[WSMDiscuss] Can Bitcoin become a real currency ? (John Hawkins) / The future of bitcoin is a bit of a toss-up (Ian McGugan)

[Jai Sen]

Tuesday, June 15, 2021

El Salvador in movement…, Ideas in movement…, People in movement…, History in movement…, Economies in movement…, The world in movement… ?

While any cryptocurrency can well facilitate more efficient transfers (without the charges banks impose), the significance of remittances to the Salvadoran economy points to another issue. El Salvador is a poor country, with one of the lowest rates of internet use in the Americas – 33% in 2017, according to World Bank data <https://data.worldbank.org/indicator/IT.NET.USER.ZS?locations=SV>.

How many vendors, street hawkers or farmers are equipped to handle cryptocurrency transactions? US dollars will more than likely remain the default currency.

The benefits of making Bitcoin legal tender are far from clear. El Salvador is already facing higher interest rates as international investors are worried about the move <https://www.reuters.com/technology/el-salvador-presidents-bitcoin-push-casts-shadow-over-imf-efforts-2021-06-07/>. There are concerns wider use of Bitcoin will facilitate the black economy and make tax avoidance easier.

So this is a great experiment <https://theconversation.com/bitcoin-el-salvadors-grand-experiment-162382>. For the sake of El Salvador’s people, let’s hope it is successful. But the odds are on it being further evidence of the cryptocurrency’s unsuitability for use as a real currency – confirmation that Bitcoin is nothing more than a speculative gamble.

…..

El Salvador declares bitcoin to be legal tender. Half a world away, China arrests more than 1,000 people for using the profits from crime to buy cryptocurrencies. Meanwhile, the Basel Committee, an international forum for financial regulation, suggests draconian new regulations aimed at discouraging banks from speculating in digital tokens.

It has been a busy week for cryptocurrencies. Consider it a taste of more tumult to come.

[It is, without doubt, absolutely great to see the intense and sustained exchange that is taking place on WSMDiscuss and on RED (the Radical Ecological Democracy list) on the thread with the subject line ‘El Salvador looks to become first country in the world to adopt bitcoin as legal tender’.  (For anyone on other lists who wants to see and read this exchange, check out https://lists.openspaceforum.net/pipermail/wsm-discuss/ <https://lists.openspaceforum.net/pipermail/wsm-discuss/>.)  Thanks to all those who are taking part in that, and perhaps especially Sajai Jose, but also others – Frank Kashner, Tom Abeles, and others.  And I, both as a list member and as ‘list facilitator’ for WSMDiscuss therefore – of course - have absolutely no wish at all to take anyone’s attention away from the quality of that exchange and from the issues being discussed there.  

[This said, I think that precisely because of the high level of that exchange, we also need space for exchange at another level – about the more immediate material, and also social, economic, and political, meanings of El Salvador’s (more to the point, it’s current leader’s) pronouncement on and for “the “70% of El Salvador’s population does not have a bank account and works in the informal economy” that I have signalled before; about how El Salvador’s announcement – now approved by its legislature - is being seen elsewhere in the world, and the impacts it’s having, more widely; and at another level too, just to bring the discussion to a more everyday level, for others on the list.  I’m therefore here posting two more ‘journalistic’ articles on the subject that I think may also be of interest to some, and perhaps even many.

[In doing so, I’m very conscious of the risk that my doing this post on a new thread might - might - just also draw some attention away from the other thread (and so reduce the intensity of that exchange).  Let me therefore say clearly that I of course have no wish at all to do this, and so would like to encourage all those in that exchange – Sajai, Frank, Tom, and others – to please continue that exchange; but also to consider coming in here.  (And indeed, and as happens in music, and in case there’s reaction also to this post, the two threads may well interact and produce a music of their own !)

[With thanks to Fayyaz Baqir for the first article :

Can Bitcoin become a real currency ?

