Welcome to Finance and Fury. This episode we will continue to look at what is happening in crypto markets. After last episode, we are starting a bit of a mini-series on crypto and digital currencies. This wasn’t originally intended but I have been doing more of a deep dive into this topic and there has been some timely news articles that I want to cover.

In this series, we will look at a few factors in relation to the crypto markets. Mainly governmental and financial institutional adoption of mainstream cryptocurrencies, like BTC. This series will cover the topics of firstly, el Salvador and other potential Latin American countries accepting BTC as legal tender, then Basel Regulations updates on banks/financial institutions accepting cryptos as assets and the implications this has on markets, and then to finish things off, China rolling out a digital currency that has been in the works since 2014. This may change over the weeks if I uncover any more interesting topics, but at this stage, this is the gameplan.

  1. But in today’s episode – we will be following on from last week’s episode where I give my personal thoughts on crypto currencies
    1. I mentioned last week that a few small nations may accept and adopt BTC – good timing – on the same day the episode was released – news that El Salvador was proposing the acceptance of BTC as legal tender came out – in the meantime, this has passed into legislation – so we will start the mini-series looking at this development

Now – El Salvador has become the first nation to formally adopt a cryptocurrency as legal tender

  1. and a handful of other Latin American leaders have indicated that they would follow suit – such as Paraguay and Panama 
    1. Does this really mark a change in bitcoin’s reputation and acceptance on the global stage? Yes and no – Yes for developing/3rd world nations reliant on the US dollar and remittance, but no for any major economy who are standing firm on their own domestic fiat currencies or proposed central bank digital currencies
  2. Why has El Salvador made this decision? It isn’t as simple as them being the first adopter in a global trend – Let’s look at why – as it comes down to the make up of these economies as well as their reliance on not only remittances –
    1. El Salvador – small Latin American country wedged between Guatemala and Honduras – the last time there was this much buzz around this region was the football war of 1969, which was fought over a few issues but was accelerated by the FIFA 1970 qualifying matches – but it is a small country with around 7m people living in it
      1. But it is considered 3rd world – GDP per capita of $4k v Aus at $55k
      2. They are also heavily reliant on the USD – which is another legal tender in the country
  • This is a problem for them as they are a net importer of goods – which means they can run out of USD – in other countries, you can just print more money – but El Salvador cannot do this
  1. Like many other Latin American nations – El Salvador’s economy is heavily dependent upon remittances – this is a term for funds sent home by citizens working abroad – i.e., an El Salvadorian works in the US and sends money home to family members – then this is remittance
  2. Remittances totalled over 20% of their GDP output in 2019 – and had only been growing over time –
    1. the economy in El Salvador has been struggling for years – their domestic economic output has struggled due to their internal economic issues, so they have become more reliant on external factors, such as the reliance on inflows of USD into the country to spend – they have also had some major political issues as well which we will come back to later in the episode
  3. The Governments move to adopt BTC is a very smart one from their president – when it comes to trying to maximise the remittance levels as well as potentially increase the crypto mining in the country – it works to achieve both ends
    1. Currently, remittances are delivered by money transfer services companies like Western Union – these are centralised and highly regulated under financial service regulations – this can be complicated between boarders – some nations disallow the transfer between boarders due to money laundering and counter terrorism financing laws
    2. Then to actually make the transfer happen through a money transfer service when it is permitted, it requires an in-person visit to an office and proof of identity for both the sender and receiver
  • In El Salvador – there are around 500 Western Union offices across the country – but most of these are located in populated areas – so some of the poorer individuals living in rural areas of the nation can have limited access
  1. Let’s have a look at the current state of financial services in El Salvador – around 70% of the population is considered to be unbanked – this means that they lack access to a basic bank account – which is an issue for anyone wishing to save or conduct online commerce – this is why physical cash transactions are facilitated through money transfer services – who needs a bank account when your withdrawals are coming from these services?
    1. In addition – due to the governmental history and political risk of the country – many people don’t trust financial institutions – let alone have the capabilities to establish a bank account
    2. Now – lets contrast this to say a BTC transfer – these allow anyone with a mobile phone and internet access to send or receive funds –
  • Also – BTC could be spent directly on goods and services, just as the US dollar is in El Salvador – all can be done though a wallet – so rather than someone going to Western Union and getting acceptance of the USD transferred to them, then withdraw the cash and then go spend this at their local store, they can simply be transferred BTC and then spend this on goods and services directly at a vendor
  1. it does sound a lot easier, doesn’t it? – but this is from a first world western perspective – which we will come back to in a minute
  1. But first – let’s have a look at how this could be great for El Salvador in the interim –
    1. If BTC prices continue to rise over time – and the population continue to accumulate more BTC in their wallets – then the prices of goods and services will become deflationary for them – i.e. they can afford to purchase more goods or services for the same amount of BTC
      1. As many crypto analysts suggest the price of bitcoin will rise over time – and let’s assume that it does – anyone in El Salvador that has BTC stored in their wallets can now afford more goods and services, especially whilst other goods and services are being pegged to the USD –
      2. This could potentially create an increase in wealth a consumption power by any lucky Salvadorians who has acquired and holds bitcoin if prices continue to rise
    2. If you invest 3 BTC in the country, you can also become a citizen
      1. So additional wealth and investment may come into the country
    3. Mitigation of environmental concerns around the electricity consumption of cryptocurrency – El Salvador has a large geothermal capacity – Geothermalpower in El Salvador represents 25% of the country’s total electricity production and is one of the top ten geothermal energy producers in the world
      1. However – they are currently an energy net importer – and it isn’t cheap electricity prices
      2. So, if the government, or private energy providers invests in further geothermal capacity, then the Government invites mining syndicates to set up in the country to mine crypto at a low electricity cost – could provide a cost-effective method of accumulating coins – plus they can tax it – to help generate more government revenues – this could be a major plus to their economy – but this would take years to implement

