The Breakdown - El Salvador to Become the First Bitcoin Country: Just How Big a Deal Is This?

Episode Date: June 8, 2021

On Saturday, the Bitcoin 2021 organizers teased that one of the biggest announcements in bitcoin’s history was coming. That announcement ended up being from El Salvador President Nayib Bukele, who shared that he was advancing a bill to make bitcoin legal tender in the country.  Since then there has been a huge amount of debate and discussion about the implications and the significance of the move. In this episode, NLW breaks down the story from multiple angles. -- Earn up to 12% APY on Bitcoin, Ethereum, USD, EUR, GBP, Stablecoins & more. Get started at nexo.io -- Enjoying this content?   SUBSCRIBE to the Podcast Apple:  https://podcasts.apple.com/podcast/id1438693620?at=1000lSDb Spotify: https://open.spotify.com/show/538vuul1PuorUDwgkC8JWF?si=ddSvD-HST2e_E7wgxcjtfQ Google: https://podcasts.google.com/feed/aHR0cHM6Ly9ubHdjcnlwdG8ubGlic3luLmNvbS9yc3M=   Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW   The Breakdown is produced and distributed by CoinDesk.com

My name is Ajid Bukele and I'm president of El Salvador. Great ideas are beautiful and have great power. But like most beautiful things, they can also be more fragile than we think. When I was a kid, we thought about the future and we were delighted by its possibilities. We couldn't wait for it to happen and be part of its creation. But now, ask almost anyone what they think about the future and they will say something along the lines of nuclear war, climate catastrophe, hunger, pestilence, the death of life. We didn't take care of the beautiful future.

took care of the beautiful idea that we create our own future, that we as humanity can do almost anything that we imagine. Our ingenuity, what separates us from other species. In El Salvador, we are trying to rescue this idea and start the design of a country for the future, using the best ingredients that makes us who we are while using sensibility to find the best examples of ideas from history and around the world.

I believe Bitcoin could be one of these ideas. That is why, next week, I will send to the country Congress availed that will make Bitcoin a legal tender in El Salvador. Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big-picture power shifts remaking our world. The breakdown is sponsored by nexo.io and produced and distributed by CoinDes. What's going on, guys? It is Monday, June 7th. And man, this is the type of episode that is like skipping rocks across a pond. There is so much to dig into that I feel like I'm barely

going to scratch the surface today, but I want a relatively complete starting point for anyone who wants to understand this news coming out of El Salvador. Now, before I get into it, a big caveat is that my knowledge of El Salvador stopped and started with the Civil War and the U.S.'s role in it until about three days ago. I'm learning in real time just like you guys, and I don't want to present any hint of overconfidence, particularly with regard to domestic politics in El Salvador. But with that out of the way, let's talk about this. Bitcoin 2021 in Miami was already dominating the Twitter spear before Saturday. Multiple hashtags related to the event were trending around the U.S. The crypto Twitter tribes were showing off their tribalism in

glorious fashion. The people in Miami, meanwhile, seemed to be having just an absolute hell of a time. But on Saturday morning, tweets started coming out from the official event account as well as from influencers that one of the biggest announcements in Bitcoin history was coming later that day. That was a pretty big claim, and so of course there was some amount of immediate skepticism. Could whatever the news was meet that lofty bar set by the marketing? Around 4.30 p.m. Eastern Time strikes Jack Mahler's ascended the stage to make an announcement. Now, for background, Mallors had recently spent time at El Salvador's Bitcoin Beach Project, alongside others like Square Cryptos Miles Souter, and had already contributed to some interesting initiatives there.

