A civil lawsuit alleges that the government of El Salvador lost up to $24 million in taxpayer funds when it launched the BTC digital wallet Chivo (Spanish for “cool”) last year.
This week, Guatemala-based investigative journalism outlet No Ficción reported on Shaun Overton’s August testimony in a civil lawsuit filed in the U.S. District Court for the Northern District of Texas. Overton heads ROI Developers/Accruvia, a Texas-based software development firm that is suing Athena Bitcoin Global, the company behind El Salvador’s BTC-based automated teller machines (ATMs) and the Chivo digital wallet.
ROI launched legal action earlier this year based on claims that Athena failed to pay nearly $84,000 for work it did between September and November 2021 trying to save the Chivo wallet. Athena’s ATMs, a violation Athena claims convinced El Salvador to reduce its ATM purchases.
Somewhat reassuringly, El Salvador last year became the first country to make BTC legal tender, which its president, Nayib Bukele, saw as a bid to favor foreign “crypto brothers” from Blockstream and Tether and “burn its cryptocurrency.” was done. millennial cool’ dictator image.
Despite Bukele’s merciless partying with the help of an elaborate echo chamber of government-sponsored media and online trolls, local acceptance of BTC has been largely non-existent by both businesses and consumers. Even BTC-based remittances – the alleged engine behind Bukele’s Chivo push – never exceeded 2% of the total.
To stimulate local adoption of BTC, Salvadorans were encouraged to download the Chivo wallet and collect a one-time payment of $30 USD in BTC. But Chivo has proven to be a nightmare since its launch on September 7, 2021, with Overton claiming that the Chivo software consists of “spaghetti code” that is “functionally unusable”. Unfortunately, the decisions made by government officials made the situation worse.
Know your potted plant
Overton claims that “vendor KYC after the first 150 registrations on the platform [know your customer] crashed.” Overton believed that Bukele had “almost risked his whole career [Chivo’s] successfully submitted, so the government decided to “eliminate” the KYC vendor from the process so they could “hit the initial starting point of 50,000 users”.
From that point on, Overton said, there was “literally no control” over who opened Chivo wallets. If someone had their name and Documento Unico de Identidad (DUI) number, “they could sign up for Chivo Wallet, get $30 absolutely free as a sign-up gift, and then withdraw that money right away.”
Users were required to submit their own photos to claim the $30 reward, but Overton alleges that Miguel Sabal, a Venezuelan adviser to Bukele who allegedly forms part of the “shadow cabinet” in the Bukele administration, told users to submit them instead. “Pictures of the wall, potted plants.”
Cristosal, a local non-governmental organization, reported finding that more than 1,100 people trying to register with Chivo had their DUIs entered into the system and were charged $30. DUI information is public, so Overton said, “all you have to do is find a list… sign up, get $30, get it back. [BTC] and now it is untraceable.”
Overton didn’t say how he came up with those numbers, but claims his group “estimates that 10-20% of all registered users are fraudsters. And the vast majority of this money left the Chivo Wallet system.
About four million of the population of 6.5 million have signed up for Chivo, Overton claims. If 10% of those registrations were fraudulent, the government received $12 million, double that amount if the 20% estimate applies. Not an insignificant amount, especially for a country the size of El Salvador, especially one that is struggling to service its foreign debts.
Day trading for dummies
In addition to the fake registrations, Overton claims that the Salvadoran government is “bleeding money through arbitration in a completely separate way.” The Chivo wallet updated the fiat value of BTC once a minute, meaning users could identify discrepancies between the listed Chivo price and the actual price.
The result, according to Overton, is that “we’ve got almost the entire country becoming day traders,” who wait for the real BTC price to move far enough away from the Chivo price, then “buy risk-free and sell it five seconds later and make half a percent or a percentage of their money.” .” Overton cited a specific case where “we saw a guy start with $2,000 and he had close to $400,000,” all of which was government/taxpayer money.
