Aaron Koenig travels a lot in the global, especially Latin American Bitcoin world. So it’s worth reading what he writes about El Salvador’s decision to recognise Bitcoin as legal tender.
It’s been a few days now, but an event in May 2021 was just too important not to mention again. In Miami, some 15,000 Bitcoiners gathered for the largest crypto conference ever. The appearance of Jack Mallers, CEO of the payment platform Strike, was particularly eagerly awaited. After all, he had been announced not entirely immodestly as “one small step for Bitcoin, one giant leap for mankind”, in the style of Neil Armstrong, the first man on the moon.
Jack talks about his experience with Project Bitcoin Beach, a completely Bitcoin-converted village on the coast of El Salvador, and how he met the president of this smallest Central American state through it. Then he plays a video message from President Nayib Bukele. He announces a law that makes Bitcoin the legal tender of El Salvador. Deafening cheers erupt when the Bitcoin community hears this. To a standing ovation, Mallers, crying with emotion, puts on the jersey of El Salvador’s national team.
This news, according to the general tenor, will help Bitcoin achieve a breakthrough. The “hyperbitcoinisation”, i.e. the conversion of the entire global financial system to decentralised, non-state money, seems to have moved a big step closer. In fact, the “Ley Bitcoin” will be passed by El Salvador’s parliament with a large majority on 8 June 2021. Presumably, it is only through the introduction of Bitcoins that many people know where El Salvador even is: on the Pacific coast, between Guatemala and Honduras. But what is the real significance of this new law?
Home Remittances via Lightning Network
El Salvador is one of the poorest and most violent countries in Latin America. Drug gangs terrorise the inhabitants. Robberies, shootings and kidnappings are commonplace. Under President Bukele, crime has decreased significantly in recent years, but of the 6.5 million Salvadoreños, about 2 million have left the country to seek their fortune elsewhere, most of them in the USA. Their remittances to their home country account for about 22 percent of Salvador’s gross national product. Until now, they have mostly used services like Western Union or Money Gram, which charge horrendous fees. More than 70 percent of El Salvador’s inhabitants do not have a bank account, so they have had no choice but to pay them until now.
When you pay for things with the Lightning Network IRL it’s obvious what a game changer this technology is. No permission required to transfer value. It’s obvious, but when you start doing it for real it really hits home. pic.twitter.com/nqVpQVmsX0
– ฿lackCoffee (@blackcoffeebtc) August 19, 2019
Bitcoin had changed that drastically. More and more Salvadorans living abroad are now transferring money to their families back home in Bitcoin. They mainly use the Lightning Network, which is based on Bitcoin and makes payments lightning-fast, anonymous and possible for fractions of a cent. As in most developing countries, hardly anyone has a bank account, but almost everyone has a smartphone with internet access – and that’s all you need to accept and send Bitcoins. Instead of spending hours making a pilgrimage to the nearest Western Union branch, revealing your personal details there in order to receive some of the money after deducting fees, you can now have even the smallest amounts transferred to your mobile phone in seconds, costing only fractions of cents.
This was true even before the Ley Bitcoin. Bitcoin didn’t need a law to arrive in El Salvador. But the law has strengthened and legitimised Bitcoin.
The President is taking notice
In September 2021, the Bitcoin law came into effect. Any citizen of El Salvador who downloads a Bitcoin app will receive US$30 worth of Bitcoin from the government. Where this money comes from is not known, presumably from big donors from the Bitcoin scene. The Bitcoin Beach in the village of El Zonte is already financed by Bitcoin millionaire Michael Peterson and his non-profit organisation Mission Sake. The project was initiated by Jorge Valenzuela, who was born and raised in El Zonte. Coming from humble beginnings, he became a successful entrepreneur and has been supporting his community where he can for some time. In 2019, he launched the Bitcoin Beach project together with Peterson. His goal is to build a local Bitcoin-based economic ecosystem.
Education plays a central role in this. Bitcoin Beach offers courses on various topics, on the use of Bitcoin of course, but also in English, programming or graphic design with Photoshop. In El Zonte, payment with Bitcoin is now widespread. Either a specially programmed Lightning Wallet or Jack Mallers’ Lightning App Strike is used for this, which is particularly well suited for international payments. Around 40 shops already accept Bitcoin, and over 100 people receive their salary in Bitcoin. Old people and the disabled receive a basic income worth around 100 US dollars in Bitcoin. Children and young people also receive financial support, but in return they have to prove successful participation in the courses offered. The financial incentives have drastically increased the acceptance of the means of payment, which is still unfamiliar to most.
El Salvador is using bitcoin profits to build 20 schools.
It will be interesting to see what their next move will be and to see other nations forced to compete or fall behind. bitcoin education pic.twitter.com/SOT2vujlkJ
– Netcoins (@Netcoins) November 2, 2021
Through the Bitcoin Beach project, the president of El Salvador became aware of Bitcoin. He invited Jack Mallers from Strike to the presidential palace for a talk. This apparently went so well that Mallers was involved in drafting the law to introduce Bitcoins. Nayib Bukele has recognised the potential of Bitcoin and wants to use it to move his struggling state forward. He wants to attract investments and companies, especially of course from the crypto industry.
Among other things, El Salvador has already massively entered Bitcoin mining, for which it uses cheap renewable energy, which is extracted from the numerous volcanoes of the small country. Bukele has already scored a PR coup with this. The small country is suddenly a big topic in all international media. An international delegation of Bitcoin activists has visited El Salvador and pledged its support to the president. It was led by Brock Pierce, one of the most important investors in the Bitcoin scene, who ran as an independent presidential candidate in the US in 2020.