For anyone paying attention, there was clearly some ground-up momentum around Bitcoin and Lightning in El Salvador. Mueller's announcement, however, would catapult the country into a totally new status in the Bitcoin world. As you heard at the beginning of this show, El Salvador's president, Naid Buckele, was submitting a bill to recognize Bitcoin as legal tender. They would be the first country to do so with significant implications. And while the bill would still have to be reviewed by the country's legislative assembly, Buckele's Nuevasideas party, New Ideas, had recently won a significant a majority in the unicameral body, so passage was nearly assured. As you heard, in his recorded statement, President Bucle explained that the world had lost too much of its optimism, that it had forgotten

that the future is what we make of it, and that Bitcoin, he believed, could be a force for restoring that optimism. What's more, he went on to say that in the immediate term, it could create new jobs, and helped the 70% or so of the country's citizens who aren't connected to the traditional financial system. After the president's prepared statement, Mahlers read his favorite part of the bill. Central banks are increasingly taking actions that may cause harm to the economic stability of El Salvador. That in order to mitigate the negative impact from central banks, it becomes necessary to authorize the circulation of a digital currency with a supply that cannot be controlled by any central bank and is only altered in accord with the objective and calculable criteria. So let's talk about the reactions. There was, of course, the thrilled reaction from the Bitcoiners.

and we'll talk about some modifications of that in just a minute. But there were some other types of reactions as well. One large category was dismissive. Jason Calcanus tweeted, Breaking, a country of 6 million that doesn't rank in the top 100 economies say they might embrace Bitcoin. Bitcoin community, LFG, exclamation, exclamation, exclamation. Of all the critical takes, I find this one absolutely the stupidest. As we'll discuss in a second, there are reasons to be skeptical or even concerned.

but the idea that a country opting into a monetary system that they don't have control over that isn't from a wealthier state is a hugely significant event full stop. Some were skeptical without being condescending. Hasu tweeted, quote, one of the biggest announcements in Bitcoin's history. I'll take the under on this and say we won't hear much about it after today. If you disagree, I'll hear the counter arguments. How does this help either Bitcoin or the people on the ground in El Salvador? It goes without saying that Jack Mahlers and team are absolute kings for onboarding people

a Lightning Network and Bitcoin on the ground in countries like El Salvador. My question was purely and honestly how Bitcoin being legal tender helps with that. Now, to me, Hasu is one of the most intellectually genuine good faith brains in the space, and I think his question is literally functionally around the relevance of legal tender status for Bitcoin adoption. In other words, couldn't there be just as much adoption without legal tender status? However, I think the idea that we won't hear much about this after today is one of his least likely to be correct takes ever and fails to appreciate the psychological and simplication

symbolic significance of the event. This is a symbolic, highly political gesture and one that will generate political responses, many of which might not be symbolic. A final category of responses were concerned, concerned specifically about this particular ally. As always, there were bad faith versions of this and good faith. The bad faith from people primarily who already don't like Bitcoin, effectively argued that Bitcoiners were throwing aside their values to embrace an autocrat because he put laser eyes on his Twitter profile picture. The more nuanced take was that there are some flashing authoritarian warning signals that we should take seriously with Buckele. But that, as Alex Gladstein wrote a few months ago, Bitcoin is a Trojan horse for freedom.

We're going to get into all that in just a minute, but first let's look at the more surface implications, and let's talk first about implications for those in El Salvador. One important note is that the full bill hasn't been shared yet, so we don't know about all the implications or meaning of legal tender in this context. But broadly, I think the way that it plays out is this. A permissionless, alternative banking system. system, available to anyone with a mobile phone, more or less, will be enshrined as not just legal, but formal by El Salvador. That doesn't mean that flash overnight, the 70% of people that aren't in the traditional financial system will be onboarded to Bitcoin or that it will

solve poverty. But it means that Bitcoin becomes an alternative path. There are currently 9.43 million mobile phones for a little more than 6 million people in the country, about 1.5 connections per person. Bitcoin being legal tender means that entrepreneurs who want to build Bitcoin services to help people access the Bitcoin system and network can do so with full confidence in the legality of their pursuits. It also addresses legal questions of what Bitcoin is from an accounting and tax perspective. One specific area of the economy that could be massively impacted is in remittances. Remittances account for about 20% of El Salvador's GDP. The companies that facilitate those remittances can charge 10% or more, and in general, remittances must be picked up from a physical location.

