The Breakdown - El Salvador's Battle With the IMF Is Bigger Than Bitcoin

Episode Date: January 27, 2022

This episode is sponsored by Nexo, Abra and FTX US.    When Nayib Bukele announced that El Salvador would be making bitcoin legal tender, the international monetary establishment acted with some amount of skepticism. When he announced the nation would be issuing bitcoin bonds, that skepticism turned to anger. Now, the IMF is pushing El Salvador to ditch BTC as legal tender altogether. On today’s episode, NLW explores what’s really going on.    - Nexo is a powerful, all-in-one crypto platform where you can securely store your crypto. Invest, borrow, exchange and earn up to 17% APR on Bitcoin and 20+ other top coins. Insured for $375M. Audited in real-time by Armanino. Rated excellent on Trustpilot. Get started today at nexo.io. - Abra is proud to sponsor The Breakdown. Join 1M+ users and Conquer Crypto with Abra, a simple and secure app where you can trade 110+ cryptocurrencies, get 0% interest loans using crypto as collateral, and earn interest with up to 14% APY on stablecoins and 8.15% APY on Bitcoin. Visit Abra.com to get started. - FTX US is the safe, regulated way to buy Bitcoin, ETH, SOL and other digital assets. Trade crypto with up to 85% lower fees than top competitors and trade ETH and SOL NFTs with no gas fees and subsidized gas on withdrawals. Sign up at FTX.US today. - 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=   Join the discussion: https://discord.gg/VrKRrfKCz8   Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW “The Breakdown” is written, produced by and features Nathaniel Whittemore aka NLW, with editing by Rob Mitchell, research by Scott Hill and additional production support by Eleanor Pahl. Adam B. Levine is our executive producer and our theme music is “Countdown” by Neon Beach. The music you heard today behind our sponsor is “Time” by OBOY. Image credit: chekyfoto/iStock/Getty Images Plus, modified by CoinDesk. Join the discussion at discord.gg/VrKRrfKCz8.  

What is driving all of this anger coming from the global establishment? It really comes back to what the breakdown is about power and power shifts. The IMF has been the only game in town for distressed sovereigns since forever at this point. Buckele and El Salvador are pushing against that. They represent an alternative approach. 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, Abra, and FTX, and produced and distributed by CoinDesk.

What's going on, guys? It is Wednesday, January 26th, and today we are discussing why El Salvador's battle with the IMF is bigger than Bitcoin. First up, however, if you are enjoying this show, go subscribe to it, give it five stars. leave a review or join the Discord. The Breakers Discord is where we talk about, not only the stuff going on in the show, but pretty much anything in this industry or in global politics or whatever the community wants to talk about. You can find a link in the show notes

or go to bit.org slash breakdown pod. Finally, standard disclosure, in addition to them being a sponsor, I also work with FTX. Now, yesterday a headline started flying around from Twitter and the APF News Agency that got the whole Bitcoin community chattering. That headline was breaking.

IMF urges El Salvador to remove Bitcoin as legal tender. Bloomberg had a similar headline. The IMF's board urged El Salvador to strip Bitcoin of its status as legal tender in the country, citing risks to financial stability, financial integrity, and consumer protection. This all comes from a Tuesday report titled, IMF Executive Board concludes 2021 Article 4 consultation with El Salvador. A couple of the key quotes. IMF directors, quote, stressed that there are large risks associated with the use of Bitcoin

on financial stability, financial integrity, and consumer protection, as well as the associated fiscal contingent liabilities. Directors, quote, urged the authorities to narrow the scope of the Bitcoin law by removing Bitcoin's legal tender status. Some directors also expressed concern over the risks associated with issuing Bitcoin backed bonds. This is not the first time the IMF has made this suggestion. They made a statement in November after a previous consultation to the same effect. And to be clear, they've gotten a lot louder since the plan for the Bitcoin bonds came up. Now let's talk a little bit about the actual numbers

in El Salvador. And on the one hand, it certainly doesn't paint the picture of an economically healthy country. On the other hand, it does paint the picture of a country where the impact of Bitcoin is likely highly overstated. So El Salvador currently has an estimated 84.4% debt to GDP ratio. The nominal GDP is forecast to be approximately $27.9 billion U.S. dollars for 2021. The nominal government debt was $21.97 billion in 2020 and is forecast to be approximately $23.3 billion in 2021. The long-run budget deficit of the government is in a range of 1 to 2% of GDP, with an outlier of 9.2% for 2020. The current foreign exchange reserves held by El Salvador

sit at approximately 3.34 billion USD, and this is the key part. The Bitcoin holdings of approximately 1,500 BTC that El Salvador have accumulated represent around $52 million at a Bitcoin price of 35K, 88.4 million measured by the purchase price. That equates to around 1.5 to 2% of foreign exchange reserves. Foreign exchange reserves overall are down notably from a spike to around $4.8 billion in late 2019

