The Breakdown - The Global Role of Bitcoin

Episode Date: May 7, 2023

On this week's Long Reads Sunday, NLW reads: Reviving Argentina's Economy: Dollarization and Bitcoin as Catalysts for Change - Carlos Cardenas  The Fall of Bitcoin in the Central African Republic: Why This Legal Tender Experiment Failed - Jonathan Buck Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribeto the newsletter: https://breakdown.beehiiv.com/ 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 and hosted by Nathaniel Whittemore aka NLW. Research is by Scott Hill. Editing is by Rob Mitchell and Kyle Barbour-Hoffman. Our theme music is “Countdown” by Neon Beach.

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. What's going on, guys? It is Sunday, May 7th, and that means it's time for Long Read Sunday. Today on Long Read Sunday, we are exploring Bitcoin around the world. We're going to read a little bit about why the Bitcoin Central African Republic experiment failed, an opinion on why Bitcoin could be really good for Argentina, and hear about the latest developments from new policies in Nigeria. We start with the piece by Jonathan Buck. Jonathan Buck is the founder of J.B. and G.S. Mining, a German Bitcoin mining hosting company, and this piece

was originally published on Bitcoin Magazine. The piece is called The Fall of Bitcoin in the Central Central African Republic. Why this legal tender experiment failed. Just a year after making Bitcoin legal tender, the Central African Republic aband in its plans to revitalize its country. Why? Jonathan writes, in April 2022, the Central African Republic's CAR adopted Bitcoin as legal tender, becoming the second nation in history to do so. However, just a year later, the nation reversed its decision. But what are the reasons behind this failure in the CAR? Challenging economic conditions. The CAR, one of the poorest countries in the world, faces numerous obstacles, such as political instability, inadequate infrastructure, and food shortages. In the 2018 Human Development Index,

R ranks second to last, with around 79% of its 4.7 million residents living in poverty. More than 3 million people in the country are reported to require humanitarian assistance, while more than 85% of the population lacks electricity. One of the significant barriers to the success of the Bitcoin project in the CAR was surely the country's limited internet access. With only about 10% of the population having access to the internet, widespread adoption of digital currencies was highly unlikely. While Bitcoin has been helping to bank the unbanked globally, the digital currency alone, cannot solve all of a country's underlying infrastructure problems. And while Bitcoin can be resilient

off the grid, the lack of basic amenities such as electricity and internet and CAR likely hindered the spread and usability of Bitcoin there. The introduction of Bitcoin as legal tender in CAR was met with skepticism, partly due to the country's close ties with Russia, raising suspicion about its potential plans to use cryptocurrencies to bypass sanctions. The United Nations also warned that developing countries like the CAR could face high risks and costs associated with. with cryptocurrencies. And ultimately, the economic benefits of proponents of Bitcoin in the CR never materialized. Ambitious projects such as building a Bitcoin city failed or never began, further dampening enthusiasm for the digital currency experiment. A larger trend?

Despite the disappointment in the CAR, Bitcoin and other cryptocurrencies have been gaining traction in other African countries. For example, countries such as Nigeria and South Africa have seen a significant increase in Bitcoin adoption, with millions of users now buying, selling, and trading digital assets. In these countries, the growth of the cryptocurrency industry has been driven by factors such as the high inflation rate of local fiat currencies, an increasing number of young tech-savvy individuals, and a growing number of businesses accepting Bitcoin as a payment method. In the end, the failure of Bitcoin as legal tender in the CAR can be attributed to the nation's challenging economic conditions, skepticism around its motives, limited access

to technology, and unfulfilled peripheral promises. But despite this failure, other African countries represent some of the world's most promising growing epicenters of Bitcoin adoption. If anything, this failure in the CAR highlights the importance of developed environments and good faith intentions for the successful adoption of Bitcoin, at least for the first handful of countries that hope to be successful. Now, there is one very important detail that this article missed. Alex Gladstein from the Human Rights Foundation tweeted an article about the CAR dropping crypto as legal tender and wrote, those who try to leave the CFA system find out it's not so easy. What is referring to is the fact that the Central African Republic is part of a currency region that is still effectively owned and controlled by France.

The CFA franc is the franc of the financial community of Africa. There are actually two currencies, the West African CFA franc, which is used in eight countries, and the Central African CFA franc, which is used in six Central African countries. Although separate, they're basically interchangeable and are part of the same larger system. Both CFA francs have a fixed exchange rate to the euro. Now, this is part of a colonial regime, even though the colony not. nominally no longer exists. The CFA franc was created in 1945 and was a part of an attempt to create currencies in French colonies to spare them strong devaluation after the Breton Woods Agreement.

After the end of colonialism, the CFA name was switched to stand for the African financial community. There has been rampant criticism of the CFA system. The currency is still controlled by the French treasury, and because of that, African countries effectively channel more money to France than they get an aid and don't even really control their own monetary policy. In January, January 2019, Italian ministers even accused France of impoverishing Africa through this currency. It makes sense then why a country in that regime would try to get off it and be a part of some non-sovereign system like Bitcoin. But it also likely means that there was intense pressure behind the scenes so as not to start a stampede away from the old system.

