The Breakdown - Paraguay President Vetoes Crypto Bill

Starting point is 00:00:00 They think it does show a maturation in the Bitcoin discussion that that's what this conversation is about. It's a real political discussion about whether Bitcoin fits in the economic landscape of a country. That's frankly relatively clear-eyed about what the opportunities and challenges are. And I'll take that conversation 100 times out of 100 instead of whether bad guys are going to use it for their nefarious purposes. Welcome back to The Breakdown with me, NLW. It's a daily podcast on Macro-B Bitcoin. and the big picture power shifts remaking our world. The breakdown is sponsored by nexo.io, chain aliasis, and FtX,

Starting point is 00:00:36 and produced and distributed by CoinDesk. What's going on, guys? It is Wednesday, August 31st, and today we are looking at the state of play with crypto and Bitcoin around the world. One quick note before we dive into the conversation. There are two ways to listen to the breakdown. You can hear the show on the CoinDesk Podcast Network, which comes out every afternoon,

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Starting point is 00:01:43 Use code breakdown 20 for 20% off a general pass and register today at coindesk.com slash ideas. All right, so today, as I mentioned, we're looking at news from around the crypto world with a particular lens to updating crypto policy discussions in some global jurisdiction. And we start today with Paraguay, where the president Mario Abdo Benitez has vetoed his nation's crypto-regulation bill. Now, this bill has had basically a torturous journey through Parliament. It was initially proposed in July of last year. The bill was then rejected by the lower house in April this year, with the House Budgetary

Starting point is 00:02:19 Committee judging the law to be too dangerous. The nation's central bank weighed in at the time, calling the bill a, quote, high-risk project without benefit to the state. They also raised concerns as central banks are want to do around money laundering. However, the bill was then amended and finally passed both houses of Parliament in July this year. The most recent vote was 40 to 12, so it wasn't even a nail-biter. Unlike other crypto legislation such as El Salvador's infamous Bitcoin legal tender law, this Paraguayan bill is much more focused on the issue of crypto proof-of-work mining regulation.

Starting point is 00:02:52 Indeed, it focuses on POW mining to the exclusion of things that other countries are debating like licensing and regulation of crypto firms or individual cryptocurrency legal status for payments. Now, this reflects Paraguay's unique status in South America. Paraguay has abundant hydroelectric power generation and is a powerhouse electricity exporter for the region. This means that the country has some of the lowest cost electricity in South America at around $0.6 per kilowatt hour. That's about half the cost of electricity in the U.S. That said, the country's landlocked geography means that it isn't necessarily a net. natural home for high-electricity industrial processes like aluminum or steel manufacturing.

Starting point is 00:03:32 Instead, Paraguay maintains a largely agricultural export sector, with electricity being exported directly to the rest of South America, rather than being used domestically to produce industrial goods. The president's veto of the crypto bill then primarily raises concerns about the crypto mining industry's access to electricity at industrial rates. The bill contained a 15% electricity surcharge for crypto miners, but opponents, including Felix Sosa, who's the president of the National Electricity Administration, questioned whether this would be enough to cover the cost of energy consumption. Sosa alleged that current, quote, illegal connections to the power grid were causing economic losses in a country without the infrastructure to support industrial amounts

Starting point is 00:04:11 of electricity consumption. Fernando Silva Fassetti, one of the senators that introduced the bill in 2021, strongly objected to the veto in a statement which said the president's stance, quote, ignores the existence of this activity that today functions in the regulatory shadows. Fassetti explained that the existing crypto mining industry exists in a legal gray area, where it cannot access the financial system, but still generates jobs and resources for the country. One of the proposals to amend the bill from the National Electricity Agency was to require crypto mining companies to pay for electricity usage in advance using U.S. dollars. Now, interestingly, in all of this, original concerns about money laundering and illicit financing seem to have faded in the background.

Starting point is 00:04:52 Instead, it is real-world concerns about infrastructure financing, and the level of of payment received for hosting the crypto mining industry that are coming to the four. Paraguay currently hosts less than half a percent of Bitcoin hash rate, but seems to have the potential to host much more if the parliament can arrive at a functional and suitable regulatory framework. This would be especially beneficial considering the environmental concerns that currently engulf the proof-of-work mining debate, given that Paraguay could give miners access to cheap and abundant renewable hydroelectric power. Now, of course, this is just a setback, and the story is an over for regulation of crypto mining in Paraguay.

Starting point is 00:05:27 For mining advocates, of course, further extension of a legislative process that has already taken more than a year is not necessarily a hopeful sign. So how to feel about all of this? I think one thing that's most notable to me is the way that these conversations have changed. This discussion has morphed from memes of what Bitcoin is or isn't and whether it's for criminals to about the practicalities of Bitcoin infrastructure, the specific cost-benefit analysis of the industry coming in. It's a lot about local energy politics. Indeed, a lot of this is about Paraguayan domestic politics and their relationship with energy importing partners like Brazil. Fassetti tweeted on August 29th, Today we received from the president the total veto of the law that regulates the mining commercialization, intermediation, exchange, transfer, custody, and administration of crypto activities, ignoring the existence of this activity that today works in the shadows of regulations.