and are currently sitting at similar levels to 2018. The $1 billion upcoming Bitcoin bond represents a little over one fiscal quarter of the government's typical financing when you consider that half will be committed to purchasing Bitcoin. So as I said, not necessarily a picture of a country that's doing really well economically, but the total amount of Bitcoin is, I believe, much less than most people think. Anatoly Carlin tweeted, El Salvador Bitcoin portfolio, 50 million, foreign currency reserves 3.5 billion,

total nothing burger, probably more than paid for itself just by putting El Salvador on the map as a crypto hub. Tolstoy B.B., who's no fan of Bitcoin, said, back of the napkin math says El Salvador only has 2% of total treasury reserves in Bitcoin. That's not so bad. I figured it was closer to 20%, not going to lie.

This, however, has not stopped the chattering class from utter antipathy to the El Salvador Bitcoin experiment, Professor Steve Hankey told Fortune, El Salvador now has the most distressed sovereign debt in the world, and it's because of the Bitcoin folly. The markets think Buckelé's gone mad, and he has. A Washington Post op-ed from today, he trades Bitcoin naked. El Salvador is paying the price. The lead paragraph reads, El Salvador, economists say, is learning the lesson the hard way. President Naib Buckele, who dropped the mic on Twitter this month by claiming he trades his country's cash for Bitcoin on his phone while naked, oversaw the cryptocurrency's adoption as a legal tender

three and a half months ago. Since then, its plunging value, the Vice President of Moody's Credit Rating Agency estimates, has cost the National Treasury up to $22 million worth of precious reserves. The country's bonds have tanked. Fears of diminished financial transparency, meanwhile, has stalled a vital loan deal with the International Monetary Fund, which urged El Salvador on Tuesday to drop Bitcoin as legal tender. Now, a couple of things I'll just pause here and say, can we talk about what the counterfactual article would say if Bitcoin had instead doubled? Would Buckelly be held up as a hero for the bet he made? Seems unlikely, but I think it's worth asking. Second, I do always have to laugh a little bit about this fears of diminished

financial transparency, given how natively and inherently transparent Bitcoin is. But, again, neither here nor there. Nexo is a trusted and easy-to-use crypto platform, where you can buy cryptocurrencies at the touch of a button and start earning up to 17% annual interest that is paid out daily. They support all of the major assets on the market and even allow you to swap one asset for another or borrow cash against your crypto without selling it. Nearly three million people in over 200 countries trust Nexo with their digital assets. So whether you're just getting started or you're a season pro, get the most of your crypto today with Nexo at nexo.i. Today's episode is sponsored by Abra. Join over 1 million users and conquer crypto with Abra.

an all-in-one, simple and secure app, where you can trade over 110 cryptocurrencies. Get 0% interest loans using your crypto as collateral and earn interest with up to 14% APY on stable coins and 8.15% APY on Bitcoin. Visit Abra.com or download the app from the Google Play or Apple App Store today. Abra, Conquer Crypto. The breakdown is sponsored by FTX. FtX is the safe, regulated way to buy and sell Bitcoin and other digital assets. Trade crypto with up to 85% lower fees than top competitors.

FTXUS is also the only leading exchange that supports both Ethereum and Solana NFTs. You can trade NFTs with no gas on FTX US, and gas is subsidized when you withdraw off the platform. Help support the breakdown and visit FTX.us today. That's FtX.us. So what is driving all of this anger coming from the global establishment? And it really comes back to what the breakdown is about, or what I say it's about, right? Power and power shifts. The IMF has been the only game in town for distressed sovereigns since forever at this point.

Buckele and El Salvador are pushing against that. They represent an alternative approach. And you kind of have to put yourself in their shoes. The international community in the IMF is more or less seen in the that part of the world as a with friends like these, who needs enemies kind of situation. Now again, to hear that establishment, they're saying that El Salvador is going to default. But the notion that a 25 or even 50% decrease on the value of 2% of El Salvador's foreign exchange reserves is going to cause a default is on the face of it absurd.

So the question becomes, what is this all about? Why is the IMF so concerned? There are a couple of clear possibilities. The first is losing standing as an institution. The IMF has been a central pillar of the global monetary order for many, many decades now. But if a country like El Salvador could go rogue, why would others accept the IMF's terms? Why would they accept the IMF's leadership? That relates, of course, to the other possibility, which is a fear of dominoes.

