El Salvador Makes Bitcoin Legal Tender
The theoretical barriers to Bitcoinization just collapsed
Last week El Salvador passed a bill making Bitcoin legal tender alongside the dollar. In a stroke, this cuts through the key theoretical roadblocks against worldwide Bitcoinization. Potentially leading to a “tipping point” towards Bitcoin’s adoption as, not just “digital gold,” but as an actual replacement for government money.
18 months ago, Professors Saifedean Ammous and George Selgin debated whether Bitcoin can someday replace “government-issued money.” The Bitcoin-skeptic Selgin asserted there were three core reasons he thought Bitcoin would not take over:
weak network effects (how many people use it today, therefore how much infrastructure exists for it),
high volatility, and
high fees and slow speed of a transaction.
Saifedean responded that network effects and volatility are largely due to it being early days for Bitcoin, and would improve as Bitcoin usage spread. And he argued that fees and speed are irrelevant because bitcoin transactions will be on second layer services on top of bitcoin “rails,” just as most dollar purchases are credit cards, checks, or Apple Pay on top of dollar “rails.” Because those services would batch the transactions, their fees and execution would be comparable or better than, say, a credit card.
Well, El Salvador looks like it absolutely vindicates Saifedean on those Bitcoin “rails.” While El Salvador’s ingenious dual legal tender structure, where Bitcoin is legal tender alongside the US dollar, cuts right through Selgin’s network effects and volatility concerns in a single stroke.
In sum, what El Salvador has done is an economically beautiful solution that has, I think, objectively raised Bitcoin’s odds of replacing government money altogether by at least ten-fold.
What’s in the Law?
In El Salvador’s new law, you can pay anybody in bitcoins — even your taxes — and you also have to accept bitcoins if offered. For those who don’t want to keep the bitcoins received, perhaps for its volatility, the government will instantly buy your bitcoins for dollars. So if you sell a newspaper for a dollar and they pay you in bitcoin, you send that to the government app and they’ll give you a dollar to your Strike account. It’s about as easy as clicking a link.
These payments use the Strike app, which is similar to Venmo or Apple Pay, and simpler than a credit card. Strike’s fees are less than a penny – far lower than a credit card. And transfer is near-instant.
Now, it’s true that Strike itself is centralized – it’s a business with a physical address, and holds your bitcoins deposited on the app. At the same time, users can easily move their bitcoin out of Strike and into a “cold wallet” under their own control. Meaning the amount a user might have “exposed” on Strike wouldn’t be very much. For perspective, the typical American has less than $50 in their billfold.
Of course, moving money out of Strike into your cold wallet will incur Bitcoin network fees (around $10-20), but this is similar to fees paid on dollar payments for, say, your rent or your credit card monthly bill.
So, just as we don’t lie awake fearing that a latter-day FDR will seize the $50 in our billfold, the fact that day-to-day balances are centralized doesn’t present the concerns that come from the banking system, or gold, parking your life savings where governments can get them.
Now, the Salvadoran government in general is not terribly well managed, but this is the official development bank providing the bitcoin-dollar trades instantly, while President Bukele is deeply interested in running this clean since it’s so high profile. Meanwhile, the partners at Strike have stellar reputations within the Bitcoin community. So I think it will certainly work much better than, say, the regular Salvadoran banking system.
The El Salvador Solution
What’s beautiful in El Salvador’s solution is that it instantly removes every single red flag Selgin put up. On network effects, the payment infrastructure is identical for bitcoins and dollars, while the saving or lending infrastructure is identical in the sense that you can continue using dollars if you like.
On volatility, again, the fact you can dip in and out between dollars and bitcoins means if you like the volatility you keep the bitcoin, but if you fear the volatility you flip it for dollars.
Lastly, the fees and waiting times are, using Strike or an equivalent service, equal or better than any other electronic payment system, just as Saifedean had predicted.
In fact, beyond theoretical roadblocks, El Salvador goes even further to change the debate. Because the standard assumption had been that the US dollar would have to undergo some serious trauma before Bitcoinization – dollar hyperinflation, widespread seizure, zombie apocalypse.
