El Salvador can do better with its bitcoin legal tender law
What steps should El Salvador take to further bitcoinization and foster its economic development with the crypto sector.
Saylor and Tudor Jones: it´s time to start lobbying for Bitcoin
The recent move by El Salvador´s President Bukele to render bitcoin legal tender in the country was widely reported as a very important step towards bitcoin adoption. Though I agree that this is an historical step towards wider bitcoin adoption by sovereign nations and I clearly saw this coming, I have some concerns about how this is being done by El Salvador. In particular, I am against any “forced” adoption of bitcoin which, to use the words of Nic Carter, should better continue to “flourish on its own merits”.
But before getting into my reasoning let me clarify first what are we talking about here, what is the meaning of “legal tender”.
What means “legal tender”
Each country establishes by law which means of payment are accepted as “legal tender” within its borders. This signifies that the chosen means of payment will, BY LAW, extinguish debts or settle tax payments, obligations and legal fines or damages.
The concept of “legal tender” generally operates outside the scope of contractual obligations, in which the parties can rather freely decide what specific “means of payments” will they accept to settle their contractual obligations. The legal tender concept therefore applies to those obligations which arise from the enforcement of the laws of that country. For example, if someone sues another for damages and the court settles the damages at sum X in that specific country, the debtor can lawfully extinguish his obligation by paying the sum X in the currency which is legal tender in that country. The same goes with tax payments, administrative fees, fines or other legal obligations.
However, this does NOT usually mean that a private person/business IS OBLIGED to accept the same legal tender currency in exchange for his goods and/or services. That person may well decide to accept only a specific banknote denomination among those having legal tender in the country or altogether another means of payment (which is not legal tender), such as a credit card, bank wire transfer, vouchers, precious metals or — why not — bitcoin.
In Europe for instance, Art 128 of the EU Treaty establishes that Euro banknotes are the only ones to have legal tender within the Union. Yet transacting parties can freely use other foreign currencies with legal tender status in the state of issuance or privately issued money or cryptocurrencies like bitcoin. Although these are not “official” currencies and have no legal tender status — and cannot be used to pay taxes or settle judicial awards — parties can agree to use them as private money and may settle their contractual obligation with it regardless of the legally tendered currency. Although this is not relevant for this article, it is worth noting that the most widely used form of money in the EU — i.e. the digital Euros credited into your bank accounts, all of your (non physical cash) savings and electronic bank balances— are not legal tender according to the law but commercial bank money, i.e. privately issued money, substantially not different from bitcoins.
Definitely something worth bearing in mind when the ECB will issue the digital Euro/CBDC in the future.
The situation is substantially the same in the US where the Coinage Act of 1965, specifically Section 31 U.S.C. 5103, entitled “Legal tender,” states that: “United States coins and currency (including Federal reserve notes and circulating notes of Federal reserve banks and national banks) are legal tender for all debts, public charges, taxes, and dues.” Also in the US and almost everywhere in the world, private individuals and businesses are free to use the legally tendered currency or, alternatively, other means of payments to settle their contractual obligations.
Basically only dictatorships or countries which apply capital controls dictate that private parties MUST accept the legally tendered currency in their contractual relationships.
And this is the potential problem with El Salvador´s new law.
Legal tender vs “coerced” legal tender
President Bukele is simply gone one little step too far with the new article 7 (see page 14) which prescribes that everyone, including private businesses, MUST accept bitcoin when offered in payment.
Early critics like Nic Carter and especially George Selgin, have correctly pointed out why Article 7 is really not needed and why it should be removed. One thing is to give Salvadorans the chance and freedom to choose between the slavery of the US dollarization and bitcoin as “no one´s money”, another is to oblige Salvadorans to use bitcoin to buy a coffee.
It is true, as it was pointed out by George Selgin, that the law still leaves ample room within Article 12 to evade the application of Article 7. In addition, one has to bear in mind that bitcoin is not the sole legal tender currency in El Salvador. The US dollar is the other one, therefore Salvadorans still have the option between using the US$ or bitcoin. But for this very same reason, it would be smarter to implement only carefully crafted laws which will contribute both to the development of the country and the adoption of Bitcoin as a tool towards economic progress.
A quickly rushed legislation like this one may give easy ammunition to Bitcoin detractors in case of failure and may open the door to speculation about the real intentions behind the move. Some new developments here.
