This episode is sponsored by NYDIG.
El Salvador made history on Tuesday, Sept. 7, when it became the first nation to make bitcoin legal tender. In this episode, NLW reviews the first day of bitcoin in El Salvador, including reports from the ground as well as the salty tears of anti-BTC libertarians. He also looks at new crypto legislation out of Panama. Finally, he covers a new bill to legalize and regulate bitcoin and crypto in Ukraine.
“The Breakdown” is written, produced by and features NLW, with editing by Rob Mitchell and additional production support by Eleanor Pahl. 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: andreydayen/RooM/Getty Images, modified by CoinDesk.
What’s going on guys? It is Thursday, September 9, and today we are talking about Ukraine legalizing bitcoin. Before we get into a little global tour of what’s going on with bitcoin around the world, however, a couple more follow-ups on Coinbase. The SEC, you got my take yesterday, which was largely about the frustration that the crypto industry has with how the SEC is approaching this. However, there were plenty of folks in traditional finance who came out of the woodwork to call Brian Armstrong and his counsel, effectively idiots and sometimes explicitly idiots, for not just getting that lending Is a security. What I think is worth restating or re-arguing about this is the pattern of engagement and the unwillingness of the SEC to commit to explanations of their reasoning. To put it clearly, the Twitter pundits were castigating Coinbase for not getting why lending is a security, are providing more argument, more justification around their logic, than is the SEC. Many of these pundits also seem to be suggesting that everything should be treated as a security until otherwise told, that will certainly seem fine from the standpoint of a securities regulator, who has a natural incentive to see more, not less of the world as falling under their jurisdiction.
But let’s be clear, there are plenty of others in government, particularly at the CFTC, who’ve been loud and clear about what they do and don’t think falls under the SEC’s jurisdiction. As I’ve articulated numerous times, it seems pretty clear to me that there’s a fairly significant turf war going on around crypto inside the Biden administration, with everyone from the SEC, to the Treasury, to the CFTC, to the OCC involved, to say nothing of Congress and the Senate. There are some alignments, i.e. the SEC Treasury axis for one, but it’s a turf war. Nonetheless, in that context, asking crypto companies to just assume everything is a security makes no sense.
Also, I think the idea that somehow we are being petulant because we’d like to have a dialogue with our regulators where they actually explain their thinking and give, even if it is a re-expression, a re-expression of how they see former precedence applying to a set of financial technologies invented nearly a century later, is just nuts. Or, rather than being nuts, it reflects just how much of the discourse around crypto is shaped by people who just don’t like us, full stop. I tend to hate that base layer analysis of “they’re just critiquing us because they don’t like us.” But man, oh man, to watch these Twitter debates makes it hard not to see a big part of the crypto-critical world as attention-seeking academics who pick fights for clout, and salty hedge fund managers who missed the bet of a lifetime. But, I still believe alternative takes and critiques are incredibly important. So, I will endeavor to not focus on the biggest nozzles who clearly have access to grind, but instead try to share the thoughts of folks who, whatever their biases and priors, bring real examination and interesting ideas to the situation.
So, with that in mind, let’s read an alternative take from Matt Levine. Matt is certainly no crypto head, but he is thoughtful and understands market structure incredibly well. He writes: “Look, I get it from the perspective of Coinbase and its customers and frankly, most normal people interested in crypto people would really like to lend their bitcoins. It doesn’t feel like a security. It’s kind of annoying and archaic. The 1946 Supreme Court case says that it is, but look at it from the SEC perspective. The SEC really doesn’t like crypto. The SEC is a regulatory agency that has a general tendency to want to do more regulating popular tokens like bitcoin and ether are not securities and so not subject to SEC regulation, which leaves the SEC feeling antsy for crypto. Lending programs are pretty clearly securities subject to SEC regulation. So, for the SEC to say ‘crypto lending programs as securities need to be regulated,’ serves the dual purpose of one, expanding SEC jurisdiction over crypto; and two, stopping these programs. Also, it’s pretty clearly justified by a 1946 Supreme Court case.”
