Bitcoin as legal tender? Why El Salvador’s plan isn’t as crazy as you think


Salvadoran President Nayib Bukele’s proposal to make bitcoin legal tender in his country has aroused understandable scratches and skepticism among observers in the developed world.

Speaking to BBC News, Rohan Gray, professor at Willamette University College of Law, said that a country taking such a decision would cede “its degree of autonomy and control over its own political space to a network which is not stable, n There are no responsible actors and they are used to providing the kinds of price stability and liquidity that a currency is supposed to provide. “

But to understand why this move might not be as crazy as it sounds for those of us who are privileged to live in countries that have enjoyed such relative stability, let’s zoom out a little bit. .

Countries like El Salvador have struggled to trust their local monetary systems. El Salvador in particular, and not only, already has two official forms of currency in its local system – issued locally two points and US dollars. On paper, both are good for all debt, public and private, but in practice, a local bitcoin told CoinDesk, Salvadorans use dollars for trade and settlers as “table ornaments. “

The reason some countries outside of the United States adopt its currency, or “dollarize” their economies, is that the greenback is seen as more stable and trustworthy. It is, after all, the world’s reserve currency and constitutes a large part of the savings of central banks, corporations and, to a lesser extent, individuals around the world.

This is true even though the United States itself still has an inflationary monetary policy at best, and since the 2008 global financial crisis it has pursued a very experimental form of monetary policy involving tools such as easing. quantitative and a central bank that monetizes or buys government-issued debt to keep interest rates low.

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These decisions about the management of the US dollar can end well or badly. We do not know yet.

But for countries like El Salvador that view the dollar as a more predictable currency than the one they issue locally – which is more likely to retain its value than the one they issue locally – the ongoing experience is Washington poses a problem.

These countries look to the dollar for relative stability and predictable monetary policy, but they increasingly see an experimental currency that is completely out of their control and not managed to their advantage.

Which brings us to bitcoins.

Nothing personal

For a country like El Salvador, bitcoin’s fixed, long-term monetary policy, which can only be changed by a true majority of network participants, may offer an attractive alternative to the almighty dollar.

Announcing Bukele’s plan at the Bitcoin 2021 conference in Miami this weekend, Jack Mallers, bitcoin entrepreneur described the move as a reaction to “unprecedented monetary expansion”.

Mallers, whose start-up, Zap, works with Bukele’s government, criticized the US Federal Reserve for “crushing emerging markets,” like El Salvador, by printing money willy-nilly.

According to what appeared to be an excerpt from Bukele’s bill, included in a slide of Mallers’ presentation in Miami, “central banks are increasingly taking measures that may harm El Salvador’s economic stability.”

“In order to mitigate the negative impact of central banks, it becomes necessary to allow the circulation of a digital currency with an offer which cannot be controlled by any central bank and which is only modified according to criteria objectives and calculable “, indicates the extract. .

Unlike the dollar, the supply of bitcoin today, next month, and 100 years from now can be accurately modeled in advance. A fixed number of new bitcoins are created every 10 minutes. Every four years, the number of bitcoins created is halved. There will never be more than 21 million bitcoins and this final number will be reached in more than 100 years.

The fact that we know all of this today is important and in stark contrast to any government issued currency, including the dollar.

The problem is not who is in control, the problem is that anyone can be in control.

In the United States and most countries, this is a small group of well-accredited people who do their best to manage their currency for the benefit of their country. Twenty years ago, Bukele’s predecessors in El Salvador decided they wouldn’t trust such a task and made the dollar legal tender. next to the colon.

When you ‘dollarize’ your economy in this way, you are actually saying, “Our monetary policy for our local currency is not reliable and stable enough to put all of our eggs in this basket, so we will officially support something out of our pocket.” control that allows people to choose without holding the black market accountable.

Twenty years ago, that was something you could reasonably use the US dollar for. It was run primarily for the benefit of the United States, but compared to other currencies it was a rock, boring, reliable, and least bad option available.

Uncharted waters

Today, the dollar leads the charge of experimental monetary policy, with supply more than doubling over the past 10 years to reach $ 20 trillion in April, according to the Federal Reserve Bank of St. Louis. The data.

Nearly half of this $ 11 trillion increase has been added over the past 18 months to counter the economic effects of the coronavirus pandemic.

In this light, bitcoin is starting to look like the most “stable” currency. It is not managed for the benefit of a group or an individual. It’s just is.

So when people say bitcoin is volatile, they are not talking about its monetary policy. They talk about the current price in dollars.

In a world where the world’s reserve currency and apparently all other currencies are driven by the short-term needs of governments, what is the true value of something that is not?

For El Salvador, this is a rather interesting question and we will all have to find the answer.

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