Is Bukele good or bad for Bitcoin?

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.

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.

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.

Conclusion

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.

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