None of that is at all satisfying, I suspect but it is true. Still, I feel like both sides are wrong here and there’s an obvious better analogy. I think this thing is not a stock, or a bond, or a note, or investment contract, or a personal IOU or syndicated loan. Obviously, this thing where you have an account at Coinbase, Coinbase lends your bitcoins to people that choose, you get interest from Coinbase as a bank account. This is what banks do. They hold your money for you, they use it to fund loans, they pay you interest, they promise to pay you back even if the loan defaults, the whole thing is seamless to you, etc. It’s just a bank account. Now, a bank account is not a security. But that is not because banks have found some clever loophole to avoid securities laws that Coinbase can copy. A bank account is not a security because the securities laws, ever since they were written in the 1930s, exempted bank accounts. And, the basic reason for that is that banks are subject to banking regulation, which is generally much stricter than securities regulation.
It must be tempting for Coinbase here to say, “look, this thing isn’t a security. This is just like a savings account at a bank. And that isn’t a security, is it?” Which is quite right. But, Coinbase obviously does not want to be regulated as a bank. It does not want to be subject to bank capital requirements or prudential regulation by bank regulators who like crypto about as much as the SEC does. In general, the thing that is happening now in the crypto world is that it is rapidly recreating the things that exist in the traditional finance world. Of course, it would be nice for crypto companies to recreate banking without bank regulation, but you can see why regulators wouldn’t like it. As Matt Levine shows, it’s totally possible to have alternate takes, different ways of framing and good critiques of the way that crypto is operating without resorting to name calling. We’ll see what happens next, but I wanted to give a little bit more on the conversation that had transpired after Brian Armstrong’s tweet thread yesterday.
For a main topic, today, we’re doing a global tour of bitcoin, who is embracing this disruptive digital gold, this proto-money system. Let’s start by doing a quick revisit to El Salvador. On Tuesday’s show, we discussed some of the controversy leading into El Salvador’s bitcoin day, the formal enactment of their Bitcoin legal tender law. Unsurprisingly, and continuing the themes that I was just exploring, the gladiatorial battle on Twitter continued throughout the day. Professor Steve Hanke, who has really really tried to use this crypto cycle to jump to the very top of the bitcoin antagonists list ‚just would not shut up about it. I mean, we are talking about 10, 12 separate tweets, many of which said the same thing over and over. Here’s a good example: “Contrary to President Bukele’s unfounded claims, El Salvadorans do not want bitcoin as legal tender, the only ones who applaud are criminals. They know that the Bitcoin law paves the way for rampant money laundering and corruption.”
This is one of those arguments where, as soon as you even dine to make it, I look around at myself, everyone that I know who’s working in this industry, all the people that I know who are connected to this industry, all the people who are in places like El Zonte who have proven over the last few years how bitcoin has relevance for community like El Salvador, and I mostly just stopped listening to what you have to say because you’re clearly not in it for an actual conversation. And yet he continues, he tweeted at least three times about bitcoin’s volatility: “Bitcoin plunged 19% to a 24-hour-low of $42,921 per bitcoin today. Bitcoin’s volatility is an obvious reminder that it can never be a reliable unit of account, and thus can never be used as a currency. BTC is nothing more than a highly speculative asset. Nayib Bukele’s Bitcoin law will doom El Salvador.” Nevermind his careful use of hash tagging on Bitcoin and BTC, gotta make sure everyone sees his angry tweets.
Professor Hanke also hated it when President Bukele bought the dip and made fun of the IMF all in one tweet, saying: “Buying the dip. 150 new coins added. It appears the discount is ending. Thanks for the dip, IMF. We saved a million in printed paper, El Salvador now holds 550 Bitcoin.” Now look, I’m not saying Hanke or anyone is wrong to have serious questions about everything going on in El Salvador. As a Bitcoiner, I am phenomenally interested in and optimistic about this experiment. It feels at once much bigger than El Salvador, but also offers something distinct for the people who are actually living their lives there. If you listen to my show on Tuesday, however, you know that you can feel all those things and still have major questions and critiques. Why it’s worth jabbing a bit at people like Hanke and the shifts of the world who also, by the way, hated that naive tweet, is that there is no one saltier about Bitcoin than these old-guard Cato Institute libertarians who didn’t get into bitcoin.