That's why, when Jack Mahler's was talking about onboarding 20,000 new strike users a day when they were down there, he called it like watching the country's GDP improve in real time. Buckele reinforced these themes in his thread from Saturday. He tweets, Bitcoin has a market cap of $680 billion. If 1% of it is invested in El Salvador, that would increase our GDP by 25%. On the other side, Bitcoin will have 10 million potential new users and the fastest growing way to transfer $6 billion a year in remittances. Besides, a big chunk of those $6 billion is lost to intermediaries. By using Bitcoin, the amount

received by more than a million low-income families will increase by the equivalent of billions of dollars every year. This will improve lives in the future of millions. Furthermore, 70% of El Salvador's population doesn't have a bank account and work in the informal economy. Financial inclusion is not only a moral imperative, but also a way to grow the country's economy, providing access to credit, savings, investment, and secure transactions. We hope that this decision will be just the beginning in providing a space where some of the leading innovators can reimagine the future of finance, potentially helping billions around the world. Now, all of these benefits only happen if people adopt Bitcoin, which gets to one more

effect of this announcement for the people of El Salvador themselves. The most visible figure in their country just made his Twitter profile laser eyes and is tweeting and speaking extensively about Bitcoin. This made front page news in the country and is going to create a massive force for Salvador and citizens to learn about and try Bitcoin. There is, of course, another potential economic dimension for El Salvador as well, which is the possibility that highly mobile to centralized companies and individuals working on Bitcoin-related projects could decide to set up shop in the country. Twitter has been absolutely a flurry with sentiment exactly like that.

Stefan Levera, who couldn't get a visa to get out of Australian into the U.S. for the Bitcoin conference, poor guy, tweeted, quote, El Salvador Bitcoin Legal Tender News might be a good opportunity for people to go work remotely from El Salvador and stack sats that won't have capital gains tax on disposal. Obviously, a lot of moving parts here, citizenship, residency, how you're structured, but worth exploring. President Buckele himself retweeted this and said, we'll help with this. If you're starting to see comparisons to Miami Mayor Francis Suarez, you're not alone. When Justin's son tweeted, crypto investors and entrepreneurs will start to move to El Salvador. Buckele retweeted it saying, one, great weather.

other, world-class surfing beaches, beachfront properties for sale. Two, one of the few countries in the world with no property tax. Three, no capital gains tax for Bitcoin since it will be a legal currency. Four, immediate permanent residence for crypto entrepreneurs. I talked on the show before about how the geopolitical competition for talent is just beginning, and this is a phenomenal example of exactly that. Looking for the best way to unlock your crypto's liquidity? nexo.io is exactly what you need.

borrow against your digital assets at just 6.9% APR, earn passive income with yields of up to 12%, and swap between more than 100 market pairs with the instant nexo exchange. Try the NXO wallet app to get the whole 360 degrees of crypto banking. Get started at nexo.io. That's N-EXO.io to get started today. But what about geopolitical implications more broadly? Well, there are a couple great threads on this. The first that I want to read is from Avik Roy, the president of the president

of the foundation for research on equal opportunity. The president of El Salvador announced at the Bitcoin Conference that he is introducing a bill to make Bitcoin legal tender in the country. This is a major development in the history of monetary policy. There are many reasons why this is significant. One, in the U.S., Bitcoin is treated by the IRS's property, which means that every time you try to spend it, it's a taxable event. If Bitcoin is now a currency, it can be spent in a non-taxable wage just like euros or British pounds. If the IRS needs to treat Salvador and Bitcoin as a currency, it makes Bitcoin much more. viable as a medium of exchange. Two, because Salvadoran banks will need to allow citizens to

deposit and withdraw Bitcoin, BTC becomes much more deeply ingrained into the global banking system. Bitcoin as a legal tender makes it much easier for corporations and other institutions to hold it on their balance sheets, because the gap accounting rules for currencies are much simpler than the ones currently in place. Today, USD is the official currency of El Salvador. That's explicitly why they're making this move. The Federal Reserve moves to massively increase the quantity of USD have detrimental inflationary effects on countries like El Salvador that use dollars as a legal tenderer pegged to the U.S.D. In other words, El Salvador isn't making Bitcoin legal tender in an attempt to be trendy. This is an attempt to protect Salvadorans from inflationary U.S. policy.

