Countries begin to adopt Bitcoin, what lies ahead for citizens ?
Know what this means for financial inclusion, surveillance and the need for an honest government to sustain this system.
Disclaimer: The information in the article is for educational purposes only. None of this content must be considered financial advice, instead as personal opinions of the author.
It was quite big news around the globe and especially in crypto circles that the Central American country of El Salvador passed a bill on June 8th 2021 to make Bitcoin as a legal tender within their jurisdiction.
Their existing official currency called the Salvadoran Colรณn was replaced by the US dollar in 2001 as an official currency and unit of account at a pegged-rate of 8.75 colones Salvadoran per dollar. It was established that their Central Reserve Bank would no longer issue new banknotes or coins in colones and, gradually, the colons were collected by local banks and taken out of circulation by replacing with USD. Travel blogs say the colรณn is still used mainly as change, for stuff costing less than $1.
Reason for the switch to USD was probably to improve trade relations with other countries and to rather have a stable peg and avoid a possible devaluation of local Fiat. Now two decades later, they have made another interesting move into Bitcoin, a first for any country in the world to declare it as legal tender by law.
Also their government officials have announced that the country will be using its fully renewable geothermal (volcanic) energy source to mine Bitcoin. This effort would result in their mined Bitcoin being added to their balance sheet and hence improving their fiscal position.
Following the announcement, several political leaders from other Latin American countries like Paraguay, Mexico etc. have expressed interest on social media like Twitter into following a similar route of El Salvador. The final outcome of this is yet to be uncovered.
Its important to remember that Latin American nations have been severely affected by high inflation in the recent past, reason being they borrowed US dollar debt during the time of a weak dollar around 2009 however as the dollar turned stronger from 2018 and during the Covid crisis, their local currencies have devalued due to the debt burden. Also the U.S Fed dropping interest rates has not really helped these countries.
Hence it comes as no surprise that they are likely to adopt Bitcoin as a reserve asset though they don't have an internal ongoing destructive circumstances like a civil war or a military coup.
However if El Salvador and several other countries declare Bitcoin as legal tender, that doesn't change the fact that it won't be any easier to use BTC as a currency right away.
Its expensive to call an asset as a currency & deal with all the issues that come with it. However despite the limitations, I believe its a brave and daring move by the small country of El Salvador to enact a law making Bitcoin as a legal tender within their nation's boundaries.
So in practical terms, use Bitcoin on L2 like the Lightning Network, right ?
Well, not so fast.
Contrary to the popular opinion, it costs an on-chain BTC transaction to open/close a channel on the LN.
This is kind of like spending an entire day's wage for a common El Salvadorian to open a lightning channel by making an on-chain Bitcoin transaction which isn't ideal, obviously. Strike Global, the company led by Jack Mallers will provide instant BTC-to-Fiat USD conversion natively on their App, so users don't really need to worry about the volatility of Bitcoin prices. They are given the choice to hold and transact with either BTC or USD. This provides them with an inflation hedge option should the dollar continue to devalue.
Let's look at the medium to long term impacts of this at the end of the article.
Same applies for remittances. El Salvadorians who live abroad including the US could use the same Lightning network based apps to send money to their families, thus eliminating the need for middlemen and banks. So undoubtedly this will propel a new wave of financial inclusion for citizens and they could get access to financial services using Fiat solutions built on Bitcoin.
This would be a major breakthrough for the local economy of El Salvador as over 50% of its population as access to the internet however 70% donโt have a bank account as per Alex Gladstein, CSO of the Human Rights foundation.
The Unbanked folks in El Salvador in other developing countries are extremely likely to use apps like Strike Global to transact in USD and/or other supported FIAT currencies on it using the in-built fast conversion.
A vast majority of users won't even know that Bitcoin is involved anywhere & may not see the need to buy/own it.
It remains to be seen how the population will evolve to use BTC in their daily lives with such favorable regulations. Of course, large transactions are done and settled on-chain BTC everyday, but not the ones involving minor ones like paying for a coffee etc.
