Why — for the good of Bitcoin — one should side with the IMF.
This is not a political opinion on El Salvador´s President Bukele. Most of us know very little about El Salvador and we cannot properly evaluate Bukele´s policies. So far his fellow citizens have granted him widespread support and that´s enough. Nor should the Bitcoin community blindly applaud Bukele´s bitcoin stance. The key issue here is whether the strategy adopted by President Bukele is good or bad for Bitcoin. And I mean for the long term, for a long term adoption of bitcoin as the global reserve asset which lubricates a renewed economical renaissance fostered by a decentralized, scarce, uncensorable asset which is no one´s liability. The road to becoming a global reserve asset is still a long one and acquiring a small % of the many trillions which make up the global financial system will still represent a minor drop in the financial ocean. By no means bitcoin represents a risk to gold. Nor it will be a threat to the US Dollar reserve currency status.
The real threat to this system — as even Lenin pointed out — is the abuse of the printing presses and the privileges that derive from it. Those attacking bitcoin are the culprits, the same parasites who benefit from the fiat system are themselves killing their golden goose. Bitcoin is just a technology which finally empowers the people to opt out of an abused system of privileges and store their wealth like never before was possible. If anything, it is the canary in the coalmine that the financial establishment and the politicians should listen to. Paradoxically bitcoin can bring back some semblance of discipline in the fiat currency system. A politically motivated attack on Bitcoin — as proposed by the Biden administration — either through arbitrary restrictions to its use or by implementing a disproportionate taxation regime with the clear purpose of damaging it— will be equivalent to Roosevelt´s infamous 1933 EO 6102 on gold. A disguised attack on basic freedom rights and the essence of a capitalist system.
Stirring up an hornet´s nest
Back to El Salvador´s law, I must say that so far I am rather unimpressed with Bukele´s bitcoin strategy. Moreover, I am openly against the bitcoin legal tender law. So, for once, I side with the IMF though clearly for completely different reasons. I am worried about El Salvador, I am worried about Bitcoin being dragged into an unnecessary geopolitical fight it does not need.
Picking up a fight with the IMF — which is a proxy for the whole financial establishment and the US Dollar reserve status — does not make sense for tiny El Salvador. For what? For simply making a political statement that Bitcoin is now legal tender and stir up a dangerous hornet´s nest? Who cares? Really, it does not make any practical difference for Salvadorans who want to use bitcoin whether it is legal tender or not. They use it anyways. Being legal tender is against all that Bitcoin stands for. It is against all its libertarian foundations, freedom, non-coercion, non-censorship, decentralization. Forcing the legal tender law equals (more less than more) making bitcoin a semi-fiat currency. All that the force of law achieves can be better achieved by building the right incentives to use bitcoin. After all that´s what Bitcoin teaches us right? So, if it does not practically benefit the Salvadorans, nor the relationship of El Salvador with the financial legacy establishment, who benefits then?
I cannot answer yet. But unless Bukele is playing a bigger game or he is picking up a proxy fight with the IMF with someone on his back, confronting the international financial establishment at this delicate junction for the country seems like a suicidal tactic. Since the summer, the Salvadoran bonds have sold off and the yield is sharply up.
Risks in playing with fire
Should the subscription of the Volcano bond not go as expected, it would be prudent to assume that El Salvador would sooner or later need again the support of the IMF and the World Bank to refinance the expiring bonds at a much higher interest rate. This would be very damaging for its economy. Also, in order to reduce the interest rate now demanded by the international bond markets Bukele will have to show international creditors that bitcoin adoption is improving its economics. This will take a long time simply because it takes time to implement all the steps that I mention below in order to really foster economic development by adopting a bitcoin standard. It cannot be done miraculously by simply enacting a legal tender law. In the meantime the financial markets will have squeezed all the air out of El Salvador´s lungs, unless — risky bet — Bukele plans to use the bitcoins that they buy now to breath some fresh air in case they will be worth much more within a reasonable timeframe. But betting on the price appreciation of a treasury asset is very different from fostering sustainable productivity growth. And it will not reassure international lenders. El Salvador is not Microstrategy. A sovereign nation cannot simply copy paste a corporate treasury playbook. It needs more, it needs sustainable long term policies for economic development.
So while the apparently suicidal stand-off with the IMF remains a mystery to me, there is a much better way to foster Bitcoin adoption without pissing off the world´s financial establishment in a geopolitical game which is far bigger than Bukele and El Salvador.
Easy, just do as the IMF says and remove the Legal Tender Law. And not because the IMF says that, but simply because it is not necessary for the adoption of Bitcoin, at least not for now.
