El Salvador President Nayib Bukele’s proposal to make bitcoin legal tender in his country has been met with understandable head-scratching and skepticism among observers in the developed world.
Speaking to BBC News, Willamette University College of Law professor Rohan Grey said a country that made such a move would cede “its degree of autonomy and control over its own policy space to a network that isn’t stable, doesn’t have accountable actors and doesn’t have a track record of providing the kinds of price stability and liquidity stability that a currency is supposed to provide.”
But to understand why this move might not be as crazy as it sounds to those of us privileged enough to live in countries that have enjoyed such relative stability, let’s zoom out the lens a bit.
Countries like El Salvador have struggled with trust in their local monetary systems. El Salvador in particular, and not uniquely, has two official forms of money in its local system already – locally issued colons and U.S. dollars. On paper, both are good for all debts, public and private, but in practice, one local bitcoiner told CoinDesk, Salvadorans use dollars for commerce and colons as “table ornaments.”
The reason some countries outside the U.S. adopt its currency, or “dollarize” their economies, is that the greenback is seen as more stable and trustworthy. It is, after all, the global reserve currency and makes up much of the savings of central banks, companies and to a lesser extent individuals around the world.
This is true even though the U.S. itself still has inflationary monetary policy in the best of times and since the 2008 global financial crisis has been pursuing a very experimental form of monetary policy involving tools like quantitative easing and a central bank that now directly monetizes, or purchases, government-issued debt to keep interest rates low.
These decisions about how the U.S. dollar is managed may end well, or they may end poorly. We don’t yet know.
But for countries like El Salvador that look to the dollar as a more predictable currency than the one they issue locally – which is more likely to retain its value than the one they issue locally – Washington’s ongoing experiment presents a problem.
These countries look to the dollar for relative stability and predictable monetary policy, but increasingly they see an experimental currency that is completely outside their control and not being managed for their benefit.
Which brings us to bitcoin.
For a country like El Salvador, bitcoin’s fixed, long-term monetary policy, which cannot be changed except by a real majority of network participants, may offer an appealing alternative to the almighty dollar.
Announcing Bukele’s plan at the Bitcoin 2021 conference in Miami over the weekend, bitcoin entrepreneur Jack Mallers described the move as a reaction to “unprecedented monetary expansion.”
Mallers, whose startup, Zap, is working with Bukele’s government, criticized the U.S Federal Reserve for “crushing emerging markets,” such as El Salvador, by printing money willy-nilly.
According to what appeared to be an excerpt from Bukele's proposed legislation, included in a slide from Mallers’ Miami presentation, "Central banks are increasingly taking actions that may cause harm to the economic stability of El Salvador."
"In order to mitigate the negative impact from central banks, it becomes necessary to authorize the circulation of a digital currency with a supply that cannot be controlled by any central bank and is only altered in accord with objective and calculable criteria,” the excerpt said.
Unlike the dollar, the supply of bitcoin today, next month and 100 years from now can be accurately modeled in advance. A fixed amount of new bitcoins are created every 10 minutes. Every four years, the number of bitcoins created are cut in half. There will never be more than 21 million bitcoin and that eventual number will be reached more than 100 years from today.
That we know all of this today is significant and stands in stark contrast to any government-issued currency, including the dollar.
The problem is not who is in control, the problem is that anyone can be in control.
In the U.S. and in most countries, it’s a small group of well-credentialed individuals doing their best to manage their currency for the benefit of their country. Twenty years ago, Bukele’s predecessors in El Salvador decided they didn’t trust themselves with such a task and made the dollar legal tender alongside the colon.
When you "dollarize" your economy like this, you are effectively saying, "Our monetary policy for our local currency is not trusted and stable enough to put all our eggs in that basket, so we'll officially support something outside of our control that allows people to pick and choose without empowering the black market."
Twenty years ago, that was a thing for which you could reasonably use the U.S. dollar. It was managed for the benefit of the U.S. primarily, but in comparison to other currencies was a rock, boring, reliable and the least bad option available.
Today, the dollar is leading the charge of experimental monetary policy, with the supply more than doubling over the last 10 years to $20 trillion as of April, according to the Federal Reserve Bank of St. Louis’ data.
Close to half that $11 trillion increase was added just in the last 18 months to counter the economic effects of the coronavirus pandemic.
In this light, bitcoin starts to look like the more “stable” currency. It is not managed for the benefit of any group or people. It just is.
So when people say bitcoin is volatile, they’re not talking about its monetary policy. They’re talking about the current price in dollars.
In a world where the global reserve currency and seemingly every other currency are dictated by short-term government needs, what is the true value of something that isn’t?
For El Salvador, it’s an interesting enough question and we’ll all get to find out the answer.