Bitcoin El Salvador Option – Analysis – Eurasia Review
By Kristoffer Mousten Hansen *
Last Saturday, the President of El Salvador, Nayib Bukele, rocked the bitcoin world by announcing that he would make bitcoin legal tender in his country. The hype after that was incredible, as the hodlers went into overdrive. There have been smarter takes, from Caitlin long on Twitter and Peter St. Onge, but in general it felt like we were on the cusp of the whole new world of bitcoinization.
Good, we now have the concrete law in front of us and can see exactly what Salvadoran bitcoinization means. To use Horace’s words: Montes parturientes, nascetur ridiculus mus. The mountains work and give birth to a ridiculous mouse! Let us examine the law and its implications.
Legal tender – So what?
The front and the center correspond to the legal status of bitcoin. Not only taxes can be paid in bitcoin (Article 4 of Ley Bitcoin [Bitcoin law]), but every economic agent must accept bitcoin as a means of payment for goods and services (article 7), and all previous obligations expressed in US dollars can be paid in bitcoin (article 13). This is a massive violation of property rights and freedom of contract, and any principled libertarian or free market advocate should oppose it on these grounds alone. Is bitcoin really such a bad currency that it needs to be taxed at the tip of a government weapon?
However, the devil, as always, is in the details. The detail to consider here is the end of article 1: “What is mentioned in the previous paragraph [according legal tender to bitcoin] does not hinder the application of the law on monetary integration. For those unfamiliar with Salvadoran monetary regulations, the Monetary Integration Act is the law that gives legal tender status to the US dollar. So now (or three months from now, when the bitcoin law takes effect) the US dollar and bitcoin are legal tender in El Salvador. So what?
At this point, we need to familiarize ourselves with one of the oldest knowledge of economics: Gresham’s Law. As it is commonly said, this law says that “bad money drives out good.” Or more exactly: artificially overvalued money drives out artificially undervalued money. If the government fixes an exchange rate between two currencies – gold and silver, conventionally – and that exchange rate deviates from the market exchange rate, then people will accumulate the undervalued currency and will only use the overvalued currency in exchange. If the market exchange rate between silver and gold is 16: 1 but the official rate is 15: 1, then people will only spend money and accumulate or export gold.
The application to the case of two legal courts may not be obvious. After all, the law makes it clear that the market sets the exchange rate between the dollar and bitcoin. However, while there is no fixed exchange rate, you still have two currencies that are also usable for canceling bonds. This fiduciary equivalence means that their legal power, if only through state intervention, is the same. In this scenario, the lower quality currency will necessarily be preferred over the higher quality currency. If dollars are expected to depreciate and bitcoin to appreciate, would you rather spend your high-quality bitcoin or low-quality dollars? Most everyone will choose to spend dollars, and since this preference will be legally enforced, bitcoin will be kicked out of the market.
That the government of El Salvador adopted a provision to put in place “alternatives which allow the user to carry out transactions in bitcoin and to have automatic and instant convertibility of bitcoin into USD if desired” (Article 8) suggests that he is aware that the law’s bidding provisions will not guarantee the adoption of bitcoin. The legislation will also promote training in the use of bitcoin (section 12) and establish a trust to allow necessary conversions from bitcoin to US dollars (section 14). These provisions are clearly government subsidies for the use of bitcoin and are likely intended to encourage its adoption; in reality, we will see Salvadoran taxpayers forced to finance the use of bitcoin through the exploitation of these alternatives and the trust.
But isn’t our application of Gresham’s law being contradicted by the adoption of bitcoin in some of the poorest parts of El Salvador? In reality, on closer inspection, it is a simple private charity. Someone found an old USB stick containing a substantial amount of bitcoin and decided to use it to promote bitcoin in El Salvador. The residents of El Zonte received bitcoins on the condition that they did not exchange them for dollars but rather use them in daily trading. Under these conditions, most people would likely start spending bitcoin, and as long as the wealthy donor continues to pump money into the economy, they will continue to use it.