A real strategy to sustainable development and Bitcoin adoption
More importantly, Bitcoin adoption as a reserve asset — upon which an economic system to foster sustainable growth and avoid the pitfalls of dollarization or eurization needs to be built— is much more complex than its simple use as a currency for remittances or paying bills. This is rather the last step of a long adoption cycle. First comes protecting the Salvadorans´ savings from imported inflation via the US$ hard currency which they do not control. Then comes building a Bitcoin based banking infrastructure, services and rails. Then comes attracting investors. Then creating bitcoin offshore services. Then, in the end, the seamless and frictionless use of bitcoin as a store of value and possibly as a currency will be the automatic consequence of all the above. At that point bitcoin would be substantially legal tender without any law to declare it. Slowly, slowly then suddenly. All this without pissing off the IMF and their cronies.
To the contrary, banks can largely profit from using bitcoin as a reserve digital asset for their banking services while also the US Dollar reserve status is not at stake since bitcoin does not circulate as a currency but as a reserve asset just like gold did until 1971. Let´s see in more detail which are the practical steps that El Salvador and any other developing economy should take:
A Whitepaper titled “ Regulatory policies to foster cryptocurrency/blockchain related innovation and investments in Emerging Economies” can be freely downloaded from www.bianconiandrea.com
This article is also about El Salvador´s legal tender law.
1. The first step is to adopt a minimally invasive regulatory framework to leave ample room for businesses to innovate with little restraint. In particular new technological applications — such as digitally tokenized assets (i.e. stablecoins and tokenized securities) — must be recognized within the local legal framework. Whether Bitcoin is legally considered a property, an asset or a unit of account is irrelevant. What is relevant is that its exchange with fiat currencies should not be taxed and be as frictionless as possible.
2. The second step would be to 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). Banks must be encouraged to plug and play into the Bitcoin protocol to build a new banking infrastructure. In this El Salvador could really be at the forefront of a new wave a free banking backed up by bitcoin. The reason is simple. By holding bitcoin as a reserve asset, commercial banks can start developing a new wave of free banking services both onshore and offshore which could dramatically transform El Salvador into the Switzerland of South America. Because bitcoin bank´s reserves are fully auditable at any moment (proof of reserve) a very dynamic and competitive system of banking services could emerge without the need of governmental controls, restrictions and minimum reserve ratio obligations which are rather needed in a non transparent non-auditable fiat system or even in a gold based standard. A reliable network of bitcoin banks is fundamental to attract crypto capitals. See “Bitcoin and the lost art of Commercial Banking”.
3. Custodial applications and services are needed. Local regulations must take that into account. Laws must distinguish between custodial and non-custodial services and applications. Money transmission laws must take this into account and must be updated if needs be. This is key to position the country as a hub of cryptocurrency activity.
4. Incentivize the establishment of crypto exchanges with an agile licensing process.
5. 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.
6. 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.
7. Incentivize 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.
8. Mobilize bitcoin investors to create a Bitcoin Adoption Playbook and a Task Force with qualified professionals to help onboard developing countries. Put resources together to invite neighbouring South American countries and other developing countries to see first hand what can be done by adopting the bitcoin standard as a country. Create a Bitcoin League of Free Developing Nations. The objective here is to extend bitcoin banking from national borders to international borders creating the basis for bitcoin based international trade. Again, bitcoin does not need to be the currency of trade but it can be the lubricant of a better international trading system. Think about how arbitrary sanctions in this politically controlled financial system affect the trade and the development of many nations.
If Bukele does that, there is no reason to make bitcoin legal tender in the country. Bitcoin will become the foundational ground of El Salvador´s economy and society. In addition, it may well back up the issuance by El Salvador of a new CBDC. Contrary to the global trend inspired by the Chinese Communist dictatorship — which has built the digital Yuan as an instrument of control, coercion and oppression — the Salvadoran CBDC could be inspired by libertarian principles and be built more akin to electronic cash. Ultimately bitcoin can peacefully coexist with gold and fiat currencies. Free market forces and good incentives shall determine its future and not the force of law.
All this to ask President Bukele to be very careful. To listen to reliable and prudent advisors (not certainly the impulsive twitter frenzy crowd which populates the bitcoin festivals) because true Bitcoin adoption needs careful planning. Most importantly we, bitcoiners, care very much about El Salvador´s people and wish this to be a real success which can bring economical development and wealth to its citizens. If President Bukele and El Salvador succeed in this project we will all succeed. If not, we will all lose.
© www.bianconiandrea.com — 2022
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© www.bianconiandrea.com — 2022