This all sounds great – and any market innovations and adaptions in my book is something in the right direction – but is that what is going on here?

  1. Important to take a step back and think about the functional economy within El Salvador and the use of BTC – as a 3rd world economy – for those of us in the 1st world – we cannot really appreciate what daily life is like to operate in an economy like El Salvador
    1. For a functional BTC exchange to emerge – it requires the internet – Recipients of bitcoin realise their funds by connecting to the internet
      1. Does El Salvador have wide spread internet access in the country and is this the major method of transaction between consumer and vendor? – World Bank has the data on this –as of 3 years ago, only 34% of the country was using the internet or had access to the internet
      2. This right away may seem to be a problem – unless this government program is to give all of the rural or poor population a phone with internet capabilities – how are they going to function under BTC as a monetary exchange? Would be different if this was done in Aus – where around 95% have regular use to the internet – but in a nation without the very infrastructure to help facilitate this adoption, there is a major bottleneck
    2. Another major issue is that is appears that businesses are being forced to accept BTC – I am not a fan of this – I personally think it goes against the very core concept of crypto – that is should be voluntarily adopted and based around individual liberty – i.e. to get away from government control and oppression that the monetary system has paced on the population – now a government policy forces all vendors/suppliers in the country to accept BTC
      1. Based around the legislation translations I have seen – relying on translation, I cannot speak Spanish – but the government acceptance of BTC as a legal tender requires every single commerce transaction to have to option to be conducted in BTC
      2. If they breach this – they are now breaching the nations commerce regulations and suffer consequences
        1. It is essentially the equivalent of you going to the farmers markets and wanting to pay in BTC – but they don’t have the capabilities to accept this form of payment –
        2. I go to a farmers market and around half of the vendors only accept cash – rather than me paying on bank card or credit card – but this is okay – as it is all still AUD – it is just the method of payment which differs –
        3. With BTC – there is currently no physical widespread payment mechanism for this – if a merchant doesn’t have internet, how does this affect their business?
  • It is a big question – and one that the economy of El Salvador has been given very little time to adjust to – remember – we are not talking about a first world nation – that has the capacity to access internet and sign up to wallets if need be overnight  
    1. I personally have never been to El Salvador – but I have been to many other 3rd world nations –and the cultural acceptance of certain technologies and pace of adaption that first world nations have shown shouldn’t be projected on any other nation
    2. Many of these nations do thing in their own time – and the approach of ‘if it isn’t broke don’t fix it’ can apply to many situation – so the very fact that the government may try to force your local street side vendor in El Salvador, who may not have access to the internet themselves to adopt and accept BTC overnight, let alone within the next 5 years may be a big challenge
    3. May put additional stressors on the population and hence the economy
  1. Another major issue is the volatility of BTC – I mentioned earlier in the episode that if BTC can continue to appreciate in value, then the price effect will be deflationary, assuming goods and services continue to be prices relative to USD
    1. This is where Adopting bitcoin as legal tender is not without its downsides – what is BTC all of a sudden decline in value by a substantial margin – this would have the opposite effect – through reducing the purchasing power of those holding BTC – creating an inflationary pressure
    2. BTC can be rather volatile – as an example – at the time of putting this episode together – the price of one BTC if $46k AUD, or $35.7k USD – this represents a decline of roughly 45% from the April high this year
  • Volatility in purchasing power can be an issue – as it affects the individual’s ability to make consumption decisions – if you purchasing power can easily change by 10% +/- per day then this can create major uncertainty when it comes to make purchasing decisions, as well as selling decision – Now imagine that someone in El Salvador had received all their savings through remittance in the form of BTC – then over a month the price declined by 45% – this means they have almost half the ability to spend – so what do they do?
  1. Can create economic cycles within El Salvador – if BTC crashes – then purchasing power is less – so people won’t spend anything for a month or two – and wait and hope until prices rise – if the price does, then you may see a massive spike in consumption, with which supply cannot keep pace, then you get inflationary pressures in USD terms, then if this cycle continues, you may start to see the purchasing power of the BTC decline even further
  2. So there are some untested areas of the economy with this case study for a small nation adopting a crypto currency