This is because, today, when a Zimbabwe or Venezuela collapses, the people simply switch to dollars or euro, whether legally or not. So, the thinking ran, Bitcoinization can only happen if not just trash currencies implode, but if all the currencies in the world all implode together. Because the dollar forever stood as the cleanest dirty shirt, it was the final boss battle for Bitcoinization.
And now, it turns out, that’s not true. Because El Salvador found a way to allow dollars and Bitcoins to co-exist peacefully, with zero need for hyperinflation, meteor strike, or zombie apocalypse. This alone means the path to Bitcoinization just radically shortened.
Now, this may be a surprise, but the dual-tender solution wasn’t even on economists’ radar. Of course, dual tender is obvious in retrospect, like many clever things. Obvious because there is long historical record for “bimetallism,” where silver and gold circulate peacefully alongside one another — think “pound sterling” alongside “gold guinea.”
And yet dual tender with paper and Bitcoin peacefully co-existing on the same legal footing occurred to pretty much nobody. At least nobody who wrote it down that I could find: before El Salvador’s announcement, Google finds just 14 hits on “dual tender,” all either on the francs-to-euro switch in the 90’s or illegal dollar usage in Zimbabwe.
Indeed, Saifedean and Selgin, two of the smartest monetary economists on earth, didn’t bring it up in their debate, and it certainly hadn’t occurred to me. So this was, I think, a legitimately brilliant move.
Incidentally, while President Bukele is a smart guy, as are Jack Maller and the Strike team, honestly I think it was necessity as mother of invention: doing what you can with what you have, right now.
Anyway, setting aside the genesis, dual tender solves every theoretical barrier in the way of Bitcoinization. It allows a zero-trauma path where people can opt in at their own pace, switch at their own pace, and it doesn’t require prepper scenarios of dollar collapse and Mad Max Barter Towns. It changes Bitcoinization from major surgery to something closer to taking a vitamin. It makes a revolution feel as smooth as an evolution.
What Does History Say About Double Tender?
Historically, bimetallism was not only common, it was arguably better than the use of a single metal — “monometallism.” Rome, for example, often used two or even three (add copper) metals. This is because silver, being more abundant and therefore cheaper, is better suited for buying lunch than gold. While gold’s scarceness makes it superior for protecting your life savings.
These two functions can be elegantly divided into medium of exchange (MOE) for silver and store of value (SOV) for gold. Actually, throughout history people haven’t minded using fairly garbage monies as MOE — not just silver but wampum, glass beads, or tobacco leaves. And the reason is that if you’ve only got $50 in your wallet, who cares if it loses half its value every year — that’s, what, $2 per month in lost purchasing power in exchange for the convenience of buying lunch fast.
What was a much bigger problem for bimetallism, and why it kept collapsing into one-metal money, was that governments felt compelled to fix exchange rates. Since silver and gold market rates fluctuate daily, this invariably led to something called “Gresham’s Law,” where people hoard the undervalued metal and only spend the overvalued one. In fact, we see this today where silver dimes, now worth far more than $0.10, long ago vanished into hoards while people use up the chintzy dimes at 7/11.
So the key here is that currencies can co-circulate just fine so long as their rates are allowed to fluctuate. In fact, in many poorer countries today, the middle class regularly keep their long-term savings in US dollars while using pesos or rupiah for their daily spending. And this is perfectly stable because the government doesn’t fix the exchange rate. Indeed, if cellphones existed in the 1400’s or people could look up the exchange rate, bimetallism may well have stayed put.
So, given El Salvador doesn’t have the slightest intention to fix the dollar-Bitcoin rate — they couldn’t if they wanted to — there is no Gresham’s risk. Rather, we’ll likely get us a situation where most Salvadorans hold both dollars and some Bitcoin, and gradually shift to Bitcoin both as people get used to it and as Bitcoin’s own volatility declines on the road to reaching its final form.
I made some guesses last week about speed and magnitude of this switch, but it will be very interesting to see it play out in real-time. After all, we’re talking the championships here: this isn’t Bitcoin vs Venezuelan Bolivar or Zim Dollar, this is Bitcoin vs the World Heavyweight Champion. Pass the popcorn.
