This past week we’ve seen more details of exactly how El Salvador’s new Bitcoin Law will work, and more fire as skeptics criticize what could be one of the most important events in the past 7,000 years of monetary history.
The Law is particularly important because El Salvador is now the model: If it goes smoothly, it dramatically raises the odds that Bitcoinization spreads to other countries, each reinforcing the next in a potential “domino effect” towards economic freedom.
Meanwhile, also this week, something else happened to remind us the stakes are rising fast: testimony in the US House Judiciary Committee on the creation of a Central Bank Digital Coin (CBDC) that could bring China-style surveillance and control to America while dangling the dystopian nightmare of politicians and bureaucrats replacing free market investment altogether.
Leon Trotsky wrote, “You may not care about war, but war cares about you.” Many people still don’t care about fiat money, fractional reserve, CBDC’s, or even Bitcoin. Soon they will. Because we are rapidly coming to a choice between two mutually exclusive futures: a top-down fiat model run by increasingly unhinged politicians and bureaucrats, the other a permissionless and uncensorable Bitcoin model of decentralized money, decentralized economy, decentralized speech. All of them by, for, and of a free people.
Bitcoin Law: The Practical Questions
With that context, this week brought welcome details how El Salvador’s Bitcoin Law is going to work.
The one part of the Bitcoin Law that’s causing the most concern at home and abroad is Article 7, which mandates anybody technologically capable of receiving Bitcoin must accept it. This Article is also the most complex, requiring several other Articles to help with consequences.
Now, Salvadoran President Bukele is a savvy politician – he’s a former marketing executive and sports a 92% approval rating. So he knows to get in front of concerns. At the same time, El Salvador is breaking new ground in a complicated area that affects people deeply and for which, frankly, no guiding experts exist on earth. So he’s got his work cut out.
That ‘technologically capable’ is itself a huge loophole, raising the question whether we’re counting angels on a pin. Realistically, given the facts on the ground, I’d expect small vendors to plead tech while chain stores like Wal-Mart or McDonald’s are forced to digest Bitcoin – not a terrible outcome. Indeed, this is very likely since Bukele’s core constituency is the little guy, and he’s too smart to leave roadside pupusa vendors in the ditch. Indeed, the bill already offers help to people to become technologically capable, suggesting he’s paying attention.
A second mitigation of Article 7 is the government will instantly convert any unwanted Bitcoin to USD at zero cost. While this is politically smart, it does bring two questions: does it raise sovereign risk, and exactly what kind of dollars will people get — paper, electronic, or something weird like Tether.
Sovereign Credit Risk
Credit risk is an understandable concern, since most monetary experiments in developing countries blow up. But this isn’t a government scheme, rather it’s squarely about government getting out of the money business. Like a junkie admitting he has a problem, this simply extends El Salvador’s 2001 dollarization bill, removing money not just from Salvadoran government incompetence, but from US government incompetence.
Still, to mitigate the effects, the Law sets up a government-run dollar-Bitcoin exchange fund for Salvadorans to use free of charge and free of commission. This could raise concern given Bitcoin volatility.
Economist and Bitcoinization skeptic George Selgin sketched one such scenario on his blog. He implicitly assumes Bitcoin somehow manages to lose 10% again and again on every block all through the day -- something that has never happened. He then goes on to assume this repeats over and over — given realistic estimates of daily Bitcoins exchanged by Salvadoran vendors, he implicitly assumes something like 50 repeats in a row. It goes without saying that assuming something that has never happened will happen not just once or twice but 50 times in a row will get you to any outcome you fancy.
Do Dollaristas Get Real Dollars or Funny Dollars?
The second concern about government exchange is far better founded: will people trading their unwanted Bitcoin get actual paper dollars, or some proxy like electronic dollars in a bank or even some weird stablecoin like Tether. And what fees will they pay to get these proxies into paper dollars?
Strike CEO Jack Mallers addressed this in an interview last week on Peter McCormack’s What Bitcoin Did podcast. In the interview, Mallers noted that Strike was initially forced to use Tether only because it was literally illegal for a financial intermediary to custody USD in El Salvador. But now that Strike is integrating with the banks in the country and no longer needs to use Tether, Maller was overjoyed to “get Tether out of it.”
So what will people get? Mallers said Strike is linking with the major banks in El Salvador, as well as 1,000 “Cash Point” outlets. It’s still not clear what fees people might pay, if any fees at all, but hopefully those fees will be substantially lower than the remittance fees that largely motivated El Salvador’s Bitcoinization from the start.
After all, if Bitcoin dual-tender is to remain popular, nobody should be punished for opting out of Bitcoin. Rather, every Salvadoran should be just as happy to get paid in Bitcoin as they would in dollars. This is especially important in early days when the vast majority of people don’t yet understand Bitcoin and prefer dollars.
Incidentally, since readers in developed countries might not appreciate how screwed up regular banks are in places like El Salvador, in that same interview Mallers shared that it is currently impossible to transfer money between the top 5 banks in El Salvador. Implying you have to physically walk in, withdraw your paper notes, hand-carry them down the street, and deposit them with a teller in the new bank. This is important when we talk about inconvenience of exchanging Bitcoin in an app – keep in mind what non-Bitcoin El Salvador looks like.