My personal views – I may be completely off – but BTC being accepted as legal tender by the government may simply be a policy that benefits the upper classes of El Salvador more so than many of the poorer individuals who rely on remittance – those with money who are politically connected and already have internet access – such as cartels and political officials, corrupt or not – rather than the poor farmer trying to sell their goods on the street – this take may be cynical of me and I may be missing a major factor of this policy here – but based around the historical behaviour of the El Salvadorian government, as well as the capacity for the average population to accept BTC as a method of payment due to limited internet access, it makes sense to me at lease

  1. When you look at El Salvador or many other tiny Latin American nations – historically many of these countries are run as either a banana republic or as a narco-state – where there is an embedded relationship of corruption
    1. Who does this policy help? When you look at the fact that the majority of the poor don’t have access to the internet and will still be reliant on remittance from money exchange services – it may not be them
    2. The very lack of an internet connection in the nation stifles the adoption of the policy – plus puts a major political risk on businesses who are now required to fund to cost of getting a device and internet access to accept BTC payments
  2. But from my 1,000 foot view – take this with a grain of salt – as I am providing an analytical assessment without ever setting foot in the country or talking to the population – but the majority of the poor who cannot afford internet connections or smart phones may be left in the dust
  3. But those who have internet connections and have large amounts of capital to move can really benefit – Look at the current president and his actions – this is based on news stories, so no idea if they are true or not –
  4. The President wanted to secure a $109m loan from the US to militarise their police -the plan was opposed by both opposition parties who had the majority – game over right? Well – he ordered soldiers into the Legislative Assembly to help incentivise legislators to approve the loan until it passed in his favour
  5. He has also been accused of negotiating a deal with MS13, the most powerful gang in the country to provide less strict prison conditions if they can lower the number of public murders
    1. Gang presence is huge – MS13 and MS 18 are the largest crime syndicates in the country who are responsible for drug and human trafficking trades
    2. Who has the most money to flow into El Salvador – a group of local farmers, or a massive criminal network like MS13
  6. This isn’t a justification to ban crypto like BTC, as no other currency on earth has seen more criminal deal committed in it than the USD –

In summary –

  1. If this was a move where all major governments/monetary authorities were going to look at the same process, then this would be great news – but it is in reality a minor occurrence – as the capability to directly accept BTC for commence is lacking in the country, beyond those wealthy elite or drug cartels already set up for this
  2. but I hope it just helps to show a different side to the title that most people have read, showing that BTC is being accepted by El Salvador – as there is more to the story once you dig a little deeper
  3. I may be wrong, the internet connection and adoption by the local population may occur overnight, but time will tell –
  4. Next week – we will look at the evolution of the banking system in relation to crypto – in particular the Basel Committee views on the subject and their recently released guidance to banks around the world on how to treat crypto

Thank you for listening to today’s episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/ 

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