El Salvador’s Bitcoin Mining Proposal Faces Many Hurdles

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El Salvador is one of the countries in the world that has made the most advances in harnessing geothermal energy, which, like its Central American neighbors, is in abundance. CREDIT: LaGeo

SAN SALVADOR, July 19, 2021 (IPS) – That a country like El Salvador, poor and with many social needs, would seek so-called Bitcoin mining, which uses a lot of energy and does not create many jobs, is an extravagance that many find difficult to digest.

“In El Salvador, the financial resources are not abundant, they are not well distributed, we are fighting for climate and / or energy justice, and I think this will certainly exacerbate the situation,” said environmentalist Ricardo Navarro, director of the Salvadoran Center for Appropriate Technology, a local subsidiary of Friends of the Earth Internationalsaid IPS.

Analysts and economists also fail to understand the ultimate goal of the Salvadoran government’s decision to declare Bitcoin legal tender, as suggested by. announced President Nayib Bukele in a video shown during the Bitcoin 2021 conference, held June 4-5 in Miami.

“I have the impression that this is an improvised decision without any technical basis,” said economist Carlos Acevedo, former president of the Central Bank of El Salvador (BCR), to IPS.

There are many in public who agonize over their heads to understand Bukele’s step.

A Francisco Gavidia University A poll published July 8th found that 95 percent of respondents value the US dollar for the stability of their household economics, and only 1 percent said it was Bitcoin.

Bitcoin mining and villages without electricity

Geothermal energy has been suggested as the source of bitcoin mining in the country, but it is not entirely clear where the Bukele government will get the amount of energy needed to keep the “mining” computers running, experts said, consulted by IPS.

Bitcoin mining is the process by which hundreds or thousands of powerful computers housed in so-called “mining farms” attempt to solve the complex mathematical problems of the Bitcoin algorithm.

If solutions are found after intensive power consumption, it is said that a Bitcoin has been “mined”, as if it was pulled out of the ground. It is validated by the other “miners” or computer systems and put into circulation.

But while the government tries to encourage this activity, there are villages that still have no electricity.

To tell their stories IPS has visited villages and communities in rural El Salvador those with great sacrifices and toil Build your own small hydropower projects for self-sufficiency, as they have been marginalized by the two private companies that distribute the electricity in the country.

In this Central American nation of 6.7 million people, 97.6 percent of the population have electricity. In rural areas, however, the proportion drops to 95.2 percent. The remaining 4.8 percent use candles, lanterns, and other means to brighten their nights, according to the Multiple Use Survey published in 2020.

The community leader of Joya de Talchiga, Juan Benítez, stands on the edge of the dam that the villagers built for the mini hydropower plant El Calambre, which eventually supplied the 40 families of this mountain village in the east of El Salvador with electricity.  CREDIT: Edgardo Ayala / IPS

The community leader of Joya de Talchiga, Juan Benítez, sits on the edge of the dam that the villagers built for the mini hydropower plant El Calambre, which eventually supplied the 40 families of this mountain village in eastern El Salvador with electricity. CREDIT: Edgardo Ayala / IPS

“I would see it well if they said: Let’s see how we can increase geothermal energy by opening some wells and producing electricity for cantons that don’t have any,” said Navarro.

At the international level, the environmental criticism of Bitcoin mining focuses on the enormous electricity demand, which is sufficient to light up entire cities or even countries, and the associated generation of greenhouse gas emissions.

“Most of the bitcoin mines are in China, where two-thirds of the mix is ​​dirty, coal-based energy,” which is cheap because that country has invested in this type of energy infrastructure, sustainability and environmental expert Juan Marco Álvarez told IPS .

But the idea that the Salvadoran government should focus its efforts on attracting cryptocurrency miners, taking advantage of the fact that many are leaving China, is not entirely true, analysts say.

A law to bitcoinize the country

The Salvadoran legislature, dominated by President Bukele’s Nuevas Ideas (New Ideas) party, passed the Bitcoin law legal tender on June 9, making this small Central American country the first nation in the world to legalize cryptocurrency.

The dollar has been the official currency here since El Salvador dollarized its economy in November 2000 and will coexist with the Bitcoin starting September 7th when the new law goes into effect.

Local and international economists have criticized the move by Bukele, known for his personal style of governance, in which he announces any important action through a tweet instead of officials from the area or ministry in question.

