This episode is sponsored by NYDIG.
El Salvador’s bitcoin legal-tender law goes into effect today. NLW looks at the recent controversy surrounding the law, including:
- Institutional controversy – why the International Monetary Fund (IMF) and World Bank don’t like the law
- Bitcoiner skepticism – why some aren’t convinced the law should force merchants to accept BTC
- Authoritarian blues – why some are concerned with the Bukele government itself
See also: Bitcoin Is Economic Empowerment (This is the June 12th, Bitcoin Beach episode)
“The Breakdown” is written, produced by and features NLW, with editing by Michele Musso. Adam B. Levine is our executive producer and our theme music is “Countdown” by Neon Beach. The music you heard today behind our sponsor is “Tidal Wave” by BRASKO. Image credit: APHOTOGRAFIA/Getty Images News, modified by CoinDesk.
What’s going on guys, it is Tuesday, September 7, and that means it’s my birthday. But it also means it’s Bitcoin Day in El Salvador. My birthdays have always felt more like New Year’s, the New Year’s to me. Part of that has to do with so many years of school beginning at the exact same time. And when you’re a kid, you mark your age by your grade in school as much, if not more, than by your actual age. Part of it is that I just absolutely love fall. Either way, I find it’s a really good time to reflect on where things are, where they’ve been and where we’d like to see them go. So for giggles, before we dive into our main topic, I wanted to look back at the last couple years of shows to see what was happening around now. Way back in 2019, I hadn’t officially started “The Breakdown” yet. I was doing a pro-version of it, a live stream version called “The Crypto Daily Three at Three,” where it would basically do the “Brief” but live via Periscope and YouTube and Twitch.
The main topic of my birthday in 2019 was Libra versus China. The global digital money wars heat up: Libra had been announced that summer and China had kicked into high gear trying to get their digital Yuan efforts accelerated. Last year, my birthday actually fell on Labor Day itself. So, I did a reading of Nic Carter’s piece called “The Crypto Dollar Surge and the American Opportunity”. In it, Nic discussed many of the themes that we regularly come back to here around the continued growth of USD-denominated stablecoins and what it might look like for the U.S. to embrace, rather than to condemn, that emerging infrastructure. Interestingly, these string of September 7 stories lined up rather well with today’s stories about the way cryptocurrencies, digital assets and private monies are changing the nature of the state’s relationship with money as well, in that today’s banner story is even more significant.
Of course, today is Bitcoin Day in El Salvador. Today in a world first, Bitcoin has become the legal tender of an actual country. So, how did we get here? In June, El Salvador’s president Nayib Bukele appeared as a surprise guest during Bitcoin Miami. He was introduced by Jack Mallers of Strike. Mallers spent the previous few months down in El Salvador, specifically in El Zonte, at a project called Bitcoin Beach. Bitcoin Beach is a community project that, in many ways, paved the way for El Salvador’s Bitcoin law by showing how useful bitcoin actually was. Stores in El Zonte adopted bitcoin payments, youth got paid for jobs in bitcoin, people were able to save time by not having to take buses for hours to get remittance payments. And during COVID, contactless payments kept people safe and so on and so forth. Bitcoin Beach had initially been funded by an anonymous Bitcoin whale but quickly took on a life of its own. To hear more about that story, listen to my episode with Bitcoin Beach director Mike Peterson from June 12.
Anyway, back to Bitcoin Miami. Nayib Bukele, the president of El Salvador, appeared via video statement on the last day of the conference to announce that he was introducing a bill to make Bitcoin legal tender. That bill would pass just a few days later by supermajority in El Salvador’s legislature on June 9, and go into effect a few months later today, on September 7. Bitcoin would not be replacing the U.S. dollar, which had been the official currency since 2001, but would be given equal standing with the greenback. The response of the global Bitcoin community was just about what you’d expect, El Salvador was set to become the world’s first bitcoin nation. This would be an absolutely seminal moment in bitcoin’s history, a chance for bitcoin to live up to its promise as a tool for economic empowerment that so many of us have been so excited about for so long. And let’s be clear about something here. Despite all the controversy that I’m going to dig into next, this is one of the more significant days in bitcoin’s history. The adoption of bitcoin as an official currency by a sovereign is something that few would have believed two years ago, to say nothing of a decade ago at the beginning of bitcoin’s journey. Whatever happens next, this will be an incredibly important historical moment.
However, nothing this big happens without controversy. There have been a couple different big lines of controversy that I want to explore, and the first is perhaps the most expected, let’s call it institutional controversy. El Salvador, like any nation, is part of a collection of international institutions that make up the global order in the post Cold War world. It took just days after El Salvador’s Bitcoin bill passed to see how that traditional order, an order which should be noted exists largely to prop up the global U.S. dollar economic system, would respond. On June 17, the World Bank rejected a request from El Salvador to help with implementation around their Bitcoin law. A spokesperson told Reuters via email: “We are committed to helping El Salvador in numerous ways, including for currency, transparency and regulatory processes. While the government did protest for assistance on bitcoin, this is not something the World Bank can support given the environmental and transparency shortcomings.” So, this is self-evidently BS. The energy thing is an easy patsy in this situation, but it’s the addition of the transparency critique that makes this ring so hollow. Bitcoins on chain ledger is massively more transparent than a traditional fiat system. And given that it’s clearly them just saying, “Yeah, no thanks. We’re not touching this.”