The official Chivo Twitter feed of the government addressed this issue warned last October that it was a type of “fraud” that the government was taking steps to stamp out.
Overton said shadow minister Sabal had reached out to him again and said “it needs to be fixed now, tonight”. Overton said he warned Sabala about the dangers of going live with software changes without conducting any quality assurance testing, but was rebuffed.
True, the failed application of the “fix” resulted in the official Chivo exchange rate being 1 USD = 1 BTC. At the time, one BTC was actually worth about $60,000. About 3,600 transactions worth about $180,000 were made in exchange for more than $10 billion, which “immediately bankrupted the government.”
Overton was authorized to temporarily withdraw the entire Chivo network, but not before users could withdraw about $250,000. Because the system was designed to ban BTC withdrawals between 10:00 PM and 6:00 PM the following morning, “nobody could actually use the chain. [BTC] outside the system, they were only able to transfer it within Chivo. The only money that could leak was using Lightning.
This is a reference to the Lightning Network, a so-called “Layer 2” solution that attempts to bypass the seven-transaction-per-second limit of the underlying BTC layer. Lightning, the most prominent version of which is operated by Blockstream, allows users to transfer a certain amount of BTC on the initial blockchain, then make off-chain transactions using special Lightning game money.
Like Chivo, Lightning has been confusing from the start, but it says that one of the only real use cases it’s been able to demonstrate so far, based on the Chivo coupon, is enabling cheating.
Athena eventually split from Chivo in December 2021, with many of its roles handled by iFinex, both the parent company of the controversial Tether stablecoin and the parent company of the equally sketchy digital asset exchange Bitfinex. Giancarlo Devasini, co-founder of iFinex, posed with Bukele last month as part of a celebration of the legislative victory, pictured below.
Fraud occurs without action
The No Ficcione article included a photo of Overton at a blockchain conference in November 2021, where Bukele announced plans to build a ‘Bitcoin City’ in the municipality of La Unión. The Cockamamie project was to be financed by issuing $1 billion of “Volcano Bonds,” as Bitcoin City planned to use geothermal energy provided by local lava eruptions.
Bitcoin City isn’t getting much play these days, but last month, Bukele introduced legislation to create a National Digital Assets Commission that would offer legal protection not only to BTC, but also to other tokens, including Tether.
The legislation also purportedly clears the way for Volcano Bonds, which were originally slated to be issued this spring but have been delayed. At the time, the government attributed the delay to Russia’s intervention in Ukraine, although everyone thought Bukele’s idea was crazy.
Given all the cryptocurrency carnage that has taken place over the past month, it’s less implausible to think that these bonds are now being hailed by institutional investors. But given the 667 million euros in Salvadoran bonds due in January and the International Monetary Fund’s rejection of the country’s bailout calls, the need to sell these new bonds is urgent.
Vulcan bonds were to be issued on Blockstream’s Liquid Network, another Layer 2 that targets high-volume transactions between these exchanges. To no one’s surprise, Bitfinex was chosen to manage the bond issue through a local subsidiary.
Some secret iFinex affiliate will almost certainly be the main buyer of the renewed “Bitcoin Bonds” – probably not in dollars, but in Tether, so as not to cause any embarrassment to Bukele once the sale starts. But since half of the $1 billion raised will be used by Bukele to buy more BTC, the token will get a nice price pump, paving the way for retail users to dump iFinex.
Although the bonds promise a yield of 6.5%, it appears to be a quick citizenship for the main attractors. With increased regulatory focus on cryptocurrency scammers, the appeal to the Tether/Bitfinex crowd is obvious. El Salvador has an extradition treaty with the United States, but it is rarely used, even for members of the notorious MS-13 gang.
Local media suggested that Bukele made a deal with MS-13 to protect its members from extradition in exchange for keeping the peace. It’s not too hard to imagine Bukele making similar deals with deep-pocketed blockchain pirates.
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