Bitcoin as Legal Tender
A tale of 2 countries
Previously I have discussed on here about the game theory for countries and companies to begin diversifying their treasury into crypto.
There is game theory at play here for countries, and companies. Even if you don’t want to adopt crypto, it will get more and more expensive as others do, and so it becomes an intelligent choices to hedge against this future by exposing a portion of your treasury to bitcoin now. And many entities are doing this and have been doing this as we speak. Not Just El Salvador.
Recently, two more countries have joined El Salvador in making Bitcoin legal tender. These two countries (The Central African Republic and Panama) are wildly different and will have significantly different outcomes due to these differences. Today, we’re going to talk about why, as well as which countries we can expect to make this move in the year moving forward, as well as the recent political unrest in Sri Lanka.
I have added a Definitions page which will include all of the terms and abbreviations that I use from now on and will be referred to on every post.
Substack has launched an iOS app for those of you using apple devices. I am an android peasant and can’t tell you if its good or not, but check it out if you have an iPhone or some other such trappings of royalty.
Please feel free to skip around or ignore certain sections if it does not apply to you. The Table of Contents is made to preserve your time in this manner. You can always simply read the conclusion if you are in a hurry.
Table Of Contents
El Salvador Legalizes Bitcoin 2021
A Tale of 2 Countries
The Central African Republic
Panama
An Easy Switch
A Hard Switch
South Korea
Sri Lanka
Conclusion
1. El Salvador Legalizes Bitcoin 2021
El Salvador was the first country to legalize bitcoin as legal tender in 2021. What does this mean? Essentially this means treating bitcoin in the same way as they treat other legal tender. At the time, the US dollar was the national currency of El Salvador as El Salvador has a central bank but has no control over the currency circulating in their country. When bitcoin became legal tender this meant that no taxes would be levied on the appreciation of BTC and it is no longer treated as an investment asset. This also meant that the government would accept bitcoin as a form of payment for taxes, fines, etc. Beyond that, the government supported businesses’ ability to accept bitcoin as payment from customers and several multi-nationals operating in El Salvador accept bitcoin, such as McDonalds.
It’s been 8 months so far, and how is El Salvador doing? Roughly 20% of the population is regularly using the governments official bitcoin wallet as of April 2022, an unknown quantity may be using other wallets within the country. Initially about 70% of the country opened accounts with the governments official wallet, probably to collect the $30 incentive bitcoin the government gave to new users. We can assume this would mean that 75% of the country is still transacting in US dollars. For now this is fine, we can expect this to shrink as the reality of inflation within the US dollar sets in later this year, especially if we see bitcoin appreciating rapidly against the US dollar. People have an intrinsic sense for value, even if they don’t understand economics. There is a story that I like that comes from Zaire (now known as The Democratic Republic of Congo) in the 1990’s. Zaire was a country going through hyperinflation due to government money-printing and after the initial currency had cratered in value (known as the Zaire), the government issued a currency swap. The Zaire would be swapped for the New Zaire at a rate of 1 New Zaire for 3 million of the old Zaire. This meant several things, but one of the things it meant was that there was no more inflation of the old Zaire, while the new Zaire was taking all of the inflation from the governments money printing for 60%+ monthly inflation. What do you think that the citizens of Zaire did? Without even knowing why they slowly began shifting back to using the old Zaire.
In other words, even though the government and its central bank ruled that the old zaïre was without value and the full faith and credit of the Zairian government backed the new zaïre, the only currency with any value was the old zaïre — and the value had nothing to do with any fiat issued by the government, but instead the understanding of a sector of the population that because the old zaïre was no longer being printed, it could act as a reasonably safe store of value.
The average person is not an economist. But the average person is intrinsically aware of how much of a store of value the currency they are using is. They may not know why, they may not blame the right people, but they do know that saving money gets them nowhere, and that they cannot afford to make any large purchases because things like homes and other large purchases appreciate each month for more money than the average person can save in one month.
I suspect that in El Salvador as time passes, the adoption and regular usage of bitcoin will continue to go up. As of January 25th, the El Salvadorian treasury held 1,801 bitcoin, representing 2% of the governments treasury. We’ll see how much they decide to buy, it may be that they do not need to purchase any more, because if BTC were to continue appreciating against the US dollar this will cause bitcoins share of their treasury to continue increasing.