Here’s what’s wrong with El Salvador’s crypto plan

John Hawkins <https://theconversation.com/profiles/john-hawkins-746285>
https://theconversation.com/can-bitcoin-become-a-real-currency-heres-whats-wrong-with-el-salvadors-crypto-plan-162348?utm_medium=email&utm_campaign=Latest%20from%20The%20Conversation%20for%20June%2014%202021%20-%201973219356&utm_content=Latest%20from%20The%20Conversation%20for%20June%2014%202021%20-%201973219356+CID_a74b57ce48b70c4f55e4f47947a3c049&utm_source=campaign_monitor&utm_term=Can%20Bitcoin%20become%20a%20real%20currency%20Heres%20whats%20wrong%20with%20El%20Salvadors%20crypto%20plan <https://theconversation.com/can-bitcoin-become-a-real-currency-heres-whats-wrong-with-el-salvadors-crypto-plan-162348?utm_medium=email&utm_campaign=Latest%20from%20The%20Conversation%20for%20June%2014%202021%20-%201973219356&utm_content=Latest%20from%20The%20Conversation%20for%20June%2014%202021%20-%201973219356+CID_a74b57ce48b70c4f55e4f47947a3c049&utm_source=campaign_monitor&utm_term=Can%20Bitcoin%20become%20a%20real%20currency%20Heres%20whats%20wrong%20with%20El%20Salvadors%20crypto%20plan>
 

John Hawkins is Senior Lecturer, Canberra School of Politics, Economics and Society and NATSEM, University of Canberra.  Full disclosure : John Hawkins formerly worked for the Bank for International Settlements and two central banks.



Nayib Bukele, president of El Salvador, has got himself a pair of laser eyes – on his Twitter profile at least.

Laser eyes are something social media users give themselves to show they love cryptocurrency – and Bukele proved his crypto-enthusiasm last week by having El Salvador become the world’s first nation to make Bitcoin legal tender.


Nayib Bukele’s Twitter profile image. Twitter <https://twitter.com/nayibbukele>
El Salvador’s parliament passed Bukele’s proposed legislation on June 9, after he announced his plan just a few days earlier. The law will take effect in September.

Some Bitcoin fans have leapt on this as a step towards much broader acceptance <https://www.cnbc.com/2021/06/08/bitcoin-2021-el-salvador-adoption-could-be-huge-for-cryptocurrency.html>. But the changes in Bitcoin’s market value since Bukele announced his plan gives crypto-sceptics reason for doubt. 

Over the past week Bitcoin’s value was as high as US$38,200 (about A$49,000) and as low as US$31,428. Over the past month it has fallen from more than US$58,000. This isn’t the type of price volatility any government generally wants to see in a currency.

Such fluctations show Bitcoin’s weakness as a viable alternative to central bank currencies – good only for transactions you don’t want traced and as a speculative investment.

So what is Bukele thinking in wanting to make Bitcoin legal tender for the small central American nation (population about 6.5 million) whose economy accounts for less than 0.05% of global GDP?

Read more: El Salvador's façade of democracy crumbles as president purges his political opponents <https://theconversation.com/el-salvadors-facade-of-democracy-crumbles-as-president-purges-his-political-opponents-161781>
What does ‘legal tender’ mean?

Before we get to that, let’s clarify what making Bitcoin legal tender means.

Using Bitcoin is already legal in El Salvador, as it is in most countries. If you want to pay for something in bitcoins, and the recipient is willing to accept them, it’s all good.

Making bitcoins legal tender mean a payee will have to accept them. As the new legislation states <https://twitter.com/nayibbukele/status/1402446890466217985/photo/2>, “every economic agent must accept Bitcoin as payment when offered to him by whoever acquires a good or service”.



El Salvador’s Legislative Assembly votes to pass the Bitcoin Law. Miguel Lemus/EPA

 El Salvador making this move isn’t as significant as it would be for most nations, because it is one of about a dozen countries – most of them micro-states such as Andorra and Nauru – without its own currency <https://www.bis.org/publ/bppdf/bispap17c.pdf> (or a common currency such as the Euro).

El Salvador abandoned its own currency (the “colon”, named after Christopher Columbus) in 2001 and adopted the US dollar as its legal tender. This process of “official dollarisation” was seen as a reform that would curb inflation <https://www.latimes.com/archives/la-xpm-2007-aug-04-fi-dollarize4-story.html> and increase trade with the US (by far its major trading partner).