If you are a new entrant into crypto, it really helps to dive deeper into the concept and properties of an 'asset' and a 'currency' and come to your own rational conclusions before making an investment.
Also be informed that folks cheering & going gaga on 'cryptotwitter' that โcountries are going Bitcoinโ rarely ever use it as a currency themselves, instead they buy and HODL. ๐
This makes it a textbook case for 'Asset'.
Medium to Long Term Implications:
Now that Strike Global is the primary service provider for the country of El Salvador, it will implement a KYC like system for citizens to sign up and use their app to transact and hold Bitcoin.
The other side of this is that the El Salvador government will have complete access to all information of the wallets of each citizen and their BTC and USD balances (or they could get access via request anytime).
On the flipside, depending solely on a foreign private company to implement such an important system nationwide could also have its own set of negative implications in the long run i.e. from scaling, database hacks etc. up to trade isolation depending on international political developments.
While this move could help to track and curb criminal & malicious activities, it comes at the expense of user's right to privacy.
Using physical cash has no privacy implications and any strangers could trade and transact value without having to know each other's information.
At this time of writing, USD cash is still king in El Salvador.
This invaluable information of citizens can make ruling governments carry out moves that could politically give them an unfair advantage over their oppositions like:
Introduce new taxes targeted at certain Bitcoin holders depending on their wallet balances
Monitor the spending habits of people and implement policies to promote crony capitalism
Watch out for political opponents receiving external donations and confront them
Add their political enemies to No-Fly list (on fake tax evasion charges)
Freeze funds of a group of anti-govt protestors (if stored on custodial wallet services)
These are just a glimpse of the unknown future possibilities for the citizens there.
Only if a government is honest, then a surveillance system like this can function normally for long periods of time.
This unexpected move from El Salvador has surprised most countries including institutions like the International Monetary Fund (IMF) which said it has economic and legal concerns regarding the move, what could then impart the country's bond markets and borrowing rates. Worst scenario would be a credit crunch.
The US reaction would also be interesting to watch out, if they take it as an antagonist move, it could invite โsanctionsโ which could be disastrous for a country that uses US dollars as its official currency which it cannot print. Note that Iran whose ability to obtain dollars has been severely hampered due to US sanctions that led them to mine Bitcoin to pay for imports.
A currency in all sense of reality should be fungible & privacy preserving. Like cash.
In case you did not know, Bitcoin is a โtransparent ledgerโ and every transaction is TRACEABLE by anyone looking at the blockchain. Governments can use service providers like exchanges and blockchain surveillance firms to link an address with a person and know all about their transaction history with a very high rate of success. Once figuring out the owner of an address they can pressure them into handing over their funds (irrespective of reason). Don't take my word for it, do your own research and verify this fact.
Bitcoin is currently more of a Store-of-Value asset due to its scarcity induced by its capped supply of 21 million and nearly 90% are already mined.
Institutions forayed into this space in 2020 and they aren't buying it to use as a โcryptocurrencyโ , but rather as an inflation hedge. MicroStrategy CEO Michael Saylor who made the first move for a publicly listed US company to hold Bitcoin on their balance sheet has said on multiple occasions that he believes it is "a thermodynamically stable and institutional grade asset" apart from calling it โa digital property in cyberspaceโ.
In the future, due to rapidly accelerating innovations we could see easier on-ramps to Bitcoin layer 2 and less cost burden on the user to transact. For example, an exchange (or a custodial service) could charge a small fee from each user to move their coins to L2 while using some form of batch transaction for a whole bunch of users in a single on-chain transaction to mitigate the costs. While this is one possible solution, we are not there yet.
Thankfully there is something that can work as a true decentralized digital cash right now, not in some promised utopian future. It beats the dirty fiat and pro-surveillance coins any day.
Read about 'Monero' . I will come up with a detailed article on it later, for now please scroll to the end of the post for some basic details.
Please do share your thoughts on the next leg of Bitcoin adoption and its implications on privacy and personal freedom by commenting below.
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