This is the game theory that I’m discussing. A small investment today is a hedge for the future. If no one else invests in bitcoin, well, the government of El Salvador could lose up to 2% of their treasury, they can recover from that loss. But if a lot of other countries similarly diversify their treasury, then El Salvador’s share of bitcoin will appreciate alongside the market. They won’t have to buy any more to keep up with the market. Whereas a country that waits to do this until after many other countries already have will have to pay exorbitant prices to keep up.
The funny thing about change is that people resist it at first, but human beings are surprisingly adaptable and often will accept new things and even protect them as if it were their own idea after only a short time. What is occurring right now is that the infrastructure is being put into place for people to switch to bitcoin, next, a situation will arise during which it would make sense to switch to bitcoin, and finally the people and infrastructure will both be in place making it hard for the people to be shifted out of using bitcoin as legal tender. This is still the first inning but we are getting awfully close to the start of the second inning.
2. A Tale of 2 Countries
Now, we jump forwards to 2022, and two more countries have moved to legalize bitcoin as legal tender. The first is The CAR (Central African Republic) authorized a full legalization. The second, Panama, authorized bitcoin as to be used interchangeably as currency. Essentially this means that the government can receive it for taxes, merchants can accept it for services, and users that hold bitcoin are not taxed on it’s appreciation. This allows for merchants and individuals to more freely hold bitcoin as a treasury asset without having to account for capital gains. There are several states that treat precious metals in the same way as well and will not levy additional state taxes on transactions for gold and silver.
The Central African Republic
But lets talk about how and why these countries are likely going to have very different outcomes. As many of you know, bitcoin is a digital asset. Digital infrastructure has to exist in order for digital assets to be functional. The CAR can pass a law telling people bitcoin is legal tender and require merchants to accept it, but without the infrastructure, this is little more than a piece of paper. Ultimately less than 20% of households in the CAR have internet access and mobile data coverage is lackluster… and that’s being charitable.
This might look like an empty map, but you’ve got to zoom in. There are a few tiny 3g dots in light green, and a small corridor of blue 2g dots as well. To be fair, a good chunk of the population lives in these areas, but again, it’s only about 25% of them and 2g is not sufficient to facilitate transaction confirmations in a timely manner. So there is simply not the infrastructure in place for anyone to realistically want to switch to bitcoin. Any vendor that does so is going to be dealing with slow and spotty connections, and its unlikely that private citizens will be wanting to adopt the technology due to the inconvenience.
So why did the CAR do this? Well, the CAR is not in control of their currency, nor are they in control of their central bank. The central bank that issues Central African Francs is headquartered in Cameroon, and is de-facto still under the control of the French Treasury. I go into mild detail over this on my Instagram.
The central bank that issues these Francs is also in control of the currency of several other countries in Central Africa. The Central African Republic has been clashing with France over the past year or so and there have been mild altercations over the past year, with several French citizens being murdered, soldiers being imprisoned, and other minor dustups. To be fair, the CAR is a country that only recently emerged from a brutal civil war and became independent only 60 years ago as a former French colony. Some levels of violence and unrest can be expected and the French can’t exactly hold the things that happen in that country against the government. But they are reflective of the mood of the country towards their former colonial power.
And worse, you could say that the French Treasury’s control over the CFA Franc is detrimental to these countries in Africa, as France and the EU essentially decide how many CFA Francs are printed each year and they tie distribution of these Francs to foreign aid programs that some argue are more harmful than helpful and allow the French treasury to profit while enriching French companies by locking contracts to French entities for this aid money. When viewed from this perspective, it’s likely that the passing of this bill was intended as a message towards France who canceled all foreign and military aid to the CAR last year. Without the foreign aid strings that were normally attached to the central bank money printing, there was no incentive for them to still participate in it. And if we’re going to be honest, western incursions into Africa have increased this year, especially as Europe and Russia now see this as an area for the engagement of proxy war. Russian Troops, EU troops, and US peacekeeping forces are all present in the Central African Republic, and the border to the CAR has been shut and opened several times recently. You can find quite a few stories from western media about Russian troops all over Africa. No telling how much of that is true, and how much is embellishment from media. No doubt, if you have a VPN and access to Russian media, you can probably find stories from their side about UN, EU, and US troops all over Africa. Some of these stories about US troops reigniting conflicts in some countries in Africa that ended during Trumps term are confirmed by our media as well, Somalia as an example.
