Bukele administration insist on keeping this project?”
Plans have also disappeared for the much-hyped ‘volcano’ or ‘bitcoin bonds’ to be issued by the government — and originally thought to be brokered by Bitfinex.
But the government continues to present bitcoin as key to its brand and model of modernization. According to Mala Yerba, 25 families are set to be evicted from the El Zonte beachfront, in order to make room for Bitcoin Beach Club de Playa, a tourism project. Reneging on an original pledge, the government is looking to relocate the decadeslong residents to near a sewage treatment plant.
The Salvadoran digital environment remains a chief concern of U.S. policymakers. As the Biden administration finds less and less to say about Bukele’s unconstitutional bid for reelection and repeated reports of mass human rights violations under the 20 months-long state of exception, both governments made a joint statement on November 10 on “shared digital policy priorities.”
“The United States and El Salvador seek to collaborate to realize El Salvador’s aspirations to become a regional technology hub through pursuing a sound digital regulatory environment,” wrote the U.S. Undersecretary of Commerce Marisa Lago and Salvadoran Economy Minister María Luisa Hayem.
“It is very evident that there has been a rapprochement between El Salvador and the United States, particularly in the economic realm,” said Molina.
“Washington looks at El Salvador as a piece of its regional agenda for two main reasons: immigration and the construction of a digital wall against the influence of China and Russia,” concludes Ricardo Valencia, professor at California State, Fullerton, in an op-ed for El Faro English.
Telecoms appear to be a growing front of great power conflict in Central America. This month, Nicaragua granted rights to operate 5G to the US-sanctioned Chinese company Huawei. Costa Rica recently drew the ire of the Chinese Embassy in excluding Huawei from competing for a telecoms project worth over $1.5 billion.
In her joint statement with El Salvador, Undersecretary Lago also highlighted “bilateral cybersecurity cooperation” and strengthening of the “security and resilience of our telecommunications networks,” expressly mentioning 6G technology.
Valencia argues the Bukele administration sees in Washington a means to reset its fraught debt relief negotiations with the IMF: “The president’s openness to regulate the Salvadoran digital environment —this seemed profane in his crypto creed— appears to indicate he will seek a more conventional path to pay the growing foreign debt.”
The Fund’s former Latin America director, Alejandro Werner, hired by the Bukele administration in April to “collaborate” by spurring talks with the IMF, admitted last week in an interview that El Salvador is, together with Argentina and Ecuador, one of the few countries in Latin America that does not have under control its debt problem.
While the Bukele administration has received significant financial support from the Central American Bank for Economic Integration, the election of Costa Rican Guisela Sánchez to head the bank could more sternly condition access to finance for San Salvador. And with the crypto-bond path apparently shuttered, the IMF route is now back to center stage.
Sources in Washington confirm that Bukele’s new finance minister, Jerson Posada, visited D.C. in September. Kamala Harris’ top security advisor, Phil Gordon, will be in San Salvador today. The new Salvadoran honeymoon with the U.S. government makes an IMF agreement very likely.
*Correction on Nov. 28 at 12:05 ET: An earlier version of this article misstated that Binance and Zhao pled guilty to 13 charges in a U.S. federal court. While they pled guilty to charges filed by the DOJ, “13” referenced the number of charges presented by the SEC in a separate complaint, which is still ongoing.
This article first appeared in the November 28 edition of the El Faro English newsletter. Subscribe here to tune into Central America.