I don’t know. It was like the “sky is falling” bunker was all filled up or something, but either way, others are obviously telling a very different story. Peter McCormack shared photos from El Salvador, where he is right now, of the community in El Zonte lining up to access $50 in bitcoin from the Bitcoin Beach community to get them started. Of course, cynics responded saying that these people didn’t actually like bitcoin, and they were just poor and would take anything as though the past few years of adoption in El Zonte meant nothing, as if the poor weren’t capable of making rational financial decisions for themselves.
Either way, just as the response was mixed, so too was the tech rollout. There were some intermittent issues with the Chivo government wallet. But, all in all, frankly, given the speed with which this was rolled out, it seemed pretty straightforward and orderly. Just some ATM issues, some questions of Lightning interactions. But still, for day one, pretty impressive. Bart Mol, the host of the “Satoshi Radio Podcast,” was on the ground and shared videos of successfully using the Lightning network to pay at Pizza Hut, McDonald’s and Starbucks. If you’re interested in that, you should go check out his thread, he’s @bart_mol on Twitter and his thread was a really good way of capturing the energy and the mood in El Salvador on Bitcoin day.
So, to sum up here, none of the controversy was resolved. The partisans were still partisaning, but it felt like history. It really did. Edward Snowden tweeted today: “Bitcoin was formally recognized as legal tender in its first country. Beyond the headlines, there is now pressure on competing nations to acquire bitcoin, even if only as a reserve asset, as its design massively incentivizes early adoption. Late comers may regret hesitating.” Speaking of those competing nations, Panama introduced crypto legislation, Congressman Gabriel Silva wrote: “Today we propose the crypto law, we want Panama to become compatible with blockchain crypto assets on the internet. This has the potential to create jobs, attract investment and bring transparency.” He actually put out a great infographic on it as well that sums up a lot: “The law proposal on crypto and digital economy discusses three things: use of blockchain, legal certainty, digital government. Use of blockchain promotes the use of blockchain in public administration and makes processes more transparent and efficient. Legal certainty, it gives legal, regulatory and fiscal certainty to the use of crypto assets, the use of cryptocurrencies is optional. Digital government: it allows the government the option of accepting crypto assets to pay taxes, fees and others. What are we looking for out of this law? Citizen participation, any changes the authorities proposed for the regulations must be consulted with the citizens. Interoperability, it allows interoperability between crypto and future financial systems, promotes innovation, attracts and supports technology and financial innovation companies, broadens the options citizens have in regards of investments, savings and payments. Why crypto? Every day, more and more businesses in Panama and the world are innovating and allowing payments to be made using crypto assets. This proposal does not force businesses to accept Bitcoin or any other crypto assets. It provides legal certainty for its adequate and easy use. Benefits for citizens, one, new businesses will bring more job opportunities and more income sources; two, a whole new world of opportunities opens up for faster transactions without intermediaries; three, self-custody of assets and refuge against inflation for new services offered with help to lower current prices. Benefits for Panama, one, Panama should be a leading country implementing such technologies; two, allows everyone in the country without access to traditional banking to participate in a modern economy; three, it will reflect our long-established monetary freedom tradition; and four, certainty and transparency in a modern monetary system.”
So, pretty cool to see that articulated so cleanly for those people, for his constituents, who he’s trying to convince now. Obviously, you can see some big differences with El Salvador, there’s no obligation to accept Bitcoin, there’s more consideration of non-bitcoin cryptos, there’s no legal tender designation, and definitely ultimately, you see an economic competitiveness argument here. Interestingly, there’s a bit of a leapfrog thing happening as well where the bill seeks to not only give crypto assets their proper place, but to help digitize the state as a whole.
