Magic Internet Money Rocks the World
Posted September 07, 2021
It’s finally happened: a nation has adopted Bitcoin as legal tender. That nation is El Salvador. In doing so, President Nayib Bukele (with an 80% approval rating) defied the IMF, large banks around the world, and the US State Department. He did it anyway, acting on the advice of many crypto-currency experts in the US whom he assembled as a braintrust. Bitcoin rallied once the reality set in.
At this point, it appears that there is no turning back, not only for El Salvador, but for the world. This happens as governments and central banks all over the world have engaged in an epic screw up of enormous proportions. They have inflated their currencies to the point of grave danger, ballooned debts and deficits in a way that threaten macroeconomic stability, and continued to throttle economic activity in the name of virus control.
Bitcoin at this point represents emancipation from an unfolding global calamity. This is because it is not a nation-state money. The network is decentralized, uncensorable, unhackable, and truly democratic in that anyone — from the richest to the poorest — can get involved. The market does not open and close; it runs 24 hours a day all over the world.
It’s sound money redefined. And it’s not just about Bitcoin; many alt-coins are making giant moves right now. Investors and institutions have clearly decided that these assets must be part of any diverse portfolio.
All this is unfolding at a remarkable pace, following ten years in which the technology was ridiculed, denounced, and dismissed. Worse, it was called truly dangerous to global economic stability and the ability of governments to make their economies.
Bitcoin Magazine is correct: “We might be living through Bitcoin's very inflection point. Once only geeky internet money, Bitcoin is now shifting priorities worldwide and teaching the economic system what sound money is.”
The international press covering this event has highlighted only the dangers to the country. It is volatile. Not enough citizens have internet access. It opens the possibility of money laundering. People could lose their savings. And so on.
Savvy Central America
Americans reading this news cannot even fathom how people in this poor country can manage such a complex monetary instrument as Bitcoin. But such skeptics are really quite clueless about the realities on the ground. Most Americans have only had experience with one currency, except perhaps when traveling abroad. As a result, they find it inconceivable that people in a poor country like this can manage to toggle between various monies and exchange rates.
A quick story that shows why this incredulity is wrong. Back in the 1980s, I travelled to war-torn Nicaragua. The country had an unstable regime and was seriously divided in the midst of the Cold War. The national currency was badly inflated. The government was gaming exchange rates with the dollar in order to pillage travellers and foreigners as much as possible.
I quickly figured out the game and realized that the gray markets were the only source of genuine and realistic valuations. These markets operated around the clock even right outside the main Managua hotels.
The first day, I went out there to see what I could get in exchange for dollars. I was amazed to observe half a dozen kids out there on the streets exchanging money. They were approximately 10 or so years old. They seemed to have a system for managing the fast-changing rate shifts, communicating minute by minute using complex math. They behaved like savvy investment bankers on Wall Street even without any formal education.
It was simply astonishing to watch unfold. They were performing monetary calculations that not 1 in 1,000 Americans could do and only 1 in several million kids that age in the US could achieve.
That example taught me a valuable lesson. In countries with broken currencies and many competing currencies, people quickly develop the capacity to figure it out. When their material comfort and safety are at stake, people have every incentive to learn and perform complex tasks. The president of El Salvador knows this about his citizens. He knows that they are used to toggling many currencies in foreign exchange markets and dealing with all kinds of financial operations involving cross-border money exchange. For them, Bitcoin will be just another method of moving value — except that they won’t have to sneak around to do it because it is now perfectly legal to do so.
Panic in the US
Check out this headline in the New York Times: “Crypto’s Rapid Move Into Banking Elicits Alarm in Washington.” The content is pretty close to what this letter has been emphasizing for months. It explains that there is an alternative set of institutions emerging that perform all the functions of the conventional banking system except that it relies on stable coins, smart contracting, and crypto tokens. It has complex trading, lending facilities, clearing systems, and so much more.
The numbers here are what is attracting the attention. The article begins by profiling BlockFi, a startup with headquarters in Jersey City. It has “more than $10 billion in assets, 850 employees and more than 450,000 retail clients who can obtain loans in minutes, without credit checks.”
What’s bad about this? “The technology is disrupting the world of financial services so quickly and unpredictably that regulators are far behind,” the Times explains, “potentially leaving consumers and financial markets vulnerable.”
But the worry about vulnerabilities here is entirely perfunctory. The real concern is control. The regulators have not managed to keep up with the development of the industry. They now find themselves outgunned, outmaneuvered, and outsmarted. They are engaged in what they are calling a “crypto-sprint” to catch up.
“Acknowledging that it could take at least a year to write rules or get legislation passed in Congress,” says the Times, “regulators may issue interim guidance to set some expectations to exert control over the industry.”
Too Fast to Control?
The frustration for them of course is that this technology refuses to behave like traditional money and finance. In fact, it was designed precisely NOT to behave like traditional money and finance. No amount of regulation and rules are going to change that. All the interventions will be annoying and costly but they will not change the fundamentals about crypto, which is designed ultimately to operate peer to peer.
More than that, these new banks operate without federally guaranteed deposit insurance because they are keeping 100% reserves. As for credit checks, there is no need since the crypto itself serves as the collateral. At this point, officials at the Fed and Treasury are in the odd position of just sitting back and marvelling at the way in which crypto has come to perform so much better for so many tasks than conventional money and finance — so much so that The Fed and Treasury continue to make noise about starting their own cryptocurrency.
Here’s the problem for old-line money regulators. They cannot blast and condemn the crypto industry even as they talk about creating one for themselves. There is an additional problem here too: what precisely is the value proposition of a government-created crypto in a world in which the private sector has already created such astonishing innovation?
All of this reminds me of the time that the Post Office found itself seriously annoyed about the existence of private email. The Postmaster General went so far as to encourage all citizens to register for a government-provided email address. The effort completely flopped. No one signed up for it and the effort was quickly abandoned.
This is why this El Salvador situation is so very interesting. I have every confidence that the experiment here is going to go well. Other small nations will copy the model. Gradually we could see the unfolding of what many of us dreamers imagined could happen some ten years ago. Give it time. Let the innovation proceed apace. Eventually we’ll see the crypto space innovate to become the metaverse of money and finance, doing an end-run around the antique world of central banks and governments.
All told, this is a real source of hope. One of the few in times of unrelenting chaos and confusion!