The Breakdown - Why the IMF Is Pressuring Argentina to Discourage Crypto

Starting point is 00:00:00 It's also worth noting here that there are two very different interpretations of what's going on. The first is that the IMF is concerned about money laundering and currency controls and fears that crypto can help people get around things like this. The second interpretation is that the IMF seeing crypto in places like Argentina as a do-it-yourself recovery vehicle that competes directly with their loans. Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the Big Picture Powering. shifts remaking our world. The breakdown is sponsored by nexo.io, Arculus, and FtX, and produced and

Starting point is 00:00:36 distributed by CoinDesk. What's going on, guys? It is Monday, March 21st, and today we are talking about the growing contest between new crypto-powered sovereign fundraising schemes and the traditional IMF-led order. First, however, if you are enjoying the breakdown, please go subscribe. to it wherever you listen to podcasts, give it a rating, give it a review, or if you want to dig deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes or go to bit.le. That's L.Y slash breakdown pod. Also, a disclosure as always, in addition to them being a sponsor of the breakdown, I also work with FTX. We are in a weird liminal in-between moment. What do I mean by that? Well, on the Russia-Ukraine front,

Starting point is 00:01:30 we're now in the thick of the fighting. It's settled in that this isn't going away. Markets are getting used to it on the face of it. However, the economic dislocations are just starting. The early stuff is pretty apparent, right? The costs of gas, of course, in the U.S., which is well publicized and much discussed. But it still feels closer to the beginning than the end. We're still just starting to grok and grapple with things like fertilizer prices that are up 111% year-over-year-over year, and which will have much more significant second order effects. On the macro and monetary policy front, obviously the Fed meeting was last week. We got the anticipated rate increase, and we also got some color on how balance sheet reduction was likely to happen, not in the form of the Fed actively

Starting point is 00:02:18 selling assets into market, but instead allowing bonds to mature without replacing them. Even with that color, though, however, that's still something that's in the future and wouldn't be starting until at least next month? What about the in-between feeling in the crypto world? When it comes to most of the industry, the focus continues to be wrapped up in the macro and geopolitical. Russia and Ukraine have simply added a new context to the crypto debate with sanctions entering the mix in a major way. Remember last week on that front, we had first a hearing where experts said that it wasn't really possible for Russia to use crypto to evade sanctions in a major way. Second, a Treasury Department official, Nellie Lang, the Undersecretary for Domestic Finance, telling Reuters,

Starting point is 00:03:03 quote, the transaction size we've seen is fairly small. Of course, we recognize we may not see everything, but there is a fair amount of oversight. At this point, we just don't see that crypto could be used in a large-scale way to evade sanctions. However, in spite of all of that, we still had Elizabeth Warren releasing legislation that would give Treasury sweeping powers over exchanges to compel them to block addresses even which weren't associated with sanctions evaders. To the extent that there is anything else going on in the crypto industry that is pushing in a different direction, I think you have to look to the excitement around Yuga Labs, the parent of the Bored Apes Yacht Club, buying the IP for Cryptopunks and then launching Apecoin at the end of

Starting point is 00:03:45 last week. That has certainly put some life into the NFT and Metaverse side of things and opened up big new questions about what comes next and what sort of precedent they've now set. But I still don't think it's a big enough catalyst to get the industry as a whole out of its larger macro focus. So the point is all of this just feels in between, like we're between different eras, macroeconomically, geopolitically, and certainly within the crypto industry. One of the places that I think you see that playing out is with regard to how crypto-powered systems are increasingly competing with traditional economic systems. We've talked extensively on this show about the idea that we're moving from one global monetary order to another. You'll remember the Bretton Woods three show from now a week

Starting point is 00:04:30 and a half ago or so, where we explored the idea that Russia's invasion of Ukraine, or more specifically the sanctions that came next, were the last gasp for an old order and the beginning of a new one. However, it's not just Russia and Ukraine that have made some people wonder if a new monetary order is emerging. And if so, what role Bitcoin and crypto more broadly have to play in that new order? These questions were certainly front and center last year when El Salvador announced that it was making Bitcoin legal tender and then proceeded in just a few months to do exactly that. Nexo is the go-to platform for all things crypto. Invest in the hottest coins out there and start earning risk-free interest of up to 20% APR, paid out daily. Need cash,

Starting point is 00:05:24 SAP but don't want to sell? Use your crypto as collateral and receive a credit line at premium rates. Open your NXO account by March 31st and receive up to a $100 welcome bonus. Get started today at nexo.io. That's N-E-X-O.I-O. Meet Arculus, the next generation cold storage wallet. Arculus secures your crypto using three-factor authentication, providing a simpler, safer, and smarter way to store, buy, swap, send, and receive crypto. Arculus is offline cold storage. Your private keys are encrypted on the Arculus keycard and are never online. Stay safe from hackers with no cords, no charging, no Bluetooth. Just crypto security made simple. Buy Arculus on Amazon today. The breakdown is sponsored by

Starting point is 00:06:17 FTXUS. FtXUS is the safe, regulated way to buy and sell Bitcoin and other digital assets, with up to 85% lower fees than competitors. There are no fixed minimum fees, no ACH transaction fees, and no withdrawal fees. 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 FTCX app today and use Referral Code Breakdown to support the show. El Salvador has been in the news recently with regard to its Bitcoin bond scheme.