In other words, what happens if bigger and bigger markets try to get out of the IMF's sphere of influence? What if it's not El Salvador next, but Brazil? Does that have the potential to undermine in a more fundamental way, the system that has existed and operated for the last several decades? Let's turn to see what the community thinks, and it basically follows these lines. Will Clemente writes IMF worried other countries will follow El Salvador? Quite bullish that they take Bitcoin that seriously and are worried about the domino effect

of nation-state adoption. Edward Snowden writes, someone sounds nervous. Eric Weiss of Blockchain Investment Group says clearly the IMF is feeling threatened that El Salvador has given their citizens the option of using Bitcoin or U.S.D. as legal tender. Options equal freedom. Byzantine General writes, lots of people give him shit, I understand why. But Moody's is as corrupt as it gets, and the IMF is as corrupt as it gets. I think it's commendable that this guy basically tells the whole system to go F off because he doesn't want to sing to their rotten tune. Finally, there's Macroscope who writes, there it is. Out in the open now.

Brings to mind the saying, judge a man by the enemies he makes. Everyone who cares about the excess of Bitcoin and the ecosystem should do what they can to support El Salvador right now, tourism, investment, etc. I plan to visit in 2022. Now, on top of that, there are also the assorted jokes that the headline IMF says stop accepting Bitcoin as legal tender. Blockbuster urges Netflix to remove movies from the internet. Kodak urges Apple to remove cameras from their iPhones. Xerox urges internet to remove itself. There's also a more specific consideration, is the IMF in particular worried about its SDR, a type of international reserve asset that was created by the IMF in the late 60s. Carson BKK wrote, Bitcoin's liquidity is way higher than the IMF XDR

liquidity, special drawing rights. Bitcoin even overcame legal hurdles in El Salvador. XDR didn't. No wonder they are freaking out about Bitcoin being legal tender and that El Salvador issues a Bitcoin bond. SDR is top-down forced upon us reserve asset. Bitcoin is a grassroots movement creating a reserve currency. It must hurt them to watch us. To me, all of this feels like a very grand narrative competition. And frankly, I sort of think that regardless of what one feels about El Salvador or Bucle, it's good, it's important even, to have these international institutions tested. How unfathomably brittle would the IMF have to be for this to be the thing that takes them down?

Whatever our international institutions are, be they centralized forces or bottoms up decentralized forces, they need fundamentally to be resilient. It's going to be a lot more to watch here. I don't think this is the end of the IMF El Salvador conversation. But before we leave, a couple more smaller ones. Reports are that the Biden administration is planning to release an executive order on crypto as early as February. Bloomberg is reporting, citing unnamed sources.

They say that senior officials have held multiple meetings, that this executive order would put the White House at the center of efforts and that it's meant to reduce the current scattershot agency-by-agency approach. The memo would detail economic, regulatory, and national security challenges posed by crypto. It would call for reports from various agencies due the second half of this year. It would also create a carve-out for a huge variety of agencies from State Department to Commerce. And it's not just about fear. Some of the tasks that will be assigned will be meant to ensure that the U.S. remains competitive on digital assets.

Finally, it will likely discuss CBDCs but not take a firm stance. My take is that right now at this point, the more the U.S. government, government's starting position on crypto is in the public and articulated, the better. Agencies jockeying for position does not work. It is unsustainable and must come to an end. Which is why I think this is generally positive, even if there's a fairly good chance it starts negative. We might not like what we see in the Biden executive order, but at least it will be a starting point that provides some amount of clarity. Next, it's the end of an era. Bloomberg writes Mark Zuckerberg's stable coin ambitions unravel

with DM sale talks. Long story short, Facebook's Libra, which then became Meta's DM, is trying to sell off its assets. The new bit of color we got from the story is that apparently Facebook had been working with Silvergate Bank to be the issuer of the DM stable coin. But after a long back and forth, the Federal Reserve told Silvergate last summer that they were not comfortable with the plan. That would correspond with when senior leadership of DM started to leave. And I think an important thing to remember here is that the plight of DM or Libra has always been as much, if not more, about it coming from Facebook than about it being a stable coin.

There are still many battles to be had around stable coins, but Facebook will not be a part of them. Finally, some relief insight? You've probably noticed that crypto has stopped hemorrhaging and the S&P 500 is rebounded from the low. Why? Well, it's earnings week and there are positive signals from the beleaguered tech sector. Microsoft said its cloud business could drive growth. Texas Instruments said demand for electronics components remain high, and there's generally some optimism going into a Fed meeting statement that will be released at 2 p.m. Tom S.A., a former Merrill Lynch trader who founded the Seven's report, writes, markets have priced in a much more hawkish Fed so there's opportunity for a not-as-bad-as-feared relief rally,

like we saw out of Powell's testimony, even if the Fed telegraphs a March rate hike. But inflation remains high, and Fed rhetoric has been hawkish, so while not as likely as a dovish surprise, We can't rule out a hawkish outcome either. Either way, we'll know later this afternoon, and I will share what we learned tomorrow. I want to thank my sponsors again, nexo.io, Abra, and FTX for supporting the show, and you guys for listening.

Until tomorrow, be safe and take care of each other. Peace.