El Salvador’s Chivo Wallet Buffeted by Sanction Threat, Identity Theft and Privacy Problems

El Salvador’s Chivo wallet just can’t catch a break.

The digital wallet President Nayib Bukele had built to give Salvadorans a $30 incentive to use bitcoin after the country adopted bitcoin as legal tender is still seeing waves of identity theft, which is doing nothing to give an already-skeptical population confidence in the project.

Another 131 complaint of identity theft were reported over the last week, bringing the total to 886, said Zaira Navas, an attorney and victim.

“We represent a group of people who reported to our digital platform, but there are many other people who went to the Prosecutor’s Office on their own or to the company’s headquarters to complain,” Navas said after bringing the cases to the Attorney General’s office, La Prensa Grafica reported. Financial mismanagement — and the bitcoin policy looms large in this — was the main cause, she said.

There’s also the steep drop in the price of bitcoin, which has left President Bukele’s investments down nearly $5.7 million. As such, perhaps it’s not shocking that a third major protest march against the Bukele government took place on Dec. 12.

“While many families are enduring hunger due to the economic crisis, there is a government that cares more about its image than about addressing the problems that are affecting the country,” opposition Congresswoman Dina Argueta told the El Salvador.

U.S. Sanctions May Hit Chivo Wallet

However, a much bigger problem just appeared on the horizon. President Bukele’s cabinet chief, Martha Carolina Recinos De Bernal, is under U.S. sanctions for allegedly enriching herself by awarding inflated contracts as part of the country’s anti-COVID-19 campaign. That means U.S. citizens and companies are prohibited from doing any business with her.

Unfortunately, she is also a director of the Transmission Company of El Salvador (ETESAL), which, along with Ahuachapán Electric Light Company (CLEA), created the state-owned firm that built the Chivo wallet, La Prensa Grafica notes.

As Recinos joined the ETESAL board in September 2020, she “would therefore have a direct relationship with the Chivo Wallet application, the ATMs and [point of sales] POSs with which they operate nationwide,” the news outlet noted.

“In general, the problem with being put on that list is that no company that wants to do business will want to offer you services,” IT expert Mario Gómez told La Prensa Grafica. “It has implications beyond the United States. If they discover you that you are selling services to a sanctioned person [the U.S. government] can sanction you.”

That will make any company think twice about doing business with Chivo.

Sanctions Busting Bitcoin Policy?

Ricardo Castaneda, senior economist at the Central American Institute for Fiscal Studies (ICEFI), suggested that the broader decision to make the first cryptocurrency legal tender in the country “could have been to overcome U.S. sanctions on officials.”

News outlet E Salvador said that Castaneda pointed out that “if a person cannot pass money from acts of corruption through the conventional banking system, bitcoin can give them that opportunity.”

Several other Bukele appointees had U.S. assets frozen under the sanctions law, which targets corruption and human rights abuses.

That said, the report did not say why Castaneda believed making bitcoin a national currency would be necessary for Recinos to use bitcoin to move and hide ill-gotten assets in the first place — not that it would be all that good an idea in the first place.

The U.S. Department of Justice and Treasury Department have been making strides in teaching FBI, Drug Enforcement Administration (DEA) and IRS agents to track bitcoin transactions over the past two years. Their efforts have led to the demolition of several terrorist fundraising networks and a major international child pornography ring, as well as the arrest of a number of drug dealers.

The issue is that bitcoin transactions are not anonymous, as most people believe. They are, more accurately, pseudonymous as the actual transactions are publicly viewable but only by a bitcoin’s long alphanumeric public key code — and a private key is required to initiate the transaction.

These public transaction chains can be tracked, and if a user makes a transfer to a wallet address that was ever connected to a bank account to cash out, an identity is revealed.

Privacy Concerns

That pseudonymity has led to another concern being raised about the Chivo wallet, with personal privacy taking the focus this week.

Much like credit card companies know exactly what an individual bought, where and when they bought it and how much they spent, anyone who can link a bitcoin wallet to a particular person can see the where, when, and how much. When a person uses bitcoin for daily transactions at stores, that tracking becomes much easier — all someone needs is a bent clerk or manager.

“We have to think of more proactive ways to protect ourselves and not just focus on the reactive thinking that the solution is bitcoin traceability,” Jessica Mila Schutzman, an attorney, advisor and former cyber investigator told El Diario in November.

While calling the adoption of bitcoin “a spectacular idea,” Schutzman said the country should prioritize privacy tools similar to those used by the traditional financial system, while at the same time making sure anti-money laundering rules are followed.

On the up side, popular crypto commentator Max Keizer proposed creating a round-the-clock bitcoin newscast in El Salvador, focused on informing the public about the cryptocurrency and countering misinformation. President Bukele welcomed it, according to El Diario Salvador.