Starting point is 00:06:55 The Bitcoin bond or the volcano bond, as some people have called it, is a $1 billion financing vehicle to be raised in which $500 million or half will go towards infrastructure spending in a new Bitcoin city that is intended to be powered by geothermal volcano energy with an item making crypto mining more sustainable. As fortune puts it, the other half will be invested into Bitcoin with any eventual capital gains, five years later being evenly split between the country and bondholders as a form of special dividend. So in short, this is an infrastructure bond. It's going to build out infrastructure in the country. This is a new way for the crypto community, the Bitcoin community specifically, to support the genuinely

Starting point is 00:07:37 radical transformation happening within El Salvador. And the country's finance minister had previously suggested that the sale could happen as early as this past week. Alejandro Zelaya, El Salvador's finance minister, had previously said the bond sale could come anywhere between March 15 and March 20th, although that was probably aspirational. Still, last week, he noted that the war between Ukraine and Russia had had an impact to slow the process. He told a local TV station, quote, we have the tools almost finished, but the international context will tell us. According to local newspapers, as of March 15th, the laws necessary for the bonds hadn't been sent to Congress.

Starting point is 00:08:13 There has also been a little more intrigue over the last week, as it's revealed that the bond will be technically issued by a state thermal energy company LaGio. Fortune again says the bond will be issued by El Salvador's state-owned energy. Energy Company LaGio on the Liquid Network created by Canada-based firm Blockstream and tradable on the BitFinex platform. Frank Musi, the author of the Common Sense newsletter, dug in and wrote a little bit more about this company LaGio. In a piece he titled El Salvador's Volcano Bond will be issued by a tiny state-owned energy company, not the government. Here's what Frank dug up about LaGio. This is a company who had revenues of $136 million last year and a profit of $36 million.

Starting point is 00:08:55 It has about $773 million in assets, but around half of them are in long-term loans to electricity distributors in El Salvador. In other words, they're highly illiquid. About 257 million of those $773 million in assets are tangible assets. The company also has $200 million in long-term debt that comes from a 2014 deal where they securitized and sold a part of their future cash flow. The company had previously had to defer principal and interest payments for 24 and six months respectively, due to COVID-19, according to local rating agency Zuma. Moosey writes, given these numbers, can LaGio repay a billion-dollar bond?

Starting point is 00:09:35 Um, no. Basically, the volcano bonds will generate $65 million in annual interest payments, which is about half of LaGio's total revenue. The company's annual interest expenses would jump from $15 million per year to $80 million per year, turning its healthy profit of around $35 million into a loss of $30 million, end quote. So why then is the bond being issued through this company? Well, Moussi posits two reasons. The first is to separate it from other sovereign debt. Quote, if Buckele stops paying traditional bondholders, he can continue paying the crypto bondholders through Leggio, and crucially, he can continue

Starting point is 00:10:09 tapping the crypto community for further financing. Second, more cynically, he argues that if things go badly, there is less recourse for bondholders. In other words, this keeps the government distanced from the repercussions of a failure. A Salvadoran Twitter account, however, gave a different interpretation of this. He writes, Oh, the bonds will be sovereign. You see it as a complicated scheme. Someone forced our government to use LaGio as collateral

Starting point is 00:10:33 because it is easier to sue a company than a government. Or if LaGio is unable to pay the bonds after they mature, they will take LaGio as payment. There is a lot of speculation out there and a lot of attribution of intent that I think it's worth taking every interpretation with a huge. huge grain of salt. Ultimately, however, a lot of this is going to come down to how big the appetite from Bitcoiners is for these bonds, and right now it seems like it's there. The Financial Times is reporting

Starting point is 00:11:00 that there is $1.5 billion in interest for the theoretically $1 billion bond. That demand may be why the institutions of international finance like the IMF are getting more and more opposed to this sort of thing. Not only in El Salvador, where they've been encouraging the country to unwind the legal tender law, but in other countries as well. On that front, some fascinating news. out of Argentina. The IMF and Argentina have reached a $45 billion deal restructuring debt payments from previous deals. From the official press release, the IMF staff and the Argentine authorities have released a staff-level agreement on the economic and financial policies to be supported by a 30-month extended fund facility arrangement. The EFF, with requested access of SDR-31.914