At the same time, the IMF also said that it saw “macroeconomic financial and legal issues with the Bitcoin proposal.” In July, they went a little farther, publishing a blog post that, not specifically mentioning El Salvador, was pretty clearly aimed at them. “Crypto Assets as National Currency: A Step Too Far?” Here are their main critiques: “The most direct cost of widespread adoption of crypto assets such as bitcoin, is to macroeconomic stability. If goods and services were priced in both a real currency and a crypto asset, households and businesses would spend significant time and resources choosing which money to hold as opposed to engaging in productive activities. Similarly, government revenues would be exposed to exchange rate risk if taxes were quoted in advance and of crypto assets, while expenditures remain mostly in the local currency or vice versa. Also, monetary policy would lose if central banks cannot set interest rates on a foreign currency. Usually, when a country adopts a foreign currency as its own, it imports the credibility of the foreign monetary policy and hopes to bring its economy and interest rates in line with the foreign business cycle. Neither of these is possible in the case of widespread crypto asset adoption. As a result, domestic prices could become highly unstable. Even if all prices were quoted in, say, bitcoin. The prices of imported goods and services would still fluctuate massively following the whims of market valuations. Financial integrity could also suffer without robust anti- money laundering and combating the financing of terrorism measures. Crypto assets can be used to launder ill-gotten money, fund terrorism and evade taxes. This could pose risks to a country’s financial system, fiscal balance, and relationships with foreign countries and correspondent banks.”
And here we get to the IMF conclusion: “As national currency crypto assets, including bitcoin, come with substantial risks to macro financial stability, financial integrity, consumer protection and the environment. The advantages of their underlying technologies, including the potential for cheaper and more inclusive financial services, should not be overlooked. Governments, however, need to step up to providing these services and leverage new digital forms of money while preserving stability, efficiency, equality and environmental sustainability. Attempting to make crypto assets a national currency is an inadvisable shortcut.”
So, on top of that, institutional skepticism. International investors have also had some skepticism. In July, credit rating service Moody downgraded El Salvador in part because of the bitcoin bet. They said: “Having that risky exchange rate volatility is what was trying to be avoided when El Salvador adopted the dollar. This clearly has no precedent.” So, that’s the institutional critique. What about within Bitcoin? Is there unanimous consent that this is a good thing? The short answer is, mostly with one big sticking point and Nic Carter perfectly sums that up in a recent tweet, he writes, “I continue to consider Article 7 in the Bitcoin law unnecessary, and I urge the Salvadoran leadership to reconsider it. A Bitcoin standard imposed coercively will not be sustainably adopted, we can celebrate sovereign adoption of Bitcoin without embracing strong arm tactics to impose it.”
So, Article 7 that he’s referring to says every economic agent must accept Bitcoin as a payment when offered to him by whoever acquires a good or service. Nic Carter wrote earlier in the summer, what that means: “To the critics led by George Selgin, this amounts to a forced tender mandate that goes far beyond a mere legal tender law, which would declare a monetary, medium and acceptable but not obligatory medium of exchange, and moves into the domain of coercion. Now, I’ve gone over this in other podcasts before, but for those of you who aren’t familiar, there are some caveats in other articles in the law, Article 12 provides an exemption for those “who do not have access to the technologies that allow them to carry out transactions in bitcoin.” And Article 8 also says that the state will “provide alternatives that allow the user to carry out transactions in bitcoin and have automatic and instant convertibility from bitcoin to USD if they wish.” So, then the critique is that it’s coercive to force merchants to accept Bitcoin, the way that the state has tried to build caveats into that is saying that if they haven’t provided them with the technology to do so, obviously, they can’t compel them. And then if they don’t want to hold Bitcoin, it can be instantly convertible to cash. On that ladder point, the government is starting with a $150 million fund to instantly convert any Bitcoin that merchants are compelled to receive to dollars before they actually receive them. In other words, merchants are going to have to use a bitcoin wallet to accept bitcoin so that they have the option to convert it to dollars instantaneously.
I’ve reflected on this for a while. And I think that the issue has to do with optics and perceptions as much as reality. Simply put, it’s a bad look for any government. But this government in particular, to be aggressively imposing something, especially something decided so quickly and implemented so quickly. Which gets to the third area of controversy, and I think this one stands above all else. That is the Bukele government itself, Nayib Bukele, is a challenging figure. On the one hand, he is an immensely successful and popular politician. He swept up power by doing an end run around the traditional media establishment, and on the promise of offering his country something very different than they’d experienced for the past two decades. On the flip side, he’s also shown some worrying authoritarian tendencies. The most notable of these was the so called “9 F” incident, when in February of 2020, in order to compel legislators to approve his plans for a $109 million loan from the U.S. to enable his new security plan, he brought 40 armed soldiers into the Legislative Assembly in an act that some say was about intimidation.