A local entrepreneur, Felipe Echandi, helped draft the bill and talk to CoinDesk about it. And here’s what they wrote: “In addition to the regulation of cryptocurrencies, the project also seeks to ‘expand the digitalization of the state’ through the use of distributed ledger technology by digitizing the identity of individuals and legal entities, according to a draft of the bill. The digitization process will allow Panama to be compatible with smart contracts and DAOs (decentralized autonomous organizations), the bill reads. ‘The country has all the potential to be a digital identity provider for the rest of the world as Estonia has done with its digital residency program,’ it adds. ‘The most futuristic vision is that Panama has to become a DAO,’ said Echandi, who added that the bill is an intermediate step toward that vision.” So, now we’ve got Bitcoin, El Salvador and a Panama DAO. Hmm. Obviously this bill has a lot farther to go. But, Congressman Silva did say that part of the reason it has taken a while for the legislation to come out is that they’ve been building bipartisan support from the country’s leading parties. As always, I choose to proceed with optimism.
And speaking of optimism for our final stop on this global tour of Bitcoin, here’s a hot little number that I heard about from Bitcoin Magazine last night, who were reporting on a report from the Kiev post. Up until yesterday, in Ukraine, cryptos were neither legal nor forbidden. There were no laws that defined them. That means that authorities had no real way to interact with them for good and ill. Yesterday, a draft law that will legalize and regulate crypto passed the Ukraine parliament and did so with flying colors, 276 to six. The law now heads to President Zelensky for signature. According to a press person for the Ministry of Digital Transformation, the goal is for Ukraine to open crypto markets up for businesses and investors.
To do that, however, their Parliament needed to pass a set of clarifying laws including around the tax code and civil code. This bill does a lot of educating, explaining what a wallet is, what a private key is. Now, one thing it doesn’t do, it does not allow virtual assets to be used as a means of paying for goods and services, that’s still restricted to Ukraine’s official currency. But people can now officially exchange and trade crypto. The bill also makes provision for crypto companies to set up shop in Ukraine, there’ll be a whole process, a $3,100 fee, there may be a new regulator created with a specific purpose to issue those permits. There is apparently some amount of mixed feeling in Ukraine among crypto businesses and entrepreneurs. Some think the integration in the mainstream system will stifle innovation. But those who are optimistic are hoping that this decreases the number of raids on crypto businesses from Ukraine Secret Services, the statute would now basically disallow Ukrainian law enforcement from unilaterally deciding virtual assets are all schemes and scams.
So, take all of these things together. And there’s a pretty clear pattern here. And it’s a game theory pattern that just makes a ton of sense. First of all, regulate in a way that is not hostile, but open. The game theory here is that everyone assumes that everywhere will eventually have a crypto regime, getting that crypto regime right will be economically beneficial because it will attract businesses and capital, and doing so in a way that still comes with compliance. I’m not sure why more, particularly in the U.S., don’t get this. There’s so much money to be made by working with the actors in the crypto space that want to fit within existing regulatory frameworks, or at least have new ones developed and applied transparently and equally. What I’m saying is that the right regulation, not just the absence of it, will be increasingly powerful as a force for attracting businesses to one shores.
For many of these countries, however, there is also another side of the game theory which has to do with ties and reliance on the U.S. economic system and the dollar at the center of it. It’s not so much that I think countries like El Salvador or Panama are particularly poorly served by the dollar system now, or even unhappy with it. It’s just that they recognize they’re in a position of limited power relative to the system as a whole and for them, bitcoin then looks like a hedge. Whatever the case, we have headlines about El Salvador, a sovereign state adopting bitcoin as legal tender, and its president talking about buying the dip. We have Panama and other Latin American countries introducing new legislation to do their own versions of crypto adoption. We have Ukraine making it formally legal and seeing how it might be an economic opportunity. These things would have been unbelievable just a few years ago, and so enjoy this moment of history we’re living through and try if you will, I will not let the salty Twitter folks get to you. Until tomorrow, guys, be safe. Take care of each other, peace!