A number of other countries could follow SLV's lead. Caribbean nations would be of particular importance. Another key point, some people like Ray Dalio worry that as Bitcoin becomes more successful the U.S. may seek to ban it. But is the U.S. willing to ban the exchange of legal tender with other nation states like El Salvador, that becomes a lot harder. Today, El Salvador is best known in the U.S. as a source of migrants. In the future, if President Buckelé is successful, El Salvador may become best known as a destination for immigrants from the United States, especially those who care about building the Bitcoin ecosystem. Think about it this way. The GDP of El Salvador is $25 billion. The market value of all the crypto in the world is $1,640 billion, a reallocation of 1.5% of the

world's crypto to SLV, $25 billion at today's prices, would be transformative. El Salvador may be the smallest country in North America, but if President Bucheli's Bitcoin proposal becomes law, El Salvador could become one of the most significant monetary centers in the world. Caitlin Long makes some similar points and goes even deeper on others. She writes, Threat about a historic day in Bitcoin. El Salvador president publicly announced support for legislation to make Bitcoin legal tender. If it does become law, it would have many secondary effects.

Steal yourself because a big fight on this is probably coming, though. I don't know anything about politics in El Salvador, but the world is about to pressure it given what's at stake. Here's a TLDR. If El Salvador adopts legislation to make Bitcoin legal tender, Bitcoin likely gets status as money, so treat it on par with foreign currency by banks, and possibly gets cash accounting treatment under USGAAP-I-FRS, in other words, solves Bitcoin adverse accounting. That's why this is likely going to be a knock-down fight. It may be a backdoor way to enable banks to handle Bitcoin, and may solve Bitcoin's lower-of-cost or market accounting problem. Politicized immigration debate in the U.S. probably comes into play too. Incumbents will try to block this. What's the big

deal? What's legal tender anyway? It's a commercial law term that means citizens must accept X if offered in payment of an obligation in exchange for delivering property. Legal tender is key to commercial law, which is the foundational layer of any legal system. In 2018, some in Wyoming wanted to make Bitcoin legal tender, as Wyoming had already done so with gold and silver. Article 1, Section 10 of the U.S. Constitution mentions gold and silver explicitly, but making anything else legal tender in the U.S. requires amending the U.S. Constitution. So it wasn't possible to make Bitcoin legal tender in the U.S. without amending the U.S. Constitution. I thought at the time another country might do it, though, and thereby opened the door

to treatment of Bitcoin as money under commercial law and cash under accounting rules. If I'm right, other corporate treasurers could also buy Bitcoin without facing its punitive accounting treatment. They now account for it like any other foreign currency. No more adverse accounting means more companies starting to hold Bitcoin. But accountants, please chime in. Back to the law. Commercial law lays out the rights and obligations of parties when exchanging property and establishes a roadmap for judges to adjudicate disputes. Yep, you got it.

If El Salvador does pass legislation to recognize Bitcoin as legal tender, Bitcoin would very likely become money under U.S. commercial law. What's the significance? Well, it means Bitcoin would gain special status in banking systems globally. Banks would likely treat it as any other foreign currency. Bitcoin may get back to our favorable treatment under bank capital requirements. The knock-on effect of El Salvador's announcement is that other countries may now follow. One likely candidate has always been Russia, which has been gradually de-dollarizing since before the 2008 financial crisis. We'll be very interesting to watch the foreign policy moves. However this plays out, it's a historic day for Bitcoin and it advances adoption no matter how it plays out. Wonderful for all involved.