So El Salvador has less to lose than other nations in adopting a second currency as legal tender. There is no controversy about losing sovereignty and monetary policy autonomy. There will be no loss of “seignorage” – the profit made on issuing currency that’s worth a lot more than the cost of making it.

Highly volatile

But having two legal tenders will complicate matters – particularly when one of those currencies is subject to wild swings in its value.

Consider the provision in the new law that “all obligations in money expressed in USD, existing before the effective date of this law, may be paid in bitcoin”.

Even that is complicated. How, and by whom, will the amount of bitcoins necessary to pay a debt be determined? Will it be based on the Bitcoin price at the time the debt was incurred, or when the debt falls due?

The difference of even a few days could be significant.

If the expectation is the price of Bitcoin is going to rise, why would you want to buy things with it? Why not wait? If the expectation is the price is going to fall, why would you want to accept it? For most transactions, using US dollars will still make the most sense.

So making Bitcoin legal tender could help destabilise El Salvador’s economy.

Read more: Bitcoin: this year I stand to make $200 million more than Elon Musk <https://theconversation.com/bitcoin-this-year-i-stand-to-make-200-million-more-than-elon-musk-155469>
Increasing El Salvador’s GDP

Things would have been simpler if El Salvador had adopted a “stablecoin” whose price is fixed at one US dollar – such as Tether, the third-largest cryptocurrency.

But that would have not been nearly so newsworthy, and would have defeated the apparent reason Bukele has championed this move.

Bukele’s reasoning, delivered via Twitter on June 6, is that Bitcoin has “a market cap of US$680 billion” and:

If 1% of it is invested in El Salvador, that would increase our GDP by 25%.

This argument – which appears to be the only “analysis” Bukele has made public – seems very confused.


Bukele explains his Bitcoin plan on Twitter. Twitter
Market capitalisation typically refers to a listed company’s valuation, based on multiplying the share price by the number of shares. The $US680 billion Bitcoin market cap Bukele referred to represents the currency’s market value multiplied by the number of bitcoins created so far. (For comparison, the market cap of Tether’s 63 billion coins in circulation is US$63 billion.)

But it is flawed logic to think Bitcoin’s total market value equals money bitcoin owners around the globe are looking to invest anywhere.

In very few cases do people buy bitcoins to invest in other things. Bitcoins are their investment. Neither major funds nor average punters holding bitcoins are likely to want to start investing in El Salvador.

Nor is foreign investment a component of GDP (which is the value of market transactions in an economy). Foreigners using bitcoins to buy assets such as land in El Salvador would bid up its price but not necessarily increase GDP. A surge in foreign investment into new infrastructure and businesess that increase productive capacity would contribute to GDP, but there’s no reason to think giving Bitcoin legal tender status will make this more likely



A street market in San Salvador, the capital of El Salvador. It’s questionable that buyers and sellers of most goods and services will want to use Bitcoin. Miguel Lemus/EPA

 

Facilitating remittances

A second reason given by Bukele is that Bitcoin “will have 10 million potential new users” and is “the fastest growing way to transfer 6 billion dollars a year in remittances”.

This apparently refers to both the population of El Salvador (about 6.5 million) and Salvadorans living abroad, many of whom send money home to help their families. In 2020 these remittances totalled US$5.9 billion, or 23% of El Salvador’s GDP <https://apnews.com/article/san-salvador-coronavirus-pandemic-el-salvador-1623416c0ddc7aa238911f8a422b6c8b>.

While any cryptocurrency can well facilitate more efficient transfers (without the charges banks impose), the significance of remittances to the Salvadoran economy points to another issue. El Salvador is a poor country, with one of the lowest rates of internet use in the Americas – 33% in 2017, according to World Bank data <https://data.worldbank.org/indicator/IT.NET.USER.ZS?locations=SV>.

How many vendors, street hawkers or farmers are equipped to handle cryptocurrency transactions? US dollars will more than likely remain the default currency.

The benefits of making Bitcoin legal tender are far from clear. El Salvador is already facing higher interest rates as international investors are worried about the move <https://www.reuters.com/technology/el-salvador-presidents-bitcoin-push-casts-shadow-over-imf-efforts-2021-06-07/>. There are concerns wider use of Bitcoin will facilitate the black economy and make tax avoidance easier.