Over the past few months, there have been a number of demonstrations against the Bitcoin law and what seems sort of clear, at least from afar, and to the greatest extent that I can tell, which is obviously limited, is that there are more protests against Bukele. And the way that law was rammed through and really just the way the government is doing things in general than they are about bitcoin. Here’s some additional thoughts from Mike Peterson at Bitcoin Beach: “How to make sense of the anti-bitcoin views in El Salvador in historical and political context? What are valid concerns and what are not? First it is important to realize that bitcoin in El Salvador has become more political than COVID in the U.S. If you don’t like Nayib Bukele, you now think bitcoin is dangerous and bad for the country. If Nayib Bukele had made bitcoin illegal, they would have been protesting against that. The vast majority have not taken a moment to even attempt to understand bitcoin isn’t the issue. That said, there are also many Nayib Bukele supporters that are also against the law. There are deep historical scars from the abrupt dollarization in 2001 that many Salvadorans feel hurt the poor and benefited the wealthy. They felt the government lied to them. Now, the government is telling them they will be free to keep using dollars, but they are afraid that this will not be true, and that the government will filter the dollars out and they will be forced to use only bitcoin. Obviously, introducing bitcoin as legal tender is very different from what happened in 2001, but to the majority of the older people, it seems like deja vu. We understand it would be impractical at this point in time to solely use bitcoin and there’s no incentive for the government. There are concerns because bitcoin is such a more efficient way to transfer money it will be used in scams and pyramid schemes. This will definitely be widespread and people who don’t understand how Bitcoin works will be more susceptible. They see lots of similarities in the way the Bitcoin law was rolled out overnight. When the country was dollarized, the people were told they could continue to use the Salvadoran colón. In reality, over a short period, the colón was taken out of circulation and ceased to be used. For those that don’t understand bitcoin, they don’t understand that this time it will actually be different. I think that is very understandable. Those who want Nayib Bukele to be hurt by passing the Bitcoin law or fanning these worries, even though they realize that there isn’t real danger.”
So, that’s a perspective from on the ground, although not from an El Salvadoran, from someone who kind of sits in the in between. I said a few months ago that the main thing with Bukele was that simply put, I was concerned with some of the signs that were showing, but he wasn’t an autocrat yet. And frankly, if that was his intention, he made a strange choice and chose an uncontrollable money if that’s the direction he wanted to go. But I also said that all would really matter is what we saw over the months to come. Some that haven’t been great. Last week, Mario Gómez, an outspoken critic of the Bitcoin law, was briefly detained without a warrant and had a cell phone seized by police. “There is a deterioration in the freedom of the press and freedom of expression,” said Otto Flores, a lawyer representing Mr. Gomez, it’s worrying you can’t deny it.
What’s more, Alex Gladstein points to this thread from the executive director of the Americas Division of Human Rights Watch. He tweets: “Bukele dismantles democratic institutions like Chavez, but at a much more alarming rate. Thread: Chavez managed to control the Supreme Court of Justice in 2004 or five years after assuming the presidency. Bukele managed to control the Supreme Court in 2021, two years after assuming the presidency. Chavez managed to bypass the limits of presidential reelection in 2009, 10 years after assuming presidency. Bukele and 2021, two years after assuming presidency. Chavez succeeded in removing hundreds of judges from lower courts in 2006, seven years after assuming the presidency. Bukele in 2021, two years after assuming the presidency. What’s next if we are guided by the history of Venezuela? Censorship of the press, restrictions on civil society, total impunity for human rights violations, arrest of opponents electoral fraud? Is the international community going to wait and see if Bukele follows this trend? "
Now as with anything, there is much, much more context. The argument that the Bukele administration has made about some of these removals of judges is that they were corrupt and certainly the last 20 years of El Salvadoran politics aren’t a paragon. But, as we’ve seen over and over and over, process matters. I think we need to be careful about uncritical cheerleading, even if we give someone who seems like a new ally, the benefit of the doubt and time to prove it. And let’s not forget that rightly or wrongly, this government now represents us and Bitcoin on a world stage as well, if they act badly, if they use bitcoin as a new financial means to cement undemocratic authority, that will have broad, broad ramifications. This is not to say that we have to assume that this will be everything comes down to the actual implementation, and there are some positive signs as well. The El Salvador government, for example, just clarified that merchants won’t have to use the Chivo wallet specifically issued by them, just that that particular wallet would be subsidized so that merchants wouldn’t have to pay fees.
Look, at the end of the day, this is a massive, disruptive change. It’s one that could be good in the long-term, good in the medium-term, but painful in the short-term. What sort of forbearance to support compassion education will the Bukele government really put behind that transition? I remain hopeful. I think the response of the global financial order is completely to be expected. I think critiques and questions locally asked are reasonable. And I hope that the government realizes that by virtue of the fact that it has passed this law, it can now afford to actually engage with criticism without fear of losing what it seeks. I believe, of course, as you know, if you’re a regular listener here, that Bitcoin can be a powerful force for the people who adopt it. Like I said, at the beginning, no matter what, it’s a historical moment. Happy September 7. Happy Bitcoin Day, until tomorrow, be safe and take care of each other. Peace!