Starting point is 00:06:21 The executive washes its hands and does not accept mining as an industry, which generates resources and sources of work, but operates in a gray area without being able to access the financial system or establish regulations that guarantee the investor, the consumer. The state opposes the regulation of a sector that asks to be regulated and destroys the possibility of the arrival of new investors and the formalization of hundreds of small and medium-sized companies that live in and depend on this industry. Worse still, it denies the possibility of fiscal and financial transparency that shows the lack of vision of the state. Paraguay will continue to give away its energy to industry in Brazil and Argentina at a lower price than what Paraguayans would pay here.

Starting point is 00:06:57 Now, I obviously am not an expert in those local energy politics in the geopolitics of that region, but I think it does show a maturation in the Bitcoin discussion that that's what this conversation is about. It's a real political discussion about whether Bitcoin fits in the economic landscape of a country. That's frankly relatively clear-eyed about what the opportunities and challenges are. And I'll take that conversation 100 times out of 100. instead of whether bad guys are going to use it for their nefarious purposes. Now, speaking of Brazil, a small note there. The largest private bank in Brazil, Itao Unabanko, has been selected by Brazil's central bank

Starting point is 00:07:35 to work on a defy liquidity pool. The move comes out of the government's financial and technological innovation and technology laboratory, which is a public program that seeks to strengthen financial inclusion. The platform using blockchain and smart contract technology will allow custody and exchange of tokens, including stable coins tied to the Brazilian Real and the U.S. US dollar. In July, the bank announced that it plans to launch an asset tokenization platform that transforms traditional financial products into tokens and also offers crypto custody to bank customers. In times like these, security of your assets should be your number one priority.

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Starting point is 00:09:28 One of the largest exchanges in the U.S. FDXUS is also the only leading exchange that supports both Ethereum and Solana NFTs. When you trade NFTs on FTCX, you pay no gas fees. Download the FTX app today and use referral code breakdown to support the show. When it comes to Central and South American countries and Bitcoin adoption, obviously the one that is top of mind is El Salvador. The latest news from that country's Bitcoin experiment is that its Bitcoin bond offering has been delayed again. Bifenex CTO, Paolo, Arduino told Fortune magazine that the bonds will be issued later this year. These bonds were first announced by El Salvador President Naibu Kelle in November of 2021. That was two months after the country declared Bitcoin legal tender. The initial plans were to raise

Starting point is 00:10:15 $1 billion through a bond sale. And at the time, a huge amount of the conversation was whether this sort of Bitcoin-based financing could plausibly be an alternative for emerging and developing markets to today's World Bank and IMF lending infrastructure. Regardless of that, though, the sale of bonds is currently awaiting legislation to be passed in El Salvador. That's expected to happen in September, and Paolo said that another two to three months after the passing of legislation would be needed to arrange the bond offering. Not everyone is convinced that this is just a technical and political challenge, however. Nathan Leigh Marshick, the head of emerging market sovereign research at Stifle Financial Group,

Starting point is 00:10:54 has suggested that the ongoing delays are more to do with a lack of investor interest, especially considering that U.S. investors are prohibited from taking part. Quote, Look at where Bitcoin is trading in the massive losses. It makes very little sense to me. This is a government that has historically over-promised and under-delivered. William Sneed, a Latin American-focused strategist at BBVA, said that questions surrounding the government's ability to pay its existing debt

Starting point is 00:11:17 also present an obstacle to the success of the Bitcoin bond offering. A crypto bond issuance has a very low probability of success, he said, and is unlikely to come to the market. In July, El Salvador announced a program to buy back $560 million worth of its existing debt. This would be supported by funds allocated last year by the IMF and a loan from a Central American multilateral lender. The concern surrounds an $800 million bond that expires early next year. Finance Minister Alejandro Zalaya said that the $560 million would be sufficient to buy some but not all of the 2023 and 2025 maturity sovereign bonds. Quote, we're not going to buy the total debt. If we buy it, we will also buy it at a discount. And we're not going to spend more than we have in the bank.

Starting point is 00:11:59 To pretend that we are going to have all the money to buy all the debt is to believe that we have a magic wand to solve the country's fiscal problems. The debt that would be the target of the buyback program has risen significantly since the announcement, with the 2023 bond rising 12 cents to trade at 86 cents on the dollar, and the 2025 bond rising a similar amount but still trading at 47 cents, implying a lack of faith in repayment. Morgan Stanley said in a research note at the time that the buyback would clearly demonstrate a willingness to pay. Quote, given that the key worry in the market has been around the willingness to pay as opposed to the ability, this transaction would ease those worries significantly. So at the end of the Paraguay section, what I was contending