So this is a great experiment <https://theconversation.com/bitcoin-el-salvadors-grand-experiment-162382>.

Read more: Bitcoin: El Salvador's grand experiment <https://theconversation.com/bitcoin-el-salvadors-grand-experiment-162382>
For the sake of El Salvador’s people, let’s hope it is successful. But the odds are on it being further evidence of the cryptocurrency’s unsuitability for use as a real currency – confirmation that Bitcoin is nothing more than a speculative gamble.



The future of bitcoin is a bit of a toss-up

As the battle over bitcoin heats up, all eyes are on El Salvador

Ian McGugan <https://www.theglobeandmail.com/authors/ian-mcgugan/>
https://www.theglobeandmail.com/investing/markets/inside-the-market/article-as-the-battle-over-bitcoin-heats-up-all-eyes-are-on-el-salvador/ <https://www.theglobeandmail.com/investing/markets/inside-the-market/article-as-the-battle-over-bitcoin-heats-up-all-eyes-are-on-el-salvador/>
June 12 2021



Roberto Carlos Silva, owner of La Zontena store, poses at his business where he accepts Bitcoins at El Zonte Beach in Chiltiupan, El Salvador. (Jose Cabezas/Reuters)


El Salvador declares bitcoin to be legal tender. Half a world away, China arrests more than 1,000 people for using the profits from crime to buy cryptocurrencies. Meanwhile, the Basel Committee, an international forum for financial regulation, suggests draconian new regulations aimed at discouraging banks from speculating in digital tokens.

It has been a busy week for cryptocurrencies. Consider it a taste of more tumult to come.

On the one hand, the regulatory backlash against crypto is gathering force in much of the world. On the other hand, El Salvador’s announcement <https://www.theglobeandmail.com/investing/investment-ideas/article-in-a-world-first-el-salvador-makes-bitcoin-legal-tender/> demonstrates the continuing appeal of digital assets for people who are looking for ways around the global financial order.

Who is winning in this showdown? For now, no one. While both crypto boosters and crypto skeptics have been declaring victory, it is far from clear who is actually pulling ahead. In an odd twist, what many people perceive to be good news for digital currencies may turn out to be bad news, and vice versa.

Take El Salvador’s sudden embrace of bitcoin on Tuesday, which was widely hailed as an enormous boost for crypto. “My guess is that the announcement will have no impact at all,” said Stephen Williamson, a professor of economics and central banking at the University of Western Ontario. He suggests the country’s decision to make bitcoin legal tender will wind up spotlighting the innate weaknesses of the digital tokens – notably that they are a “high cost, highly volatile” asset.

In contrast, the Basel Committee’s suggestions for stiff new rules may turn out to be a mild positive for crypto. In a report on Thursday, the committee urged that banks be required to hold capital equal to whatever exposure they have to crypto assets.

“The Basel Committee has decided that because cryptocurrencies have no intrinsic value and are highly volatile, the risk of total loss is considerable, and banks must therefore have sufficient equity to ensure that a total loss would be borne only by shareholders,” and not by depositors or senior creditors, tweeted Frances Coppola, a British banking commentator.

This should effectively discourage banks from holding cryptocurrencies on their own account. But, noted Ms. Coppola, the proposals still leave the door open to banks acting as custodians for other people’s crypto holdings or trading in crypto assets on clients’ behalf. And the tough new rules do not apply to regulated stablecoins, which are digital tokens that have values tied to fiat currencies.

All of this may actually encourage crypto usage. “Preventing banks speculating on crypto makes crypto safer for everyone else,” Ms. Coppola said.

For now, the practical impact of this week’s announcements is to focus attention on El Salvador, the first country to make bitcoin legal tender.

“It is an experiment the rest of the world should find interesting because it will allow us to see to what degree bitcoin will be adopted as a medium of exchange and not just as a speculative asset when there are no legal impediments to its use,” said George Selgin, director of the Center for Monetary and Financial Alternatives at the Cato Institute, a Washington think tank with a libertarian bent.

He has reservations about the experiment, notably the way it is designed to coerce use of bitcoin. Among other provisions in El Salvador’s new English-language bitcoin rules is a requirement that anyone selling goods or services must accept bitcoin unless by “evident and notorious fact” they do not have access to the necessary technology.