From “Failed State” to Pioneer
The most important topic during these consultations with the president and various ministers was the introduction of Bitcoins as a “legal tender”, but other applications of blockchain technology will soon be on the agenda, for example for land register entries, company registers or tamper-free elections. The software for such applications already exists, but so far few governments have been willing to use it. El Salvador will also play a pioneering role in this.
Nayib Bukele seems to have triggered a chain reaction with his courageous step. Bitcoin-friendly politicians (who, by the way, can be easily recognised by the laser eyes in their profile pictures) have also introduced legislative initiatives in Paraguay and Panamá. Paraguay is already a paradise for Bitcoin miners, because the country, which borders Brazil and Argentina, has much more electrical energy than its population can consume thanks to two large hydroelectric power plants. Electricity for Bitcoin mining is therefore not only 100 per cent renewable there, but also unrivalled cheap. Mexico, Argentina and Brazil are also considering introducing Bitcoin as legal tender. This could trigger a surge in development in the region.
In Latin America, which has been battered by hyperinflation, currency devaluations and capital controls for decades, openness to non-state money is particularly high. You don’t need to convince an Argentinean, Brazilian or Venezuelan not to trust governments and banks, that goes without saying for them. Too often their savings have been wiped out by currency devaluations and frozen bank accounts. Until now, US dollars bought on the black market in Latin America were the preferred investment. With the fall in the value of the dollar, whose money supply increased dramatically in 2020 and 2021 as a result of the “Corona measures”, this is likely to change. More and more, inflation-proof currencies like Bitcoin are gaining confidence.
Of course, the question arises whether the concept of the “legal tender” is still up to date at all. Is it really necessary to oblige people and companies by law to accept a certain currency? Isn’t a free competition of currencies without any coercion the better solution? As early as 1976, Nobel Prize winner Friedrich August von Hayek proposed such a “denationalisation of money”. At the time it seemed utopian. Bitcoin has made Hayek’s vision of a non-state money a reality.
While I think abolishing any legal tender laws is a better long-term solution, I still welcome the Salvadoran legislature’s decision as a step in the right direction.
The beginning of a chain reaction?
Whether El Salvador will actually find many imitators, however, remains to be seen. The situation of the small coastal state is quite special. The national currency, the colón, was abolished in 2001 and the US dollar was introduced as legal tender. So the government already did not have the possibility to create money out of nothing. It is doubtful whether other governments will give up this important instrument of power. Besides, President Bukele rules with a comfortable two-thirds majority and can thus push through pretty much any law.
For its users, it is undoubtedly a great advantage that Bitcoin limits the money supply to a maximum of 21 million. Its inflation is mathematically predetermined and exactly predictable. No politician or central banker can change it. And this is precisely the main conflict between normal people and the powerful of this world. Those who have to work for their money naturally prefer hard money that remains stable in value or even increases in value, like Bitcoin. But those who control money, can create it out of nothing and thus get richer and richer at the expense of others, have no interest in a rule-free monetary system. So it is no wonder that the World Bank brusquely rejected the request of the government of El Salvador to support it in introducing Bitcoin. The conversion of the financial system to good money is necessary, because fiat money issued by central banks is essentially worthless, it harms people and the economy. Despite the expected resistance, the denationalisation of money will be unstoppable. The model of free private cities could serve as a model for gradual hyperbitcoinisation. Large and federally structured states like Mexico or Brazil will probably first shy away from introducing Bitcoin as a means of payment everywhere, decentralising land registers and holding elections using blockchain technology. Instead, as suggested by Titus Gebel, they could create special legal and economic zones where all this can be tried out.
Mexico, for example, could first declare a tourist stronghold like Playa del Carmen on the Caribbean coast a Bitcoin zone, where many crypto activists from all over the world live anyway. If successful, the experiment could be extended to the entire state of Quintana Roo, which is home to other popular expat and tourist centres like Cancún and Tulum. Other states can follow suit and test different models in practice, including competing cryptocurrencies and blockchain solutions. The most successful ones will then surely prevail. Competition has always led to better results than central government planning.
Bitcoin can no longer be banned
You may think El Salvador’s measures are PR-driven and symbolic, but legally they change things. A currency that is legal tender in a country automatically has a different legal status, no matter how small and economically insignificant the country may be. Bitcoin can now no longer be considered a store of value like gold, as is common in many places, but must be treated like any other foreign currency. Those who make exchange rate gains with Bitcoin no longer have to pay their full tax rate on them, but the 25 per cent final withholding tax that is customary in currency trading. The disadvantage, however, is that the gains are no longer tax-free after one year, as was previously the case with valuables in many countries.
In Germany, there is the amusing legal situation that Bitcoin can no longer be officially considered a cryptocurrency as of now, because according to the text of the law, cryptocurrencies are defined, among other things, by the fact that they are not legal tender. Presumably, this law will soon be adapted to reality, as hopefully many of the outdated financial regulatory laws will be. In any case, it should now be out of the question to ban Bitcoin, because to ban an official currency of another state would be a breach of international law.
Will Nayib Bukele’s bill work out? Will many crypto companies actually set up shop in El Salvador and create jobs there? Will the introduction of a sound currency boost the devastated economy, as Ludwig Erhard did in 1948 with the introduction of the Deutschmark and the abolition of all wage and price controls?
If so, the copycat effect will be huge. Big changes usually start with small steps. Who would have thought that the introduction of a special economic zone in Shenzhen at the end of the 1970s would turn impoverished communist China into a turbo-capitalist economic power in just a few decades? Can El Salvador become the Shenzhen of Latin America?
We will probably know more as early as the end of 2021. Then the Bitcoin scene will meet at the Latin American Bitcoin Conference, which takes place in a different country every year. After Argentina, Brazil, Mexico, Colombia, Chile and Uruguay, it is of course El Salvador’s turn this year.
