Aaron Koenig travels a lot in the global Bitcoin world, especially in Latin America. In this article he shares his thoughts on El Salvador’s decision to recognize Bitcoin as legal tender.
The Starting Signal for Hyperbitcoinization?
by Aaron Koenig
At the beginning of June 2021 in Miami, around 15,000 bitcoiners came together for the largest crypto conference of all time. The presentation of Jack Mallers, CEO of the payment platform Strike, was highly anticipated. His talk was immodestly announced as “One small step for Bitcoin, one giant leap for mankind.”
During his speech, Jack described his experiences working with the Bitcoin Beach project: a village on the coast of El Salvador that has been completely converted to Bitcoin, and how he got to know the president of this smallest Central American state through it. He then played a video message from President Nayib Bukele announcing a law that would make Bitcoin legal tender in El Salvador. Deafening cheers broke out when the Bitcoin community heard the news. With a standing ovation, Mallers, weeping with emotion, pulled on the jersey of the El Salvador national team.
This news represented a breakthrough for bitcoin. “Hyperbitcoinization”, i.e. the conversion of the entire global financial system to decentralized, non-state money, seems to have come a big step closer. The Bitcoin Law went on to be passed on June 8, 2021 by the parliament of El Salvador with a large majority. The introduction of Bitcoin put El Salvador on the map. Prior to the announcement, many had not heard of this small country on the Pacific coast between Guatemala and Honduras. But what are the real implications of this new law?
Remittances via the Lightning Network
El Salvador is one of the poorest and most violent countries in Latin America. Drug gangs terrorize the residents. Robberies, shootings and kidnappings are commonplace. Under President Bukele, crime has declined significantly in recent years, but of the 6.5 million Salvadoreños, around 2 million have left the country to seek their fortune elsewhere, most of them in the United States. Remittances account for around 22 percent of the Salvadoran gross national product. So far, services with horrendous fees such as Western Union or MoneyGram have mostly been used for this. More than 70 percent of El Salvador’s residents do not have a bank account, leaving them with no choice but to pay.
Bitcoin changed that drastically. More and more Salvadorans living abroad are now transferring money to their families in bitcoin. For this they mainly use the Lightning Network, which is based on Bitcoin, and makes payments possible at lightning speed, anonymously and 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 Bitcoin. Instead of making a pilgrimage to the nearest Western Union branch, revealing your personal data there, and having your family receive funds after fees have been deducted, even the smallest amounts can be sent between mobile phones in seconds.
That was the case before the Bitcoin law. Bitcoin didn’t need a law to arrive in El Salvador. But the law has strengthened and legitimized Bitcoin.
The President is paying attention
The Bitcoin Law came into force in September 2021. Every citizen of El Salvador who downloads a Bitcoin app has been able to receive 30 US dollars’ worth of Bitcoin from the government. It is not known where this money came from, presumably from major donors in the Bitcoin scene. Bitcoin Beach in the village of El Zonte is already financed by Bitcoin millionaire Michael Peterson and his non-profit organization Missionsake. The project was initiated by Jorge Valenzuela (pictured below) who was born and raised in El Zonte. Coming from a humble background, he became a successful entrepreneur and has been supporting his community wherever possible for a long time. In 2019 he started the Bitcoin Beach project together with Peterson. Its goal is to build a local, Bitcoin-based economic ecosystem.
Jorge Valenzuela, initiator of the Bitcoin Beach project
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 and graphic design with Photoshop. In El Zonte, payment with bitcoin is widespread today. Either a specially programmed Lightning Wallet or Jack Mallers’ Lightning App Strike is used, which is particularly suitable for international payments. Around 40 businesses are already accepting bitcoin, and over 100 people receive their salaries in bitcoin. Old people and the disabled receive a basic income worth around 100 US dollars in bitcoin. Children and adolescents are also financially supported but must prove that they have successfully participated in the courses offered.
Shops accepting bitcoin in Bitcoin Beach, El Zonte
The President of El Salvador became aware of Bitcoin through the Bitcoin Beach project. He invited Strike’s Jack Mallers to the Presidential Palace for a chat. This went so well that Mallers came to be involved in drafting the Bitcoin Law. Nayib Bukele has recognized the potential of Bitcoin and wants to use it to advance his troubled state. He wants to attract investments and company settlements, especially from the crypto industry.
Among other things, El Salvador has already made massive investments in bitcoin mining, for which it uses inexpensive renewable energy obtained from the small country’s numerous volcanoes. Bukele has already landed a PR coup. The small country is suddenly a big topic in all international media. An international delegation of Bitcoin activists has visited El Salvador and assured the president of its support. 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 USA in 2020.
From “Failed State” to pioneer
The most important topic in these consultations with the President and various ministers was the introduction of Bitcoin as “legal tender”, but other applications of blockchain technology will soon be on the agenda, for example for land register entries, company registers or manipulation-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 here.
