El Salvador x Bitcoin is a bigger deal than I gave it credit for
How does a small country of 6.5M people revolutionize the global financial system? By refusing to play.
El Salvador, concerns over the Millennial super-president authoritarianism aside for now, is a small Central American country bordering Guatemala and Honduras with a purchasing price parity adjusted GDP of about $55B that is likely to soon adopt Bitcoin as legal currency.
The public sentiment has bounced between “this is a gimmick for the news cycle” and “this will destroy the global dollar hegemony and financial order”. At first I was the former, but I’m starting to think it could be the latter. What I’d like to do in this newsletter is (1) discuss the global financial system as it relates to currency power and (2) detail the mechanics of how to get a 30% rural and 70% unbanked population onto the money of the future. So let’s get started.
1. The US Dollar (USD) supremacy is a 100+ year long history of nuanced manipulation of the global financial system to (1) make the US dollar the primary currency that links to gold, allowing all other currencies to instead peg to US dollar (the Bretton Woods agreement) and (2) take the dollar off the gold standard to give the USA a global near-monopoly on currency (The Nixon does what Nixon wants special).
The thing about debt is that, denomination matters a lot. If you foolishly agree to give me a loan of $1,000 US dollars that I pay back in 10,000 Carlos Bucks, while knowing I own the Carlos Bucks printer, you would be acting very stupid. The USA is not stupid. When they lend $3.1 Trillion in USD (the total amount of US Dollar denominated debt owed by emerging markets) they expect to get paid back in dollars too.
The way for non-US countries to earn dollars, is to export goods (& services too, $6B worth of services done by Salvadorians in the US are remitted back to El Salvador) to the US in exchange for either your currency or dollars (this is why foreign exchange is such as big deal, because trade is a big deal).
Oh… but be careful, because imports from the US require you cough up dollars too. And those complicated, possibly not your native language, international “aid” financial loans you agreed to? They require you to meet certain budgetary, import, and payback requirements that can be highly destructive to countries that struggle to grow as quickly as the US and thus, their currency continuously falls behind.
If you’re catching my drift here, you might be thinking, “oh, no wonder El Salvador wants a currency that beats the dollar!”. Yes, you get it. The vast majority of the world has limited control over their economy due to (1) not owning the currency they have debt in, (2) not being able to grow faster than the country that does control their debt, and (3) engaging in international predatory lending that incentivizes corruption (see: principal-agent problem) and sacrificing of health, education, and infrastructure to pay off those loans.
Now, I’m not here to bash the US. They’re not doing anything Russia isn’t doing to former Soviet states or that China isn’t doing to Southeast Asia and East Africa. Currency is very complicated and so is trade and so is development. In some ways, these loans can be a liability for the large countries who now have to remain invested in their debtors to ensure payment (this ranges from regime change to brokering peace deals to prevent civil wars to emergency aid for natural disasters).
My point is:
El Salvador’s decision to adopt Bitcoin as legal tender is a decision to not play this game. Or at least lower the stakes a bit.
I’m not a geopolitical expert, so I don’t want to make any assumptions on the consequences El Salvador will face for making this decision. I am going to operate on the assumption that the global financial system will watch patiently to see what happens and switch to talking about how El Salvador can successfully pull off the normalization of Bitcoin nationally.
So 70% of the population unbanked, how do we get them to skip straight to self-banking with Bitcoin? Here’s what I see as the mechanics of pulling this off.
Confirm the legislation that treats Bitcoin as a currency, i.e., no capital gains taxes or taxable events related to the buy, sell, exchange, or appreciation of Bitcoin relative to any other currency.
The president of El Salvador, having freshly wiped clean nearly all opposition in all other branches of government, should be able to pull this one off. Let’s move on.
Promote existing or develop a new application that enables the storage and exchange of Bitcoin (notice I’m not saying buy/sell here).
Jack Maller, CEO of Strike, the digital wallet built on top of the Bitcoin Lightning Network (essentially, a Layer 2 for Bitcoin to reduce transaction costs to reasonable levels) has been working for years behind the scenes to support Bitcoin adoption by El Salvador and Strike is well positioned to be this app.
Deploy token amounts of bitcoin as a seed capital for those willing to engage with the application. This will bring a novelty factor and get people used to exchanging goods and services for Bitcoin.
Work with key leaders and business people in communities to get them banked and thus able to interface with a formal exchange for buying/selling Bitcoin.
Essentially, you want a localized exchange model. Instead of trying to get 6.5M banked so you can get them to do the USD -> Bitcoin onramp themselves, you want to get that 1-3% of highly connected people in communities banked and they can do the onramp for everyone else.
Imagine if every pawn shop, grocery store, phone store, internet cafe, and plenty of other businesses all accepted and exchanged both USD and Bitcoin (with a small, reasonable exchange premium). This is already quite common in countries with high cross-border mobility, where foreign exchange as a service is a type of core infrastructure.
People could natively balance how much of each currency they want with no concerns over tax or usability. You just need a critical mass of adopters such that adoption has momentum and becomes inevitable.
Provide government support, including technical assistance on (4) and discounts where appropriate for paying with Bitcoin. Public zoos, parks, attractions, transportation networks, etc. can offer a nominal discount in paying with Bitcoin instead of USD (essentially, the government absorbs the volatility risk that an individual may not be entirely able to, thus incentivizing holding some % of portfolio in that asset for the discounts). If they’re really serious, they can even discount taxes if paid in Bitcoin.
Ok so we covered why currencies matter and how El Salvador can pull this off mechanically. While I was writing this, the bill actually passed El Salvador’s Congress 62 / 84 making Bitcoin a legal tender for the first time. Monetary History has been made!
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