How China and El Salvador's Stances on Digital Currencies Highlight Potentially Increasing Relations

February 18th 2022

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The People's Republic of China (PRC) and El Salvador have both recently made headlines in very different ways with their niche touting of specific financial instruments. On one hand, the PRC's digital yuan's release and successful test pilots have ranked it as one of the world's premiere central bank digital currencies. El Salvador's legalization of Bitcoin as legal tender presents an interesting use-cases given El Salvador’s history of dollarization. Despite their seemingly contrasting stances, both these tools are simply extensions of these dual ever-growing authoritarian states, violating international data privacy standards to enforce controlling measures over an ever-fearful population.

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The People's Republic of China (PRC) and El Salvador have both recently made headlines in very different ways with their niche touting of specific financial instruments. On one hand, the PRC's digital yuan's release and successful test pilots have ranked it as one of the world's premiere central bank digital currencies (CBDCs), while El Salvador's legalization of Bitcoin as legal tender presents an interesting use-cases given El Salvador’s history of dollarization. Through this unique lens, one can better understand how despite their seemingly contrasting stances, both these tools are simply extensions of these dual ever-growing authoritarian states, violating international data privacy standards to enforce controlling measures over an ever-fearful population.

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Current ties between El Salvador and China

After winning the Salvadoran presidential race in February 2019, then-President-elect Bukele made comments critical of the PRC, telling the Washington-based Heritage Foundation that "China does not play by the rules" when it intervenes in other countries' democracies. However, just a few months later in December 2019, El Salvador and the PRC signed an infrastructure deal focused on development projects, to include a sports stadium, national library, and tourist pier. More recently, in May 2021, President Bukele praised the PRC for its public investments worth $500 million in El Salvador, with a document from the Ministry of Foreign Affairs reporting a "non-refundable donation" from the PRC to El Salvador to the tune of over $62 million.

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The proposed La Unión water port project further emphasizes PRC power
projection in El Salvador, with this critical port potentially enabling the
establishment of critical trade zones for the PRC, which could use La Unión to further enter into other Latin American markets without having to involve local enterprises. Further PRC-El Salvador ties can also be seen economically, with El Salvador's imports from China having steadily increased over the last decade, with a peak of $1.6 billion in 2019.

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Implications of digital currency usage

China's digital yuan is one of the world's foremost CBDCs, with the PRC's ban on cryptocurrencies in September 2021 refocusing attention on CBDC usage as a payments mechanism domestically and internationally. Simultaneously, the PRC has been spearheading a campaign against China’s largest technology firms, stopping Ant Financial’s IPO in December
2020 while levying regulatory fines against Alibaba, Baidu, and Tencent in November 2021. With the obvious goal of wresting control of the digital payments market away from private technology companies, the PRC has been able to utilize these campaigns and leverage digital yuan usage as a pretense to exercise greater control over its population's cash flows. By banning cryptocurrencies while reducing the use of private enterprise payments platforms, the PRC is setting the stage for the digital yuan to become the sole payments mechanism domestically, with the end goal of better controlling its populace through their money.

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While El Salvador has announced Bitcoin as legal tender, a move directly in-line with the principles of decentralized finance (defi), it has done so under the auspices of introducing its Chivo wallet to its population. So far required to utilize government-specific ATMs for cash withdrawals and other transactions, Chivo offers the Salvadorian government unparalleled insight into its population's finances and spending habits. This is especially concerning given the many issues currently reported with Chivo wallets, highlighting data privacy issues and susceptibility to outside actors, to include the Salvadorian government. In fact, Chivo wallets are even forcing users to pay high commission fees on individual transactions, making Salvadorian citizens pay for the privilege of being increasingly taxed and surveilled.

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Through their differing approaches to digital payments, it becomes easy to understand how both the PRC and El Salvador are countries focused on building more-easily traceable financial products to surveil their respective populations, whether this be through a CBDC like the digital yuan or through a government-mandated ATM network. El Salvador's continued acquisitions of Bitcoins further proves this point, with its goal of creating a system too-large-to-ignore ensuring citizen participation regardless of cooperation. In short, it is easy to see how both countries' aims are undoubtedly to better exercise control over their populations through the surveillance of individual finances and digital payments mechanisms.

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Frankly, it would not be surprising for the PRC to further usurp Salvadorian independence by convincing Bukele to use the digital yuan for currency substitution in El Salvador. While El Salvador has practiced dollarization, utilizing the e-CNY as a reserve currency, particularly with its newly-proven widespread adoption and capabilities, might present an appealing value proposition in light of all of the problems of trust and usage of the Chivo wallet. This is especially concerning at the strategic level, where the PRC could fluctuate exchange rates at the drop of a dime, wreaking havoc on El Salvador’s financial markets and beyond.

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Authoritarian regimes and their capacity to initiate social crackdowns

Additionally, both the PRC and El Salvador also share some similarities in their authoritarian forms of governance. The PRC's infamous surveillance state framework, to include its social credit system, has sought to control the Chinese population to heights unseen before, blending the utilization of modern technology such as artificial intelligence (AI) and facial recognition software with Communist Party ideology. From crackdowns on video games  to banning effeminate men on television, the PRC has made
it clear that it will control its population’s future down to the microscopic
level. 

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Similarly, just a few months after winning El Salvador's presidential elections, Bukele and his allies flexed their powers on May 2021, removing and replacing all judges in El Salvador's Supreme Court and the nation's attorney general. Amidst proposed reforms to the Salvadorian Constitution,  Bukele has also sought to reduce citizen rights when dealing with the state while expelling journalists from the country. These types of actions are extremely reminiscent of a China just several decades earlier, with Bukele's actions undoubtedly giving pause to individuals, organizations, and international governments alike.

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The authoritarian nature of both regimes highlights a potential military avenue of cooperation between both nations. In this case, the La Unión water port project offers not only a trade route into Latin America, but also potentially functions as an overseas military base for the PRC akin to the PRC’s Djibouti footprint. Also, in March 2021, reports surfaced of a PRC delegation visit to the Salvadorean military academy just one year prior, with additional discussions of providing PRC equipment to the Salvadorean National Civil Police, highlighting potential increased relations between both authoritarian regimes.

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Conclusion

If established separately and independent of one another, a digital payments system could benefit the citizens of both the PRC and El Salvador, ensuring financial services for the underbanked, critical loans for small businesses, and much more. However, when established under the backdrop of an authoritarian regime, digital currencies, no matter their centrally backed or distributed ledger nature, seem to increasingly be a tool for governmental control over their respective populations.

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Both the PRC’s and El Salvador’s approach to ensuring greater financial inclusion through respective CBDC and Bitcoin adoption are more indicative of exercising greater control and surveillance over their citizens, perhaps indicating a greater era of cooperation in both civil and military realms between both states in the present and future.

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