Or rather, they will continue to use existing intermediaries. As anyone familiar with bitcoin knows, the transaction fees are far too high to use it for everyday purchases. For years, the Lightning Network and other second layer solutions have been touted as the solution to this problem (the easiest solution would have been to just let the block size increase, but I digress). By setting up an intermediary, or a “side chain”, you can save on expensive blockchain transactions. And that’s actually what happened in El Salvador: the transactions seem to all be done through intermediaries, first Wallet of Satoshi and now mainly the Strike app, which moved to El Salvador in March. It’s actually a third-layer solution because it’s built on the Lightning Network. All bitcoin users are customers of the same middleman, although they are presumably free to withdraw their bitcoin from the app, but which poor Salvadoran has enough funds to pay the resulting fees? Too bad for peer-to-peer money!
Send and receive … dollars
Remittances from abroad have been touted as a second obvious use case for bitcoin in El Salvador. Remittances represent around 20% of Salvadoran GDP, and the cost of sending dollars is quite high: 6-10%. While this is quite expensive, bitcoin on its own wouldn’t be really competitive in the Salvadoran case, as transaction fees would easily be as high as Western Union fees. Again, the Strike app is the solution on offer, as it allows for a smooth integration of their bank account and bitcoin wallet. Since Salvadorans who receive remittances would thus accumulate bitcoin, this could be an additional boost towards wider adoption of bitcoin, as they could choose to spend it directly instead of converting it to dollars. Yet the provisions in current law for those who cannot or do not want to receive bitcoin payments make it likely that bitcoin balances will simply accumulate in the government’s bitcoin trust, as receivers. of bitcoins, whether they come from overseas or from those who insist on using it in day-to-day commerce, will exchange it for dollars through official channels. Thus, the fund becomes an additional subsidy from the government for the use of bitcoin, as its legally mandated acquisition of bitcoin must be funded in one way or another and in the absence of a central bank, taxation appears. the only way. Alternatively, we will see de facto Salvadorans forced to hire Strike’s services and keep their funds on deposit with that company. But why should we regard such monopoly privileges as something to celebrate?
In fact, we shouldn’t. If Strike becomes the primary vehicle for remittances and for spending bitcoin in El Salvador, it will not be because Salvadorians prefer its services to market competition. Its use will indeed be massively subsidized by the promised official trust. Good news for the people behind Strike, but not really something to celebrate for Salvadorans – or anyone else, for that matter.
President Bukele’s “new ideas”
Speaking of the celebration, President Bukele’s adoption of bitcoin caused it to become something of an icon overnight. Considering that most bitcoiners are supposed to be in favor of freedom and free markets, this is confusing. I am not talking here about his authoritarian tendencies and his alleged connections with the underworld. I don’t know anything about Salvadoran politics, and maybe it’s just as if nothing had happened there. In any case, it is not worse than the totalitarianism on display in Europe and the United States. However, when we look at the President’s policies so far, they can be summed up as follows: spend, spend, spend! Whether it is on new infrastructure projects, free computers for all children, or an increase in police salaries, the Salvadoran government is certainly happy to increase its budget and therefore its depredations on the private economy. These are not healthy free market policies, Austrian or otherwise; if there is a philosophy behind these policies, it is standard Keynesianism. The bitcoin law is simply a continuation of those policies: it gives the government access to additional funds for spending through the new bitcoin fund, and it’s a disguised gift to the President’s American friends behind Strike, who are expected to earn a lot. money with bitcoin. intermediation. That some so-called free traders have been duped by this is simply obscene. But again, a large contingent of bitcoiners seem to be interested in nothing but “numbers increasing”. And forcing Salvadoran taxpayers to finance a bitcoin fund will of course generate additional demand, so optimistic for bitcoin!
Hopefully El Salvador is on the path to a more prosperous future; its long-suffering people certainly deserve just as much. For that, new ideas are indeed necessary. But an oily Keynesian president with skillful American advisers? This is nothing new, not even when they put their plans in modern bitcoin parlance and put laser eyes on their Twitter accounts. If the president really wants monetary freedom for El Salvador, he shouldn’t have presented them with what, in fact, is a government document for bitcoin holders and the companies behind the Strike app and d ‘other potential intermediaries. Instead, he should have simply repealed the existing legal tender provisions and announced that people would be free to use whatever medium they prefer for their transactions. Of course, that wouldn’t have allowed him to set up a giant government program of forced bitcoinization, but it’s like that with real freedom and really sound monetary policies: there is no money to be made out of it. for politicians or their buddies.
* About the author: Kristoffer Mousten Hansen is a research assistant at the Institute for Economic Policy at the University of Leipzig and a doctoral candidate at the University of Angers. He is also a researcher at the Mises Institute.
Source: This article was published by the MISES Institute