Nayib Bukele seems to have started a chain reaction with his brave move. Bitcoin-friendly politicians (who, by the way, can be easily recognized by the laser eyes in their profile pictures) have introduced legislative initiatives in Paraguay and Panama. Paraguay is already a paradise for bitcoin miners, because the country bordering Brazil and Argentina has much more electrical energy than its population can consume thanks to two large hydropower plants. Electricity for the production of bitcoin is therefore not only 100 percent renewable there, but also cheap. Mexico, Argentina and Brazil are also considering introducing Bitcoin as legal tender. This could trigger a boost in development in the region.
In Latin America, which has been plagued by hyperinflation, currency devaluations and capital controls for decades, openness to non-state money is particularly high. You don’t need to convince an Argentine, Brazilian or Venezuelan not to trust governments and banks: for them, that goes without saying. Too often their savings have been wiped out by currency devaluations and frozen bank accounts. Until now, US dollars bought on the black market have been the preferred investment in Latin America. With the decline in the value of the dollar, the money supply of which rose drastically in 2020 and 2021 as a result of the “Corona measures”, this is likely to change. Inflation-proof currencies like bitcoin are gaining more and more trust.
The question naturally arises as to whether the concept of the “legal tender” is still up to date at all. Do you really have to oblige people and companies by law to accept a certain currency? Isn’t free competition between currencies – which does not require any pressure – the better solution? As early as 1976, Nobel laureate Friedrich Hayek proposed such a “de-nationalization of money”. At that time it seemed utopian. Bitcoin has made Hayek’s vision of non-state money a reality.
Even if I consider the abolition of all legal tender laws to be the better solution in the long term, I still welcome the decision of the Salvadoran legislature as a step in the right direction.
The beginning of a chain reaction?
It remains to be seen whether El Salvador will find many imitators. The situation of the small coastal state is quite special. The national currency, the Colón, was abolished as early as 2001 and the US dollar was introduced as legal tender, meaning the government no longer had the opportunity to create money out of nothing. It is doubtful whether other governments will give up this important instrument of power. In addition, President Bukele rules with a comfortable two-thirds majority and can thus enforce pretty much any law.
For its users, it is undoubtedly a great advantage that Bitcoin limits the amount of money to a maximum of 21 million. Bitcoin’s inflation is mathematically predetermined and precisely predictable. No politician nor central banker can change that. And therein lies the main conflict between normal people and the mighty of this world. Those who have to work for their money naturally prefer hard money that remains stable in value or even gains. Bitcoin is such a money. But those who control money, can create it out of nowhere and thus get richer and richer at the expense of others, have no interest in a sovereign monetary system. So it is no wonder that the World Bank brusquely rejected the request of the El Salvadorian government to support it with the introduction of Bitcoin.
The conversion of the financial system to good money is necessary, because fiat money issued by central banks is essentially worthless without mandates to enforce its use, and harms people and the economy. Yet despite inevitable resistance, the denationalization of money cannot be stopped. The model of the Free Private Cities could serve as a model for step-by-step hyperbitcoinization. Large and federally structured states such as Mexico or Brazil will probably shy away from introducing Bitcoin as a means of payment everywhere, decentralizing land registers and holding elections using blockchain technology. Instead, as suggested by Titus Gebel, they could create special legal and economic zones in which all of this can be tried out.
Mexico, for example, could first proclaim a tourist stronghold such as Playa del Carmen on the Caribbean coast to be a Bitcoin zone, where many crypto activists from all over the world already live. If successful, the trial could be extended to the entire state of Quintana Roo, which includes other popular expat and tourist centers such as Cancun and Tulum. Other states can follow suit and test various models in practice, including competing cryptocurrencies and blockchain solutions. The most successful will then surely prevail. Competition has always produced better results than central government planning.
Bitcoin can no longer be banned
One may consider El Salvador’s measures to be PR-driven and symbolic, but legally these actions change a lot. A currency that is legal tender in one country automatically has a different legal status, no matter how small and economically insignificant the country may be. Bitcoin can no longer be viewed merely as an object of value like gold – as is customary in many places – but must be treated like any other foreign currency. Anyone who makes price gains with bitcoin no longer has to pay their full tax rate, but the 25 percent withholding tax customary in currency trading. The disadvantage, however, is that the profits are no longer tax-free after one year, as has been the case with valuables in many countries.
In Germany there is the amusing legal situation that bitcoin can no longer be officially regarded as a crypto currency, because according to the legal text, crypto currencies are defined, among other things, by the fact that they are not legal tender. Presumably, this law will soon be brought into line with reality, as hopefully will many other financial regulations. In any case, it will become increasingly impossible to ban Bitcoin, because banning the official currency of another state would violate international law.
Will Nayib Bukele’s plan work out? Will many crypto companies actually settle in El Salvador and create jobs there? Will the introduction of a solid currency boost the slumped 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 imitation 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 make impoverished communist China a turbo-capitalist economic power in just a few decades?
The question now is: Can El Salvador become the Shenzhen of Latin America? The success of the Latin American Bitcoin Conference and Adopting Bitcoin Conference that took place in El Salvador last week have given many cause for optimism.
Post author Aaron Koenig in Bitcoin Beach, El Zonte
This blog post is an English translation of a German-language post that appeared on Bitcoinblog.de.