Congrats to everyone, most especially to the people of El Salvador. So there's the beginning of a de-dollarization story emerging, brewing a potential political conflict with the U.S. But it's just a small country, right? Well, the question is, what if other countries follow? This is the thing that makes the dismissive it's a small country response so patently stupid. There are a set of countries around the world that use the currency of another more economically powerful country, particularly the U.S., as money as legal tender. This effectively makes them subject to U.S. monetary policy. To the extent that Bitcoin's programmatic, inviolable monetary supply was ever to present a true alternative, it was always going to be

an experiment that started first in small countries who felt like they had nothing left to lose and much to gain. Keep in mind as well that other Central American countries are seeing the pop-up of Nueva C. Dias parties to mirror El Salvador's. Just this morning, a Paraguay and Congressman changed his eyes to lasers on Twitter. However, there is another dimension to the geopolitical. story, which is the controversy around Buckele himself. And let's not bury the lead. There is growing concern that President Buckele is showing authoritarian tendencies. Last year, the Organization of American States issued a statement regarding concerning reports of treatment of prisoners. Other human rights focused organizations have accused him of undermining democratic institutions and attacking the free

press. One of the most highly visual examples that caused concern was when on February 9th, 2020, he entered the Legislative Assembly flanked by armed soldiers. Buckele said it was an attempt to pressure legislators to approve funds for his security plan. Others called it a strong man intimidation tactic. On May 16th of this year, the Los Angeles Times published a long expose titled, El Salvador's millennial president is a man with one vision, power. One of the things they focused on was a recent move to oust critics of his on the Supreme Court. In February, the New Ideas Party swept midterm elections. On May 1st, when they were sworn in, they swiftly removed opponents in the Supreme Court in the Attorney General's office. The justification was COVID-19,

people from the New Ideas Party who had won 56 out of 84 seats said that these five judges were removed for deterring Buckeli's ability to fight the pandemic. They also ousted the Attorney General. In the wake of their election landslide, these officials were some of the last checks and balances against the New Ideas Party. The response from America rose right to the top. Vice President Kamala Harris tweeted after the event, quote, we have deep concerns about El Salvador's democracy, in light of the National Assembly's vote to remove constitutional court judges. An independent judiciary is critical to a healthy democracy and to a strong economy.

Buckele responded with a defiant tweet, To our friends from the international community, We want to work with you, trade, travel, get to know each other, and help where we can. Our doors are more open than ever. But with all due respect, we are cleaning our house, and that's none of your business. It's not surprising that this message came via Twitter. Buckele is perhaps the most social media adept head of state in the world. He was a marketer who realized he was really frigging good at it before starting in politics

at a mayoral level, backed because he was so good at marketing. But let's go back to the cleaning house part of his response. What does he mean? Well, between 1979 and 1992, El Salvador was in the midst of a full-fledged civil war, which was largely a Cold War proxy war for the U.S. During the Carter and Reagan administration, we were spending $1 to $2 million a day in aid. By 1983, U.S. officers were actually making critical military decisions. And regardless of whatever you think about communism and capitalism, the Civil War left a bloody, brutal legacy for the people who are actually there. Death squads, child soldiers, numerous human rights violations, tens of thousands dead and a lost decade. And when it ended, the carcass of the two fighting sides turned

into the shells of the new parties that would come to dominate politics for the next 25-plus years until Buckele came to power. During that time, El Salvador became one of the poorest and most violent countries in the world. An epicenter for gangs and one of the globe's murder capitals. In 2019, Naïbe Bucle became the first candidate to be elected president not under one of the two major political parties, instead forging a centrist's path under his own New Ideas banner, which has been resoundingly unwillingness to categorize itself by the labels of the past. According to its statutes, it is a, quote, democratic, decentralized, plural, and inclusive political party, without obsolete ideologies, but at the forefront of the struggle

for the recognition of all rights for all citizens, without exclusion or privileges. Among its principles are building a free El Salvador, defending diversity of thought, a free market and social economy, assuming political activity and the exercise of power as an act of commitment to the country. And keep in mind, Buceli is an extraordinarily popular politician. A CID Gallup poll from earlier this year of Salvadorans gave him 91% approval of his handling of the pandemic. In 2020, the number of homicides per capita fell 44.9% compared to 2019, which was the lowest level since the end of the Civil War. Although even this is complicated, as there have been accusations and reports that this came from negotiations with the gangs