The CAR legalizing bitcoin is not a financial move. It’s purely a political move, part of a larger post-colonial conflict. This has to be viewed through that perspective rather than simply a financial perspective. It’s really just a statement for France and the West to respond to and for Russia to potentially take advantage of. If I were in charge of Russia’s central bank/treasury I would be encouraging Putin to offer the Ruble and Russia’s interbank system (SPFS) as a replacement for the CAR. For a background on SPFS, you can revisit section 2 of this post from before the Russian invasion.
Panama
And now for the exact opposite situation. Panama has no central bank and has been using the US Dollars as it’s primary means of commerce. They have no control over the inflation rate of their currency. They cannot finance government expenditures by printing money, and in fact, our printing of money directly harms their ability to function while they get none of the benefit of printing the money themselves.
Panama has a fairly robust mobile data network and a high penetration of internet use among the citizenry. The infrastructure is in place, and this is less of a political move, and instead a move that has limited downside beyond managing the volatility of the bitcoin they will be receiving as tax payments. As far as I am aware, there is no intentional treasury allocation of bitcoin being made proactively by Panama. If inflation of the money supply of US Dollars increases, then simply giving their treasury the option to receive deflationary currency for payments is as close to a low risk financial move as can be made. A list of the crypto-currencies accepted by Panama is a who’s who of the top 2 (BTC and ETH), and a few of the crypto-currencies that spend their treasury on marketing and hitting the convention circuit. If you asked me which one of these are worth a damn, it’s just BTC and ETH, with ALGO in a distant 3rd.
A copy of the draft bill, shared by Silva on social media, said citizens, banks, and legal entities in Panama would be permitted to use several cryptocurrencies as a means of payment “without limitation.” Those were: Bitcoin, Ethereum, XRP, Litecoin, XDC Network, Elrond, Stellar, IOTA and Algorand.
3. An Easy Switch
You may notice a trend among the 3 countries that have so far made moves like this to adopt BTC. None of them have any control over the currency used for commerce in their country. They aren’t giving anything up. They aren’t eschewing the ability to print and control the money supply and interest rates. They don’t have much control over costs within their economy, nor can they adjust debtors access to liquidity to indirectly impact prices.
It’s an Easy switch. We’ll likely see more countries that have relatively easy switches making the move to Bitcoin. And lets be honest about one thing. So long as the countries that make these switches don’t have any power to give up, these switches are relatively meaningless in terms of the 5th industrial revolution.
Above is a map of all of the countries within the world that do not have their own currency. Any of these countries that adopt bitcoin are kind of meaningless other than creating implicit demand for bitcoin as a means of exchange. You can actually see the French post-colonial influence still in existence across Africa in this map, it’s significant.
If I had to guess what the next country will be to make this move, I’d look towards Bermuda in the Caribbean. They have their own currency, but it is pegged 1:1 to the dollar, and (much like Tether) is backed by US dollars and treasury assets held by the Bermudian treasury. Much like Panama, they are negatively impacted by the US government inflating the money supply and have nothing to lose by adding Bitcoin as a competing asset for payments to the government and commerce. If we remember Gresham’s law, bad money chases out good. Meaning that if people have the option to use two forms of currency in commerce, they will tend to hoard the more valuable one while using the less valuable one. Which is why I suspect that we’ll be seeing more countries offering discounts for people to pay taxes in bitcoin, like Rio De Janeiro did. At that point it’s a no-brainer, when tax time comes, convert your fiat into bitcoin and pay taxes for an instant 10% discount. Meanwhile the city, or at some point the country is incentivizing people to acquire good money (deflationary: i.e. bitcoin) and provide it to the treasury.
