Strike CEO Jack Mallers was having dinner at a San Salvador sushi restaurant with a few of his friends this spring when he received a bizarre DM from Twitter. The DM claimed to be from El Salvador’s president’s brother, and that they wanted to speak to Jack about the rapid growth of his app.
The Strike app, launched in March in El Salvador, was quickly the most downloaded app in El Salvador. Jack wasn’t sure if the government was happy or furious. He brought along a friend to the meeting, promising that he would go to jail with Jack if necessary, and another friend to wait outside to ensure they returned safe.
Their concerns were misplaced. Nayib Bukele, El Salvador’s president, was happy with what Strike was doing. This was primarily to provide fast, cheap money transfers to a nation that relies on remittances for 20% of its GDP. Using existing players such as Western Union can be expensive and risky. Strike’s new method of paying is Bitcoin and its second-layer’ lightning network.
The Strike app allows users to pay bills and send money via Lightning’s technology (typically through QR codes) that is connected to their bank account. Lightning is required to make Bitcoin transactions. Otherwise, it could take up to ten minutes and incur high fees. Lightning is similar to Visa and Mastercard, enabling you to make payments immediately before the bank actually settles them.
This is a great idea for El Salvador, which has a system so broken that it’s difficult to transfer money from one bank into another. The government and banks have embraced this new alternative. After much discussion with Jack, the country decided to accept Bitcoin as legal tender starting September 7, making it easier to transact in Bitcoins that won’t need to be converted back into dollars.
This announcement was made in June at the Bitcoin Miami conference. It is highly controversial. Critics claim it will encourage more corruption in a country already corrupt (since Bukele took office in early 2020, he has been called both ‘autocratic and ‘authoritarian’) and that nearly half of El Salvadoreans do not know what Bitcoin is. The World Bank even refused to assist with Bitcoin legalization, citing its transparency and environmental shortcomings.
Proponents claim that El Salvador’s current financial system is already abused. The Reagan administration intervened in El Salvador’s civil war that lasted ten years and led to a devastated economy, as well as a massive migration of people to the U.S. In the hope of boosting growth, the country adopted the U.S. Dollar in 2001. Despite the fact that there is a lot of trade with America, it hasn’t worked out.
Many are now wondering who might follow El Salvador’s lead and add Bitcoin to its legal tender. This is a clear demonstration of the country’s dissatisfaction with the current dollar-based financial system. One observer wrote that Latin America “has started to chip away at the financial system that doesn’t work well for this region.” Paraguay is the subject of much speculation.
This is a serious threat to the dollar’s global standard and the dominance of the World Bank/IMF. However, it might not be the worst thing for them. In recent years, El Salvador has tried to improve relations with China as its situation has become more dire. It severed diplomatic relations in mid-2018 with Taiwan. It signed an infrastructure deal with China in late 2019.
Could Bitcoin be an ally to the west in its “cold war” with China? One that, by offering a financial option to Chinese funding, could actually improve relations in the Western Hemisphere. It makes one reflect on China’s recent ban on Bitcoin mining. Hey, Bitcoin Beach sounds lovely at this time of the year.