to be less violent and support the party in exchange for more lenient prison sentences and better treatment. What's more, there is no denying the corruption and rot of the previous parties. Three previous Salvadoran presidents from the two parties have been charged with corruption. One died in house arrest awaiting trial. One is serving a 10-year sentence for stealing public funds. One is an asylum in Nicaragua to avoid facing money laundering charges. This cannot help but impact how people see the actions that are being called undemocratic. This is a selection from a Reddit user who wrote a post called, quote,

I'm from El Salvador and I'm here to clarify some things about the Bitcoin adoption recently announced. Quote, Buckeli's party is made up of mostly young professionals tired of the corrupt system that has kept the country poor and underdeveloped for the past 30 years. In just their first day in office, they fired the Attorney General who had been protecting other corrupt politicians and five other magistrates accused of being bought by the oligarchy to protect their economic interests. In just a month, the new Congress has approved unprecedented financing for education and infrastructure and has passed bills that make sure the predatory economic elites that used to buy politicians in the past are kept in check. Many big infrastructure projects are expected to be approved by Congress soon, including the construction of a high-speed railway and a new international airport.

He goes on to talk about numerous other projects Buckele is spearheading. an infrastructure project called Surf City that is bringing the world surfing games to El Salvador, a revamped health care system, a program to give laptops to 100% of the students in the public school system. So by this reading, the people who support Buckele are sick of corruption, and the institutions that are being called out by the international community for being violated are inherently corrupt. So what to make of all this? Well, I thought I was going to spend my life dealing with war and post-conflict societies. And what I've observed over and over is that the Corruption and control of institutions that are given the democratic seal of approval by the

international community post-conflict can be one of the great multi-generational drags on a people. It is completely understandable for Salvadorans to want that corruption gone, and to want it so much that they don't care much about the means. But the means tend more often than not to matter. The world is absolutely replete with autocrats and authoritarians, who swept to power on promises of reform and delivered for a while before slinking. into their own new, unique forms of corruption themselves. I don't believe that that's predestined for Bucce. There are absolutely concerning indicators, but there is also context, and more than that, there are choices, the choices that Buckele has yet to make and will make about how he wants

to wield this power that he and his party have won. We can at least identify it as interesting that this particular powerful person decided to opt into a monetary system that they can't control. Alex Gladstein, who has gone to pains to point out that we can be excited for a people even if we're concerned about their leader, pointed to the fundamentals of the situation. He wrote, I mean, he's promoting a currency that no one can control as an alternative to dollars which the U.S. controls. Instead of creating a new fiat, he's opting for Bitcoin. Really interesting. This is why for Gladstein, there is reason to be thrilled for Salvadorans themselves, regardless of concerns with the president. And this, I think, is the most important starting point for our discussion about what's going on in El Salvador. Yes, there is reason to actively monitor President Buchele in the path he now charts. Yes, there are reasons to watch dominoes of adoption of Bitcoin by small states and whether it provokes a response

from the U.S. Yes, there are really fascinating things to learn about the global jurisdictional competition for talent. But the most important thing, and the reason why, yes, this is a hugely significant moment, is that Bitcoin is being given the full force of authority to do its best to be able to actually improve the lives of up to 6 million people. We get to watch that experiment play out in real time in a way that has never happened before. What's more? We get to be a part of it. We get to help build it in ways that are small and big. That's an incredibly powerful opportunity, and I hope we do right by it. There is so much more to dig into here, and I'm sure I'm going to spend more time on it. I'm trying to bring some local voices on soon. But for now, the TLDR is,

yes, this is a big deal. It's something we're going to be talking about. It's a new context, a new moment Bitcoin is playing on a new stage. Until tomorrow, guys, be safe and take care of each other. Peace.