Starting point is 00:12:36 is that the discussion has shifted a little bit from the memeified version of things around Bitcoin to real economics and politics, and even in this case, even in El Salvador, which many people see as the most memeified version of the Bitcoin discussion, that's where a lot of the Bitcoin bond stuff is starting to fall as well. It's about the practicalities of Bitcoin and crypto right now. It's about whether there's actually demand for this in the current market context. It's about what it has to do with these other loans. Still, one interesting thing on Twitter, which I think was probably inevitable, is that you're starting to see a shift in the narrative a little bit around El Salvador. John Jimenez points out that President Buckelé no longer has laser eyes and says, quote,

Starting point is 00:13:14 El Salvador's Bitcoin experiment may be over. Dennis Porto writes, El Salvador may very well make other countries less likely to adopt Bitcoin. Summary of Bitcoin in El Salvador. Forced adoption by an authoritarian strongman. Three percent of businesses think it's valuable to offer Bitcoin services. Two percent of remittances use Chivo. That's the local wallet. $30 airdropped citizens now worth about 10, Volcano Bond failed, Chivo Buggy and centralized. The real reason El Salvador adopted Bitcoin was to Juice Buceli's Twitter followers. Every dictator needs loyal partisans and Toxamaxies love their god kings. Now, obviously, Dennis has a particularly cynical take here, but I don't think that he's

Starting point is 00:13:52 alone in some of that reevaluation. Warren Tagami from Blockstream has a slightly more middle of the road take, responding and saying, The undeniable part was the botched launch of Chivo. November 2021, I met locals who had customer service nightmares, where on-chain or lightning network payments disappeared or severely delayed. That was their first impression of Bitcoin, entirely avoidable if they instead went with strike. To their credit, they kept the promise to allow other wallets. Businesses have reliable customer experience because they pay for quality service instead of used free processing by the government. Credit card interchange fees in El Salvador are above

Starting point is 00:14:26 4%, so it's a win for business. Knowing nothing about the exact situation in El Salvador I just have to assume that there isn't demand for that sort of bond right now. We did a whole episode back in the day around different critiques of the structure and Matt Levine's contention that it didn't really add anything new relative to the other types of debt you could buy of El Salvador's and why in some ways it was really a mission statement kind of purchase around Bitcoin. But there's just not a lot of energy for that right now, given where we are from a market cycle perspective.

Starting point is 00:14:54 Whether that means it's a failed experiment or an experiment that's just on life support waiting for the right time is something we'll just have to wait and see. And lastly today, a weird little one out of South Korea. South Korea's central bank has released a new report which calls for the institutionalization and regulation of initial coin offerings or ICOs. ICOs, as you all well know, are ways that cryptocurrencies fundraise from the public through direct token sales. South Korea banned ICOs in 2017 in the wake of the ICO boom.

Starting point is 00:15:23 The central bank is now saying that the ICO ban has been ineffective and needs reform. The report points to the case study of Terraform Labs Luna token, which was launched by a company founded by South Korean national Doe Kwan, but conducted its ICO through a Singaporean subsidy company to avoid the domestic ban. The ICO tokens were then able to be listed in South Korea using various domestic and international exchanges. The collapse of the Terra ecosystem in May sparked a crackdown on the South Korean industry, with regulators flagging 16 firms for noncompliance in mid-August. But it also has triggered a re-evaluation of the effectiveness of existing regulations. So with that, the central bank's report calls for a review of the nation's regulatory legislation

Starting point is 00:16:00 in the Digital Asset Basic Act. The report looks to the new European Union framework markets and crypto assets are MECA as a potential model. The report focuses on two key areas of MECA that they believe should be explored for adoption in South Korea. Firstly, stablecoin rules, obviously front of mind due to the role of Terra's algorithmic stablecoin UST playing in the collapse of that ecosystem. And second, the EU's proposal for establishing a licensing framework, capital requirements, and other standards for token issuers. Now, holding aside where they want to next, the report really does read as a tacit admission that an ICO ban has failed to achieve its goal. All that seems to have been achieved is pushing companies offshore in order to engage in regulatory

Starting point is 00:16:40 arbitrage without providing any meaningful investor protection or regulation of market participants. By constructing a framework where ICOs and any other part of the crypto markets function legally within a set of defined parameters, means potentially that bad actors have reduced ability to access retail investors. And this is, of course, what regulatory advocates here in the United States and everywhere else around the world say. It's one of the many reasons why it's so easy to get flustered with the state of discussion around quote-unquote investor protections. But in any case, if the theme of this show is growing nuance in the global regulatory discourse around crypto, this is certainly part and parcel of that trend. For now, I want to say thanks again to my

Starting point is 00:17:17 sponsors, nexus.com.com. And thanks to you guys for listening. Until tomorrow, be safe and take care of each other. Peace. I want to tell you about CoinDesk's new event, the investing in digital enterprises and asset summit or ideas. The event facilitates capital flow and market growth by connecting the digital economy with traditional finance. Join CoinDesk October 18th and 19th in New York City for a 360-degree investment experience, where you can source, invest, and secure the next big deal in digital assets. Use code breakdown 20 for 20% off a general pass. You can register today at coin desk.com slash ideas.

The Breakdown - Paraguay President Vetoes Crypto Bill

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