Since this would be far too risky and far too conspicuous on the part of young President Bukele, I would rather grant him the benefit of doubt about his good faith and good intentions, despite the not very well thought after and planned move.
So what should El Salvador rather do?
A “bitcoinization” framework for El Salvador and all emerging economies
In addition to sharing George Selgin´s observations, particularly on the article 7 and the risks for the “bitcoin trust fund” under article 14, I would like to focus on broader policy measures: what should El Salvador do to adopt bitcoin and further its economic development.
Since Rome was not built in a day, making bitcoin legal tender (though avoiding the coercion for private transactions) is only one step in the adoption process and likely not the most important one.
El Salvador should rather aim to develop a competitive framework to jump start the sector and activate a virtuous cycle. I will then indicate below the steps which are required in order to jump start the crypto sector in developing economies. A Whitepaper titled “Regulatory policies to foster cryptocurrency/blockchain related innovation and investments in Emerging Economies” can be freely downloaded from www.bianconiandrea.com
1. Avoid restrictions on innovative technologies and applications: In general, the country should embrace a posture of “permissionless innovation” when it comes to emerging technologies. Rather than inadvertently stifling new industries with precautionary regulations, the state should instead allow space for tinkerers to experiment under the watch of the relevant agency. Innovation is hard to create but trivially easy to kill.
2. Avoid government investment or endorsement of any particular technology or application: just as governments should not target specific technologies or applications negatively, neither should they do the reverse. Subsidizing or propping up preferred use cases distorts market signals. Technologies that appear promising today may not end up being the market winner. If the state were to privilege what would otherwise be a technological loser, we would risk getting stuck in an inferior standard. Furthermore, the state should approach government adoption of blockchain technologies very cautiously. Legislators should keep in mind that these are new and still developing technologies. Private businesses can experiment in ways that state governments cannot, for both constitutional reasons and to protect the public interest. The legislature should first focus on reforms that will unlock cryptocurrency’s full potential within the state. Once these technologies are more tested and vetted, the state will have a better idea of which are safe enough for government use.
Specifically, the following is a list of the main regulatory developments which have been either taken by successful countries worldwide or which should be taken to foster development of the crypto industry:
(i) regulations dealing with the recognition and the legal status of digitally tokenized assets (such as stablecoins and tokenized securities).
The regulatory framework implemented by Liechtenstein, Switzerland and US State of Wyoming are good examples.
(ii) implement an agile crypto bank charter to regulate mainly the issue and the custody of crypto assets, like the one implemented in Wyoming for the SPDIs (Special Purpose Dep. Institutions). Encourage banks to plug and play into the Bitcoin blockchain to build a new banking infrastructure. This is important since regulated banks offer a higher level of security versus unregulated entities to custody crypto assets for both retail and institutional investors. A reliable network of bitcoin banks is fundamental to attract crypto capitals.
(iii) incentivize the establishment of crypto exchanges with an agile licensing process.
(iv) review and if needed reform money transmission laws to exempt non-custodial services and applications. Clearly distinguishing between custodial and non-custodial applications of cryptocurrency and exempting the latter not only would be consistent with analog institutions, it would better position the country as a hub of cryptocurrency activity.
(v) adopt bitcoin as legal tender or encourage the use of bitcoin to pay for administrative fees and taxes and ensure free and full convertibility between cryptocurrencies and the local fiat currency. Business adoption is also important, specially for expensive items such as paying for real estate . All this will bring sound money reserves into the government modern digital coffers. Favour (not compel) bitcoinization to slowly reverse the dollarization of the economy.
(vi) grant incentives to attract both crypto capital/investors and talented human capital. Tax incentives are very important. Money flows where it is treated better. But also human capital relocates where business opportunities and living standards are better or at least where better prospects are offered. Programs such as the residency and citizenship for investment are very important. A new bitcoin E-residency program, similar to Estonia´s E-residency program can be a smart option.
(vii) possibly channel bitcoin capital invested in the country into a bitcoin fund held by the central bank to finance infrastructure and development projects in the country (think about bitcoin mining using residual and renewable energy sources). This might encourage the local central bank to allocate a portion of its reserves to bitcoin.
These steps can position not only El Salvador but any emerging economy as a leader in the crypto industry. If the country has the appetite for growth and technological development, all that is left to do is to ensure that its policies will allow the investors/entrepreneurs to reach their objectives as frictionless as possible.