Starting point is 00:11:41 billion, equivalent to U.S. 45 billion, aims to provide Argentina with balance of payments and budget support to address the country's most pressing economic challenges, and to enhance the prospects of all Argentines by implementing measures designed to promote growth and protect essential social programs. Now, it is that latter part that is the most interesting in terms of what else is being agreed to as part of this deal. Several Argentine news sites caught a paragraph in the memorandum outlining financial policies to be implemented under the agreement that references crypto. Quote, strengthening financial resilience. While commercial banks remain illiquid and well-capitalized, strong bank oversight will continue, especially following the unwinding

Starting point is 00:12:21 of pandemic-related regulatory forbearance. To further safeguard financial stability, we are taking important steps to, one, discourage the use of cryptocurrencies with a view to preventing money laundering, informality, and disin remediation. Two, further support the current process of digitization of payments to improve the efficiency and costs of payment systems and cash management, and three, safeguard financial consumer protection. Now, what people noticed right away was that the IMA was here being clear that one of their goals was preventing disintermediation, in other words, protecting financial intermediaries. David Morris from CoinDesk wrote, Unpacked yesterday's news that the IMF's new $45 billion line to Argentina will require that they

Starting point is 00:13:01 quote-unquote discourage cryptocurrency. The IMF notes specifically, and this blew my mind, cites the danger of disintermediating the financial system. They're saying the quiet part loud. However, Argentine crypto organizations have some questions. The executive director of ONG Bitcoin In Argentina, Javier Madariaga wrote, We are convinced that the path is neither disincentives nor prohibition, but to work in a coordinated manner with the private and public sectors to take advantage of the potential of decentralized finance, so that more and more individuals can transact in a secure manner

Starting point is 00:13:31 and security forces can improve their ability to combat cybercriminals. It worries us that the authorities are agreeing to disincentivize a technology that the population itself has already massively adopted instead of unleashing its potential to address historic problems. Now, of course, there is also a question of practicality. Argentina deals with extremely high inflation. The goal of the IMF deal, for example, is to get it below 40% by 2024. And in that context, it already ranks as number 10 on Chainalysis's 2021 Global Crypto Adoption Index.

Starting point is 00:14:03 This is a place that has a huge and vibrant crypto community. I brought my father-in-law to visit with Argentinian crypto companies and community members in February of 2018, just as one example. The point is that compliance is going to be extremely difficult. However, it's also worth noting here that there are two very different interpretations of what's going on. The first is that the IMF is concerned about money laundering and currency controls and fears that crypto can help people get around things like this. In other words, it's a discreet concern for this big traditional institution. The second interpretation, however, though, is that the IMF seeing crypto in places like Argentina as a do-it-yourself recovery vehicle that competes directly with their loans. This would obviously be the much more significant geopolitical interpretation.

Starting point is 00:14:50 My guess, despite everything that has gone on, is that it's still more, number one, a discreet concern about the way that crypto changes the equation, at least in the minds of people like the IMF, as regards money laundering, currency controls, etc. However, you have to believe that the example of El Salvador makes number two this concern about competition in a totally different way to organize the economy around non-sovereign assets and non-official rails, as more of a concern than it has been in the past. It also seems likely to me that that concern is going to do nothing but grow. Take, for example, a headline from Bloomberg today.

Starting point is 00:15:29 Malaysia should adopt crypto as legal tender, ministry says. Speaking in Parliament, the Deputy Minister of the Communications and Multimedia Ministry made this assessment. Now, this is a group that oversees the digital and broadcast sectors, things like rolling out 5G mobile networks and attracting tech investments. It's not clear exactly what their role with digital assets is or even exactly which ministry has authority over digital assets. The central bank has not given a formal position on Bitcoin as legal tender, although in January it did tell Bloomberg that it was assessing CBDCs.

Starting point is 00:16:01 Now, this could be just one rogue minister saying one rogue thing and it not meaning much more than that. However, there's no denying the extent to which Bitcoin is entering the discourse when comes to the global monetary realignment. The Bitcoin bond, whenever it happens, could be another step in that, and you have to think that many governments around the world are watching with interest what happens then. For now, I want to say thanks again to my sponsors, nexus.io, Arculus and FTX. And thanks to you guys for listening. Until tomorrow, be safe and take care of each other. Peace.

Starting point is 00:16:36 Hey, breakdown listeners, come join CoinDesk's Consensus 2020, the festival for the December centralized world this June 9th through the 12th in Austin, Texas. This is the only festival showcasing and celebrating all sides of blockchain, crypto ecosystems, Web 3, and the Metaverse, and is designed for crypto-newbies, investors, entrepreneurs, developers, and creators. Don't miss speakers like Kathy Wood, SBF, CZ, Punk 6529, and Joe Lubin to name just a few. Use code breakdown to get 15% off your pass at coin desk.com slash consensus 2022. Thank you.

The Breakdown - Why the IMF Is Pressuring Argentina to Discourage Crypto

There aren't comments yet for this episode. Click on any sentence in the transcript to leave a comment.