Bitcoin Law: The Moral Question
Aside from practical hurdles, the main concern from free-marketers has been the compulsory acceptance in Article 7. Most countries require you use their “official” money for existing debts, but allow you to use anything you like at point-of-sale. Well, anything buyers and sellers agree on — an important distinction in a moment.
I would argue that, yes, in an ideal world there should be no legal tender at all — you should be able to contract in any currency you like, both for point-of-sale and for debts. Indeed, the US didn’t have legal tender laws until the late 19th century; courts would simply go by the customary expectations of buyer and seller, as it should be.
On the other hand, remember that Article 7 gives a freedom to buyers equal to the burden on sellers. That is, buyers now have 2 rather than 1 choice of currency, even as sellers can now exclude one fewer dollar alternative. After all, sellers can still reject 180 foreign currencies, 4,000 other cryptocurrencies, thousands of monetary commodities from gold to stamps to Harrah’s casino chips.
So if buyers go from 1 to 2 options while sellers go from, say, 7,000 exclusions to 6,999 exclusions, buyers have more freedom even as sellers have less. You may still oppose it, but it is far from the kind of nefarious mandate where countries force their own garbage money on a hostage people. Indeed, it’s very nearly the opposite.
Wider Benefits of Mandatory Acceptance
Finally, there are enormous practical benefits to mandating acceptance of Bitcoin. Benefits so large that you could argue opposing the Law because of Article 7 is akin to letting your neighbor’s house burn down because he’s not home to get permission to use his garden hose. Morally perfect, perhaps, but a pity for the neighbor.
What are those benefits? First, it helps people receiving remittances — a main justification for the bill. Remittances make up nearly a quarter of Salvadoran income, so this isn’t a small question. With mandatory acceptance, these recipients — typically poor — don’t need to pay exchange fees when buying groceries, because they just spend the Bitcoin directly. Already one fifth of Salvadorans say they want to use Bitcoin for remittances, and that number will likely rise as more people try it.
The second even larger benefit is that Article 7 dramatically raises broader usage and savings,in Bitcoin. Because if you know you can always spend your Bitcoin anywhere, you’re more likely to treat it as a replacement for fiat, leaving it in your wallet and keeping it out of the hands of some future government.
This wider usage gradually removes the overwhelming advantage incumbent currencies have in network effects from installed base, customer familiarity, existing savings, and menu pricing. Taken together, they rapidly accelerate learning and familiarization with Bitcoin.
Pairing all this with the “technologically capable” loophole above, in the grand scale of government outrages over these past 18 months I’d rank Article 7 mandate pretty low. And comparing it to the enormous freedom and economic benefits that Bitcoin can bring to the Salvadoran people, frankly, I can definitely find a way to live with it.
So, politically, if Bukele wants quick applause from the local Chamber of Commerce, he’ll repeal Article 7. But if he wants to help poor families receiving remittances, to help the unbanked use the financial system with dignity, and to give regular Salvadorans a chance to accumulate wealth outside the control of any future less-enlightened government, he should stay the course.
Conclusion
Of these three critiques of the Bitcoin Law, I think the most valid is interoperability and ensuring fair treatment for opt-outs. The process should protect innocent non-Bitcoiners as much as possible, and I’m encouraged that both Bukele and Mallers seem aware of this and are solidly on the side of the little guy. I hope they succeed, and I think they will.
On Article 7, I do understand libertarian concerns with the Bitcoin mandate, but I also think it misses the much larger point that this is our best chance in 100 years of toppling the cancerous fiat system that steals from us all — above all from the poor — to feed a Leviathan that preys ever more upon us.
Finally, assuming El Salvador does succeed, it can act as a magnet not just for other developing countries seeking to help their poor and control their destiny, but even for those of us in rich countries increasingly straining against a death-orbit of government surveillance and control pulling us ever farther from that warm sunlight of human freedom.
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The most important factor in determining to transfer Bitcoin or USD to Al Salvador is to establish whether Bitcoin has a strong trend of big increases or decreases in value.
If there is no trend and Bitcoin is volatile the most important factor would be in which currency the commitments of the El Salvador resident is denominated in. In this scenario if there are no specific currency denominated commitment and you are a gambler, bet on your preference.
Only when the value of Bitcoin vs the USD is stable, the cost of the transfer would become a determining factor as long as you may easily covert from the one to the other in Al Salvador.
At the end of the day, as I see it, it all depends on the currency of your commitments. If goods, services and loans are priced only in Bitcoin and you earn Bitcoin this experiment might succeed (as long as you are not allowed to buy goods overseas in USD) as there is no exchange risk. If you do not earn Bitcoin, history has proved that you will be on a hiding to nothing, you will also receive less and less Bitcoin for the value of USD transferred from abroad and you will only be saved if goods, services and loans are priced in both Bitcoin and USD. If you earn bitcoin and you can choose in which currency you want to pay, history dictates that you hold onto your Bitcoin as long as possible and only pay in USD.
However history has also therefor proved that if you are an employer, seller, lender or provider of a service and you make your prices in USD and Bitcoin, you will only do business in USD and the Al Salvador Bitcoin experiment will be a failure. God helps the employer who contracts to pay his workers in Bitcoin while prices are quoted in both.
If history is proved wrong, the winners will become losers and the losers will become winners.
The cost of the transactions does not matter at all, it is the currency goods, etc, are priced that will determine how long the experiment will take to fail.