I’ve stated this before in the Parallel Economies post, but there is a game theory being played. If every country is going to adopt a scarce asset for their treasury at some point, then you can hedge for this future by allocating 5-10% of your treasury to bitcoin now, and it will appreciate to represent your full treasury in that future. But if you instead wait for that future to arrive, you will have to pay a lot more to switch. I suspect that countries will slowly be figuring this out and the rate at which they do that will accelerate with each coming year.
But now lets talk about a much more meaningful event that has not happened yet.
4. A Hard Switch
A much more meaningful event will be when a country that has it’s own central bank and it’s own currency decides to give up that control to bet on the game theory at play here. That would be an incredibly meaningful event because it would require whoever is in power to give up significant control, likely at no benefit to the head of state. It’s possible that the short term ramifications would make it incredibly difficult to win re-election as the government would have to reduce spending to well-within their means. The only way I see it working out for the party in power is if they time their entry for the start of a bull market.
South Korea
There are quite a few countries to watch in this respect, one who has recently pivoted their stance significantly due to the last presidential election is South Korea. I previously wrote about how South Korea was heavily targeting centralized exchanges with regulation causing those exchanges to shut down withdrawals for all South Korean citizens (a reality that I have discussed a timeline of occurring for Americans). The most recent South Korean presidential election was won by President Yoon Suk-Yeol, who during the presidential primary doxxed his ICX wallet and minted an NFT.
He is fairly serious about rolling back crypto regulations and has already started along with a push to issue a CBDC. CBDC’s are of course a dirty word, and issuing one guarantees that at some point a future regime will use it to torment citizens, even if the current regime might not do such a thing. But I wouldn’t be surprised to see South Korea issue a longer term decree authorizing certain crypto for payments to the government and a treasury allocation along with their own Digital Korean Won.
There are some rumblings about countries that are experiencing significant inflation making the switch, like Turkey, Lebanon, or South Africa. But this is the wrong way to look at this. If you have no control of your currency, then it’s a great move. But if the ruling regime is inflicting inflation on it’s population while benefitting themselves from the money printing, then they have no reason to want to make such a move and it would hurt the ruling party significantly. Realistically, you’d have to look at countries that have minimal debt to GDP ratios, a balanced budget or budget surplus, or you’d have to look at countries that just had a radical shift in the ruling power. Countries running balanced budgets or budget surpluses aren’t currently benefitting from money printing, so it’s not as big of a loss for the ruling party to make the shift. And countries that just had a radical shift in the ruling class (like Sri Lanka) have a brief window in which radical change can be made, especially if their is significant unrest about the financial status of the country.
Sri Lanka
For those of you unfamiliar, Sri Lanka has been undergoing a significant inflationary crisis due to rampant corruption in the government.
For the past few months they essentially ran out of FX reserves (foreign currency) as the government attempted to print money to purchase US dollars and other assets in order to buy oil, gas, and food. This is the other side of the petro-dollar. Countries like Sri Lanka that experienced a massive downturn in the economy post-pandemic have to make enough exports to receive foreign currencies. If they can’t do that to maintain their imports, then they have to devalue their own currency in order to buy the currencies needed to acquire these imports. The suffering in all of these countries is what allows us to be incredibly unproductive here in the US and maintain record trade imbalances for long periods of time. I covered how the US trade deficit went negative and never returned since the Petro-dollar was established in the 70s in Section 3 of this post.
Our reserve currency status puts a bid on the dollar regardless of how much we actually produce and export. Allowing us to consume more than our fair share of global production. Up until last week, the ruling class was essentially printing money, and using it to buy Dollars so they could replenish their reserves of medicine, oil, and food. Without dollars, they can’t buy any of that stuff.
So what did Sri Lankans do in response. They targeted their ruling class and their possessions.
You’ll note that when angry the Sri Lankan residents went to the homes and possessions of their government officials. They didn’t go to their local car dealership, grocery store, or gucci store. The riots in 2020 in the US were an embarrassment. Watching small business owners bleed in the street while there wasn’t even a window broken at the courthouse despite the riots being over a perceived failure of the justice system was eye opening to many. It was a sign of just how well the disinfo campaign ran by leftists after their march through the establishments in the 80’s and 90’s worked. We are at the tail end of a multi-decade campaign by certain factions within the left to craft public opinion towards certain default opinions and away from others. Eat the rich, but spare the leech. This can’t be fixed overnight.