Bitcoinization (done well) can bring huge potential to all emerging economies.
The Bitcoin community should help and the likes of Saylor and Tudor Jones shall do their part
Despite Bitcoin´s many adversaries, it may yet find potential allies. Banks and emerging economies could be two powerful allies. Banks may not have yet realized all the opportunities that Bitcoin can bring to the sector. But commercial banking is dead under the aberration of negative interest rates and the terminally ill fiat regime. Even more uncertain is their future under a CBDC regime in which the role of commercial banks will be greatly diminished, despite the central banks lies and assurances to the contrary. Bitcoin banking is therefore the only future and the best option for banks. The sooner they will understand that the better it will be. I have described the opportunities for them in Bitcoin and the lost art of commercial banking. Emerging economies are also vital for Bitcoin true adoption and this goes hand in hand with the scaling up of Bitcoin banking services and the emergence of Bitcoin banks. But developing economies cannot do it all by themselves. As the case of President Bukele shows, they need support from competent crypto people, from the community and from prominent crypto investors like Saylor and Tudor Jones. Investors should also do their part. They have huge financial incentives to do so and a lot to gain, or to lose.
What means that they should be “doing their part”?
“Lobbying for Bitcoin”
Even if I hate the word, “lobbying” for Bitcoin sums up pretty well what I mean and what is needed here. The Bitcoin Mining Council does not even comes close to what is necessary. A much broader and comprehensive effort is required to challenge multiple narratives that are spread by powerful interest groups with US$ hundreds of millions to spend. Many competent crypto authors independently publish good articles, papers, podcasts and interviews to counter the disinformation machine, but only investors with large bitcoin vested interests like Saylor and Tudor Jones have the financial means to create a more powerful structure to coordinate and promote the massive response effort which is required. More importantly, emerging economies must be targeted with a precise “bitcoinization development plan” (as I have roughly described above) and supported in the whole transition phase. Also, crypto business leaders must bring their businesses into those countries to help them develop a Bitcoin based economy and services.
After all bitcoiners need a reliable “safe heaven”. A sovereign country where crypto capitals can be safely parked, invested and shielded from the global reach of the world government of the globalist elites. They will increasingly use “laws and regulations” as the most effective tool to both discourage crypto adoption and damage crypto holders. It is not necessary to ban crypto. It is far easier and more effective to over-regulate it and over-tax it. But once the first sovereign country will be onboarded, others will follow and “regulations” — as a “discouraging tool “— will become ineffective. Afterwards smart countries will start to compete to attract crypto capitals. Until then though, the likes of Saylor and Tudor Jones will have to ramp up their efforts to support this “lobbying for Bitcoin” effort. Just think for a moment what the impact on bitcoin´s price could be and how much they stand to lose if a global massive tax on crypto is implemented by the globalist elite. A truly decentralized, uncensorable cryptocurrency like Bitcoin is smoke in their eyes. They want to get rid of it for the same reason they want to get rid of cash. Power and control. They crave for a digital currency which can be a powerful global surveillance tool. Digital fiat money (CBDCs) is their baby.
Some may say, “who cares about El Salvador?” How much weight does poor little El Salvador carries in world affairs?
A lot, at least at this early stage of Bitcoin adoption.
For all emerging economies are exactly in the same situation as El Salvador. They are caught between the rock of their own weak fiat currency and the hard place of a “dollarization” or “eurization” of their economy, which produces the devastating long term effects we all know. Therefore they have to choose now. Either with Bitcoin or forever enslaved by the usual suspects. El Salvador could be followed by Paraguay, Uruguay, Argentina, Costa Rica, etc. Practically the entire emerging world is on the Rubicon and their leaders must roll the dice and make history or remain the corrupt puppets of the usual suspects.
Maybe young President Bukele has the opportunity to become El Salvador´s “Caesar”, he has rolled the dice right but he must now choose his next steps carefully. We are here to help him.
On this topic see also:
- Free Whitepaper download: “Regulatory policies to foster cryptocurrency/blockchain related innovation and investments in Emerging Economies”
- Which country will first enter the multi-trillion bitcoin adoption race?
- Bitcoin and the lost art of commercial banking
- King Dollar will be King of crypto-fiat
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© www.bianconiandrea.com — 2021