Episode 30 – Bitcoin & El Salvador – what does it all REALLY mean?

EL SALVADOR. It’s been in the news recently, and if you’re watching this, you probably know why. 

It’s the first country in the world to accept BITCOIN as LEGAL TENDER.

Sounds like a big deal, and it might well turn out to be. But the ramifications are complex, and what it means for YOU even more so. 

What exactly is a LEGAL TENDER? Why should you care? And how could El Salvador’s radical action affect you in the future?

Well, that’s what we’re here for, because this – is School of Block. 

And if you like helping us help you find financial freedom, then why not give us a like and a subscribe? It makes the world of difference. No really. It actually does. 

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INTRO

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Let’s start off by recapping what LEGAL TENDER actually is. Surprisingly, it’s not just ‘MONEY’, and having ‘Legal Tender’ doesn’t mean that someone has to accept it as payment.

Technically it means that if you offer to fully pay off a debt to someone in legal tender, they can’t sue you for failing to repay. 

And the concept is relatively new – the US introduced the LEGAL TENDER ACT in 1862, authorising the use of paper notes to pay the government’s bills. And European nations were on the case with similar laws in the 19th century too.

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In practice these days, the NATIONAL CURRENCY is LEGAL TENDER in practically every country, hence us frequently substituting the idea of it with money. 

What Legal Tender laws also mean is that they prevent the use of ANYTHING OTHER than the existing legal tender as money in the economy. 

So whilst Legal Tender serves the economic functions of money, it’s also useful for other things, like making MONETARY POLICY and CURRENCY MANIPULATION possible – which come in handy when you’re trying to control your country’s economy.

And this is where it gets interesting. 

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EL SALVADOR

Let’s talk about EL SALVADOR.

A relatively small country in Central America, with a population of 6.8 million people. Since the devastating Salvadoran Civil War which ended in 1992, the country has been beset by high rates of corruption, poverty, inequality and gang related crime. 

After former president Tony Saca was sentenced to 10 years in jail for embezzlement in 2018, young former marketing executive NAYIB BUKELE swept to power in 2019 with a SUPERMAJORITY and an approval rating of 85%.

BUKELE now controls all three branches of government and has been instituting sweeping reforms, including a ruling that prevented re-election… and rumour has it that secret negotiation with the country’s most powerful gangs has been responsible for the drop in crime rate. 

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So why would El Salvador now adopt BITCOIN as legal tender?

Well, El Salvador is DOLLARIZED. It’s not the only country where the US dollar has replaced the original national currency, and it often happens when a country has problems with instability or inflation, and adopting the US dollar levels stops the country and citizens’ buying power being eroded. 

One of the downsides of DOLLARISATION however, is that El Salvador has literally ZERO control over its own MONETARY POLICY or the ability to MANIPULATE CURRENCY when necessary.

When Janet Yellen decides to make the US money printer go BRRRR, what happens – ironically – is that the PURCHASING POWER of these small dollarized countries takes a pummelling. 

And for a poor country like El Salvador, that’s significant. 

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It’s not like President Bukele can control the supply of BITCOIN, but he can make the country less dependent on the DOLLAR.

Given that 70% of Salvadorans do not have bank accounts, Bukele has claimed that elevating Bitcoin to the status of legal tender will help many citizens transition into the formal economy. 

And when more than a fifth of the nations GDP comes in from abroad – it will also make it cheaper and quicker for citizens to receive this money. Why? Because international remittances settled in the traditional fashion not only take ages to transfer, but also carry eye-watering fees. 

Bukele thinks using Bitcoin will stop companies like Western Union and MoneyGram collecting this third party commission – worth up to $400 million a year, and thus spur even 

GREATER INFLOWS.

In order to encourage the transition, a special Bitcoin wallet has been developed – called ‘CHIVO’, meaning ‘cool’, which will give a $30 bitcoin bonus to anyone who downloads it. Salvadorans will be able to convert bitcoin into cash from 200 ATMs and 50 other locations.

Transactions in bitcoin will be exempt from capital gains tax, and any foreigner who invests 3 BTC in the country will be granted residency.

THE FLIPSIDE

All sounds pretty good, doesn’t it? But the adoption of bitcoin as legal tender doesn’t come without its challenges. 

Only about a THIRD of Salvadorans use the internet, and the adoption isn’t popular – recent surveys showing 2/3 of the population were AGAINST it. 

Some economists think that the move might cause SERIOUS MACROECONOMIC problems and the IMF is worried it could turn the country into a haven for MONEY LAUNDERING. 

The ratings agency MOODY’S downgraded El Salvadoran debt over fears the move represents WEAKENED GOVERNANCE.

And perhaps the biggest concern is that the adoption of bitcoin exposes a population with little financial education, who don’t have an economic safety net – to the fate of the crypto markets. 

What if they TANK? Another 80% drawdown could be worse than Yellen going berserk on the money printer for the next TEN YEARS. 

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But for BUKELE, these risks are worth taking. If Bitcoin price triples in value, then so does the wealth of his nation. YOLO investing, on the national scale. 

It’s certainly an experiment, and not one that traditional economists who’ve commented on the issue are particularly optimistic about. The Financial Times for example, saying it’s “hard to see the experiment ending well”.

https://www.ft.com/content/c257a925-c864-4495-9149-d8956d786310

Part of the issue here is that the borders between financial and political revolution are marginal. It doesn’t take a lot for this kind of action to have big political consequences. 

What happens when other dollarized countries – like ECUADOR or PUERTO RICO – or huge, semi-dollarized countries like COLOMBIA and ARGENTINA go down a similar road?

It might only take a sustained bitcoin pump to push them over the edge – who wouldn’t want a 100% jump in GDP? And this swing in purchasing power across continents could lead to a huge shift in the balance of power. 

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CONCLUSION

If there’s one thing you might have taken away from the first 29 episodes of School of Block – it’s this: MONEY IS EVOLVING. And as money evolves, so does the FINANCIAL SYSTEM. 

And as those evolve, so it puts pressure on POLITICAL SYSTEMS to follow them. 

To quote the legendary GILFOYLE [clip] – Crypto is out there, and it’s not going away. 

Maybe, in the due course of time, it won’t be bitcoin that topples governments and provides a new form of money – it could be something else, whether that’s a WORLD CURRENCY, CENTRALISED BANK STABLE COINS, OTHER STABLECOINS or CRYPTO TOKENS.

But what we’ve seen in El Salvador is unquestionably the start of something – and it’s in all of our interests to watch how it pans out. 

You’ve been watching School of Block, presented by Ledger and the Defiant, demystifying decentralisation, one block at a time. Don’t forget to subscribe, drop us a like if that’s what you’re into, and as always – here’s to your financial freedom.