This goes much further than most countries’ legal tender laws. In Canada and the U.S. for example, laws require that people accept domestic bills and coins for settlement of debts, but impose no requirements that they accept cash for transactions. Businesses are free to set the conditions under which they will sell their products because no debt has yet been incurred. A fast-food restaurant, for instance, can decline to accept $100 bills or larger denominations.

El Salvador’s far more intrusive law does not seem to jibe with bitcoiners’ professed desire for freedom, Mr. Selgin said. Neither does the country’s plan to set up a national network for allowing merchants to transact in bitcoin and then instantly convert their crypto into U.S. dollars. If the plan succeeds, much of the country’s bitcoin transactions are likely to flow through a government-run counterparty.

“So all the pseudonymity, all the decentralization features that are much lauded by bitcoin purists may wind up being sacrificed in the name of making it easier for people to take up bitcoin,” Mr. Selgin said.

On a practical level, it is not clear what incentive people would have to use bitcoin, he added. True believers who think the price of bitcoin is going to the moon won’t want to part with it. Those who are more skeptical about its future have little reason to acquire it.

So why is El Salvador pushing bitcoin with such ferocity? Mr. Selgin speculates that politics may be a factor. El Salvador effectively adopted the U.S. dollar as its currency 20 years ago. As tensions have grown between Washington and Nayib Bukele, El Salvador’s authoritarian President, so has the possibility that the U.S. could find ways of using the country’s dependence on greenbacks to impose sanctions. Bitcoin could provide the country with a backup option.

A more mundane explanation for El Salvador’s turn to crypto is that Mr. Bukele is simply attempting to attract bitcoin investors and bitcoin miners to his country. In recent days, he has touted the idea of using geothermal energy from El Salvador’s volcanoes to power bitcoin mining operations.

It is a notion that faces some practical obstacles. Most bitcoin mining takes place in cold climates because of the tremendous amounts of heat generated by mining computers, said Prof. Williamson, the economist at Western. El Salvador, of course, is anything but chilly. “They better be counting on a lot of air conditioning,” he said.


____________________________

Jai Sen

Independent researcher, editor; Senior Fellow at the School of International Development and Globalisation Studies at the University of Ottawa

jai.sen at cacim.net <mailto:jai.sen at cacim.net> &  <mailto:jsen at uottawa.ca>jsen at uottawa.ca <mailto:jsen at uottawa.ca>
Now based in Ottawa, Canada, on unsurrendered Anishinaabe territory (+1-613-282 2900) and in New Delhi, India (+91-98189 11325)

Check out something new – including for copies of the first two books below, at a discount, and much more : The Movements of Movements <https://movementsofmovements.net/>
Jai Sen, ed, 2017 – The Movements of Movements, Part 1 : What Makes Us Move ?.  New Delhi : OpenWord and Oakland, CA : PM Press.  Ebook and hard copy available at PM Press <http://www.pmpress.org/>; hard copy only also at The Movements of Movements <https://movementsofmovements.net/>
Jai Sen, ed, 2018a – The Movements of Movements, Part 2 : Rethinking Our Dance.  Ebook and hard copy available at PM Press <http://www.pmpress.org/>; hard copy only also at The Movements of Movements <https://movementsofmovements.net/>
Jai Sen, ed, 2018b – The Movements of Movements, Part 1 : What Makes Us Move ?  (Indian edition). New Delhi : AuthorsUpfront, in collaboration with OpenWord and PM Press.  Hard copy available at MOM1AmazonIN <https://www.amazon.in/dp/9387280101/ref=sr_1_2?ie=UTF8&qid=1522884070&sr=8-2&keywords=movements+of+movements+jai+sen>, MOM1Flipkart <https://www.flipkart.com/the-movements-of-movements/p/itmf3zg7h79ecpgj?pid=9789387280106&lid=LSTBOK9789387280106NBA1CH&marketplace=FLIPKART&srno=s_1_1&otracker=search&fm=SEARCH&iid=ff35b702-e6a8-4423-b014-16c84f6f0092.9789387280106.SEARCH&ppt=Search%20Page>, and MOM1AUpFront <http://www.authorsupfront.com/movements.htm>
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