Conclusion
It’s hard to overstate how smart El Salvador’s dual tender model is for Bitcoin. Indeed, it is so obviously a better path than what we’ve been working with, I think it raises at least ten-fold the objective odds of Bitcoin replacing, not just gold, but paper currencies — a $120 trillion market worldwide.
This, therefore, really illustrates how much is riding on El Salvador. As I mentioned last week, if this turns out popular among regular Salvadoreños, then even the most fiat-enslaved politicians in the world will line up to get on that Bitcoin train.
Why? Well, because politicians are sociopaths with no moral principles — usually a bad thing, but it also means they will join literally any parade with legs, even a parade that is leading us to freedom.
Still, there certainly remain real practical barriers to even just El Salvador’s full Bitcoinization. Especially opposition from regulators and lobbyists in America or Europe who have the power to hold El Salvador’s economy hostage. The IMF, for example, has already signaled its concern.
So it remains important for Bitcoiners to be vocal and vigilant. To ensure these obscure bureaucrats realize there are millions of us watching them very, very carefully. If there’s one thing bureaucrats fear, it’s a spotlight. We can provide that in spades.
In the meantime, if you can, visit El Salvador, talk about El Salvador, do what you can to counter the inevitable FUD so the next country is excited to join the party.
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Per definition "legal tender is anything recognized by law as a means to settle a public or private debt or meet a financial obligation, including tax". Unless loans etc. are based in Bitcoin, legal tender means nothing. Borrowing in the ever more valuable Bitcoin is too ghastly to contemplate. Investing in Bitcoin only and borrowing in USD only, or the other way around, will not work as it will give rise to a massive one way arbitrage. It means nought, even if it is law that you may pay anybody in bitcoin whilst the payment is in bitcoin the value of the transaction is based on another currency, I.e. the payment price is not listed in bitcoin. If the purchaser can choose to pay in fiat or bitcoin, if the price for the same article is fixed in USD and Bitcoin (if you have both freely available), the purchaser would choose the most favourable payment medium for himself and the seller will always be at the losing end of the transaction because of the volatility of Bitcoin. But yes, that is not the focus of your article.
Funny you use Zimbabwe as an example, for all day to day financial transactions millions of Zimbabweans use EchoCash which is a mobilephone-based money transfer, financing and microfinancing service. The Zimbabwean Stock Exchange all share index is up 252% ytd, 500% 1y and 3894% 2y – where do you think Zimbabweans invest their money? Although Zimbabwe is my neighbouring country, I don’t profess to have any intimate knowledge of their market.
Bimetalism and dual-tender can never be compared to one another as in Bimetalism, as you state in your article, the rate between the two metals are fixed, end of the story. It matters nothing if you buy or invest in either of the metal coins as the value between them are fixed. The one may be more practical than the other tough as who want to hoard vast amounts in copper coins rather than gold ones as far as space is concerned.
You find nothing on dual tender as it has no right to exist. Tender (except in El Salvador) applies to dept only and if you borrow USD you owe USD and if you borrow GBP you owe GBP, your debt is in the currency you owe and you have to repay in the currency you owe.
Gresham’s Law applies to the weight and physical condition between two coins of the same domination and precious metal and not to the values between two coins of different metals. It is only natural for the better, newly issued, precious metal coins of full weight and in perfect condition, to disappear out of circulation, hoarded by the population and be replaced by the putting worn, lower in weight and defaced coins back into circulation. It applies to all coins of any valuable metal and that is why modern coins are composed solely of base metals. You are 100% correct in saying Gresham’s law can and will never apply to bitcoin ( even if a rate could be fixed) as there is no physical coin and it has no intrinsic value.
The only condition that may save the El Salvador Bitcoin experiment of total disaster is if goods and services and debt are NOT priced in Bitcoin. The effect on employers as opposed to employees, sellers as opposed to buyers, lenders as opposed to borrowers, etc is too ghastly to contemplate. Until Bitcoin becomes less volatile like fiat, no normal day to day transaction can be priced in Bitcoin without bankrupting someone in any transaction over the long term.