You might say to yourself that you’re glad you don’t live in Sri Lanka after seeing the suffering happening there, but I say the opposite. At least as a citizen in Sri Lanka you are far less likely to be targeted by people angry at problems caused by the government. As tensions continue to boil over in the US and shortages escalate you have no idea what will get targeted, because US citizens seem to be unfocused and full of inchoate class based rage. For a longer explanation about the level of corruption that was present in the prior Sri Lankan regime, the Lotus Eaters provided a decent video explanation.
So why am I bringing this up? Well, Sri Lanka’s prime minister resigned 7 days ago after one of his mansions was burned down, and the new Prime Minister at least seems serious about fixing the problems. They of course have more pressing issues at hand, with a recent quote from him on the food shortage literally being “We are going to die.” Serious words. For now they will be focused on either soliciting foreign aide packages (Will China and Russia provide the more attractive package, or will the West and the IMF?), and structuring some form of spending plan and consolidation of the previously corrupt practices caused by the single family government that was previously in charge.
In general, if you are in politics, you should not be brokering deals for your siblings, relatives or children to profit from (Looking at you Biden, Trump, The Bush family, The Clinton family, etc.). Anyways, they have a lot of work ahead of them, but if they are able to pull themselves out of this and they recognize the painful position their FX reserve requirement and the petro-dollar puts them in, they may decide to adopt a deflationary reserve currency like Bitcoin. And the new Prime Minister has no real attachments to any of the remaining organs of the Sri Lankan government. Whose feet is he stepping on? Anyone that might oppose this had their lamborghini burned and fled to Switzerland.
Politicians have names and addresses, they aren’t hard to find. As I said, if the current Prime Minister is able to navigate his way out of the current crisis, they are ripe to be the first country to give up their central bank and the money printer. Far easier said than done. They are an island with little in the way of energy resources to exploit. In the current environment, securing oil and gas reserves sufficient enough to consider giving up the money printer is a tall order. But this is the opportunity I see here.
Conclusion
The legalization of Bitcoin as legal tender was probably barely even a consideration that crossed Satoshi Nakamoto’s mind when he wrote the first white paper for bitcoin back in 2008. Our creations grow larger than ourselves, larger than our dreams. The potential to echo across decades or centuries can sometimes begin with just a private joke and a mall laugh. I sincerely believe that this represents the first opportunity for the separation of finance and state, on par with the Protestant Revolution in Europe. I believe that over this decade we will be seeing numerous financial upheavals as countries, groups, and individuals make the switch away. I believe this in my mind and in my actions. Whether crypto goes to zero or the moon, I am in it to the bitter end. Safe choices are for those that never found a reason to live. You can make safe bets when you’re in your 50’s and 60’s and maintaining health and quality of life is of primary concern.
We are watching countries make the risky choice now, and the early adopters will either be significantly rewarded, or will watch their bet go to zero. It’s game theory. A small allocation now is all that’s required to be part of the ride by the end of the decade, if successful. And if the central banks maintain control, or wrest away our attention with CBDC’s then this shift will be delayed. But make no mistake, this shift is inevitable. No structure of undue power can last forever. I’m making a bet on it occurring during my lifetime, and I’ll be doing what I can to bring it about. I have found no larger foe in my life, and no larger opportunity. Maybe you believe in bitcoin, maybe you don’t, but it’s a god-damn club and I’m going to swing it at these bastards. Whether some 3-letter agency made bitcoin or not, I don’t care, it’s mine now.
110% correct on the misguided 2020 American Riots. The wrong blood was spilled.
Nothing but respect and sympathy for the Sri Lankan residents. Especially the ones flipping the car in the water. Respect because their anger was laser focused at the correct targets and sympathy because they’re being bled by parasites that don’t care if they starve.
I liked your last paragraph a lot. I don’t see many btc proponents using that kind of imagery to describe this fight, but I find it inspiring!