The Ahuachapán geothermal power plant, one of two of its kind in El Salvador, which processes renewable energy from the warmth of the earth's depths.  CREDIT: Edgardo Ayala / IPS

The Ahuachapán geothermal power plant, one of two of its kind in El Salvador, which processes renewable energy from the warmth of the earth’s depths. CREDIT: Edgardo Ayala / IPS

Fictitious geothermal wells?

On June 9th, Bukele tweeted: “I instructed the president of LaGeo (our public geothermal energy company) to implement a plan to power Bitcoin mining facilities with energy from our volcanoes: cheap, 100 percent clean and emission-free. That will develop quickly! “

He added that LaGeo engineers had just informed him that they had opened a new well that would provide around 95 MW of 100 percent clean and zero-emission energy from El Salvador’s volcanoes.

The tweet was accompanied by a short video that featured a couple LaGeo Employees try to control a jet of steam that gushes at high pressure from a pipe that is part of a newly drilled geothermal well.

We’re “starting to design an entire mining farm around it,” said Bukele.

The president did not make it clear, however, whether it was a drilling in one of the two existing geothermal stations in the country or a new one in an unknown location.

One The plant is located in the Ahuachapán department, in the west of the country, and the other near Berlin, a municipality in the eastern department of Usulután.

Together, the two stations have an installed capacity of 204.4 MW and a net production that corresponds to 21.8 percent of the electrical energy generated in El Salvador one of the countries with the greatest use of geothermal energy. According to official figures, the rest of the electricity mix consists of hydropower (27.75 percent), solar (10.78 percent), biomass (17 percent), bunker fuel (15.94 percent) and diesel (0.04 percent).

There has been much speculation about the actual existence of the announced new well, as information is scarce and little more is known than what the president said in his tweet.

“First of all, there are no 95 MW geothermal wells in any country in the world. I haven’t seen any lists of the most productive wells, but as far as I know, the most productive well in the world must be around 40 MW, “former LaGeo President José Antonio Rodríguez said in a post on a social network.

The expert added that the well that produces the most energy in El Salvador is the TR-18th at the Berlin train station, which delivers around 20 MW.

Additionally, drilling a geothermal well is expensive, costing anywhere from $ 15 million to $ 20 million, making it impossible in the short term, although it could be doable in the medium term in four or five years, Álvarez said.

For his part, Acevedo, the former president of the BCR, said he saw no incentive for “miners” to move to El Salvador, given the high cost of electricity, the average price of which is around 12 cents per kilowatt / hour compared to three or four cents it costs in more competitive countries like China or Kazakhstan.

A solar park in the central Salvadoran department of La Paz was the first solar power plant in the country with 320,000 photovoltaic modules and is one of the largest in Central America.  Credit: Edgardo Ayala / IPS

A solar park in the central Salvadoran department of La Paz was the first solar power plant in the country with 320,000 photovoltaic modules and is one of the largest in Central America. Credit: Edgardo Ayala / IPS

Also, El Salvador’s tropical climate, where the average daytime temperature is around 30 degrees Celsius, is not the best environment for installing computer equipment for mining, which generates a lot of heat. Because of this, it is usually placed in countries with colder climates.

“In a country like Iceland you need air conditioning to cool the computers, just imagine that in the case of El Salvador,” commented the economist, who headed the BCR from 2009 to 2013, during the first government of the left-wing Farabundo Martí. National Liberation Front.

A viable way to attract them, however, would be for the companies that “mine” here to develop their own solar power plants – the cleanest energy – for self-sufficiency, said environmentalist Álvarez.

Otherwise, they would have to connect to the national electricity grid and that would mean withdrawing electricity from the public, including industry, he said.

An experiment with an expiration date

Even before it comes into force, experts predict that Bitcoin in El Salvador could end sooner rather than later, as it encounters a number of contradictions with a dollar economy, for example in foreign trade, which is also pegged to the dollar, Acevedo said.

The economist pointed out that El Salvador was paying for imports of goods and services, which totaled $ 12 billion in 2019, with exports and remittances, each bringing in $ 6 billion that year, which meant a balance of payments.

But if about half of the remittances were transferred in bitcoins, as the current government expects, so that Salvadorans abroad would not have to bear the costs of the transfers, then there would be a balance of payments gap of three billion dollars to pay for imports of goods and services, he said.

“There the accounts are no longer correct because we would have to pay 12 billion, but we only have nine billion dollars,” said Acevedo.

“So I think it won’t be long,” he argued.

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