Next up, a piece by Carlos Cardenas. He's an institutional account manager who has worked at legacy banks and crypto exchanges and writes, reviving Argentina's economy, dollarization in Bitcoin as catalysts for change. Many experts have suggested dollarization as a way to save Argentina's flailing economy, but it needs Bitcoin too. This again was published by Bitcoin Magazine first on May 3rd. Carlos writes, Argentina is on the verge of financial collapse as record inflation in Argentine peso devaluation hits the market. According to research from Steve Hanky, a professor of applied economics at Johns Hopkins University, the peso has depreciated 47% against the U.S. dollar, and inflation is running higher than 118% per year.

year. His solution, dollarize the Argentine economy. While dollarization is already in play in Argentina to some extent, save in dollars and accept dollars in their businesses, the peso is still the de facto currency of the country. The blue dollar rate, an informal measure of the cost of buying and selling a physical dollar bill in Argentina, has risen 23 times since 2018. At the time of this writing, it sits at 465 Argentinian pesos to one USD. Factors such as the rising cost of living, bad economic practices, and the COVID-19 pandemic have led to this outcome for Argentina. Pundits, politicians, and local citizens are advocating for full-fledged dollarization as the solution. But is this the best method, or can we find something better?

Given the inherent problems with the USDA, perhaps a hybrid approach that implements the superior qualities of Bitcoin could serve Argentina better. To analyze this, let's take a look at Ecuador, which was one of the first Latin American countries to leave its national currency, the sucre, and adopt U.S. dollars in 1999. By the end of 1999, inflation in Ecuador had reached 60%, and the sucre had devalued by about 300%. To prevent bank failures, the government shut down banks and started to, quote-unquote, rescue the financial system. As expected, this did not work, and not only did poverty explode in the country, but the monetary base expanded by 552%. Consequently, Ecuadorian citizens abandoned their currency, and by 2000, the government officially adopted the U.S. dollar as legal tender.

The short-term consequences for dollarization were dire. People lost their entire life savings, some committed suicide, and many left the country to work in the United States and in Europe. That immediate cost caused the government to collapse and the country to suffer a depression that eventually it recovered from. Fast forward, and as a result of dollarization, the real GDP of Ecuador grew by 75% in total from 2000 to 2013, while the inflation and interest rates dropped. This might have seemed like a happy ending, but due to corruption and mismanagement of resources, the full economic potential of Ecuador was never realized, and today it has a below-average economy. Dollarization was very successful in Ecuador, such that it continuously posed a threat to politicians

and central bankers. They no longer had the power to manipulate a currency, so, with the inspiration of blockchain technology, came up with a program to develop a central bank digital currency through a fintech program called De Niro Electronico between 2014 and 2018. Because there were no effective data controls, this program allowed the government to print more dollars and allow users to transact via their phones, thus creating a currency that operated in parallel to the dollar. This added to privacy concerns and a lack of trust that drove the program to crash and burn. Lessons learned for Argentina. Seeing the initial success of the U.S. dollar in Ecuador, I do believe dollarization is the most prudent way that Argentina can go about fixing its monetary policy. However, Argentina

can also officialize Bitcoin as legal tender in order to reduce the immediate shock to the economy, modernize its financial system, and offer its citizens' alternatives. Mere years ago, Bitcoin was non-existent. Today, Bitcoin has a market cap of well over $500 billion. and it is leveraged by sovereign wealth funds, hedge funds, insurance firms, tech firms, and retail users all across the globe. Bitcoin's Lightning Network is now 1,000 times cheaper to use than major credit card providers like Visa or MasterCard. The potential for businesses relying on international capital and remittances would be huge and bring trust to the country. Argentina also already has one of the higher indices of crypto adoption in Latin America, with over 31%

of the retail-sized crypto transactions being conducted with stablecoins, a way for citizens to protect themselves from the ARS inflation. In addition, over 60% of Argentinians believe that Bitcoin has capabilities as a store of value with the power to outperform the peso. Argentina's commission National de Valores, its National Securities Commission, authorized the launch of a Bitcoin futures contract that settles in ARS. In addition, Bitcoin is up 105% year-to-date, as quoted in Argentine pesos, reflecting the conviction that both citizens and the government have in the orange coin. There are many challenges that could slow down Bitcoin adoption in Argentina. such as the lack of infrastructure or regulatory clarity. Nonetheless, with a population that is already

highly educated in crypto assets and in need of a lifeboat, Bitcoin hybrid dollarization might might provide a better experience than Ecuador's. In addition, incorporation of Bitcoin adoption would deliver a better social contract between the government and its citizens. Now, there are a couple interesting points here brought up in this article by Carlos. The first is the idea that dollarization is a path for some of these economies to deal with their most immediate short-term challenges, especially when they're effectively already dollarized, as is the case in Argentina, but don't enjoy many of those benefits because of the false exchange rate held onto by the banks. One thing they lose, however, is the ability to control monetary policy.

That has led, as Carlos points out, to some attempts to try to work around and reclaim some of that old power, with potentially problematic consequences. Perhaps Carlos suggests, bringing together Bitcoin with dollarization is a solution that gives citizens more options, that gives the economy more tools, but so preserves the inability for politicians to tamper over much with the economic system. There's a lot to discuss in debate, and then people in places like Argentina are just going to continue to adopt Bitcoin on their own, but I think you're going to see this type of conversation come up a lot more in the future. Now, sometimes it might be to explore more use of Bitcoin. Bhutan, for example, is slated to now set up a Bitcoin mining facility as a way to get more

cryptocurrency into the country. You're also, however, going to see some governments run in the opposite direction. Nigeria is an interesting case study where they're exploring a large blockchain regime, including licensing digital exchanges for tokenized coin offerings that are backed by assets, including equity and debt, but who are trying to ban cryptocurrencies themselves. Whether this actually gets the government what it wants in terms of more financial innovation, without losing control to crypto, seems highly suspect to me, but is something that will have to play out in practice. Anyways, guys, really interesting things happening around the world with Bitcoin and crypto in these different countries.

Thanks to Jonathan and Carlos for their pieces. Thanks to you guys for listening. And until tomorrow, be safe and take care of each other. Peace.