“Bitcoin Country” in a Bear Market

“Bitcoin Country”

  From September 2021, Lu Bingquan in Hangzhou noticed a change in the circle: many people changed their WeChat address to “El Salvador”. These people aren’t necessarily there, they’re doing it to express some sense of community.
  Lu Bingquan calls himself a “practitioner”, and it is not easy to add an appropriate industry prefix. In his view, both blockchain and Web3 (abbreviation for the new generation of Internet) have been or are experiencing “demonization”. The industry is large and complex, and Lu Bingquan, who “has the aboriginal complex of crypto (cryptocurrency)”, is reluctant to be simply classified.
  El Salvador, which stirs up the community vibe, is a small coastal country in northern Central America. The land area is less than the size of Tianjin, and the economy is dominated by agriculture, with a weak industrial base. When referring to El Salvador, the most familiar tags are “volcano,” “civil war,” and “gangster.” However, with the official entry into force of El Salvador’s Bitcoin Act in September 2021, the country has received a new label – the first country in the world to adopt Bitcoin as legal tender.
  According to the bill, bitcoin will become the legal currency of El Salvador alongside the US dollar, which can be used for commodity pricing, payment and taxation. The bill also stipulates that every economic entity is obliged to accept bitcoin as a payment method for goods or services unless it does not possess the technology required for the transaction.
  Compared with some people in the circle, Lu Bingquan was “not particularly excited” about this. “The definition of Bitcoin in the Bitcoin white paper is a ‘peer-to-peer electronic cash system’. Bitcoin itself has not been given any meaning. Bitcoin to achieve its own purpose and narrative.”
  After the end of the civil war in 1992, El Salvador embarked on a round of financial reforms, including the 1993 El Salvadoran krona pegged to the dollar at a fixed exchange rate. Eight years later, in the wave of currency dollarization in Latin America, El Salvador followed in the footsteps of Ecuador and Panama, becoming the third Latin American country to use the U.S. dollar as its national currency. In the view of the government at the time, “dollarization” would help El Salvador better integrate into the global market, reduce interest rate and foreign exchange risks, activate the economy, and attract overseas investment. Critics argue that the introduction of the policy, which was not well prepared and researched, not only caught businesses and consumers off guard, but also did little to address the country’s structural economic problems.
  While El Salvador’s inflation has remained low for the past 20 years, the cost of adopting the dollar is also evident. In addition to bearing the spillover effects of the US fiscal and monetary policy fluctuations, El Salvador was unable to stimulate investment and consumption through monetary policy when responding to its own economic and financial crisis, and could only rely on tax cuts and increased government spending, resulting in higher fiscal deficit. At the same time, high crime rates and widespread gang violence offset the attractiveness of low interest rates and foreign exchange risk to outside investors, and El Salvador remains one of the fewest Central American countries to receive foreign direct investment.
  Some economists have discussed the possibility of introducing a new El Salvador currency, but the problem is that if trust in the reliability and stability of the national government and monetary system cannot be established, economic entities will still choose the US dollar, and currency substitution will be difficult. Finish. The dilemma was finally torn apart by the current president of El Salvador, Nayib Bukele.
  In February 2019, the new generation of political leader Bukele was elected president with 53% of the votes, 20 percentage points higher than that of the main opposition candidates, breaking the situation in which the left and right sides of the political circles alternate in power. Bukele was born in a businessman’s family. He was born in the 1980s with a prominent personality and is good at using social media. His image as a “rigid system reformer” has won the support of a large number of young voters. During the campaign, Bukele refused to participate in the candidates’ televised debates, and turned to live broadcast on social media to explain his governing philosophy. After being elected, he also frequently tweeted decrees and even the appointment and removal of important government positions.

El Salvador’s President Nayib Bukele. Figure / People’s Vision

  However, with the development of his term of office, this “new star in politics” began to be frequently criticized by mainstream Western public opinion, and was labeled as “strongman politics”, “populism” and “dictatorship”. On February 9, 2020, the federal armed forces entered the parliamentary chamber at one point to put pressure on MPs who were holding a special session. At the time, Congress was considering a $190 million loan proposed by Bukele to equip the military and police to fight violent criminal gangs. Some media interpreted it as “the reappearance of the repressive image of the dictatorial military government in the 1980s and 1990s”. However, that did not affect the presidential approval ratings of Bukele, who won the midterm elections a year later and took control of the legislature.
  Like its predecessor, who announced the legalization of the dollar 20 years ago, the introduction of the Bitcoin Act led by Bukele seems to be “hurried and improvised.” On June 5, 2021, Bukele made a video appearance at the Bitcoin Conference held in Miami, USA, announcing his Bitcoin plan. Three days later, the bill passed Congress and went into effect 90 days later.
  At the end of June 2021, in an interview with a video column, Bukele talked about the reasons for the introduction of the “Bitcoin Act”. He mentioned the damage to El Salvador’s economy caused by the “big water release” of the US dollar. “That money was not printed for you, we did not get more dollars, but we have to bear the high inflation that comes with it.”
  In the “Bitcoin Act” Three months ago, U.S. President Joe Biden signed into law the $1.9 trillion economic stimulus bill passed by both houses of Congress. In the year from March 2020 to March 2021, the total amount of US fiscal stimulus funds reached 5 trillion US dollars. Since 2022, with the multiple effects of Russia-Ukraine conflict and geo-economic division, the world is accelerating into a new inflation cycle. According to the Bank for International Settlements, inflation in 60% of advanced economies has exceeded 5%, and more than half of emerging market economies have inflation above 7%, the highest since the 1980s.
  Comments generally believe that, because of the inability to print money, Bukele needs other sources of revenue to make up the fiscal deficit to avoid a default on the $800 million sovereign bond due in January 2023, which will affect the outcome of its 2024 re-election bid.
  “There are two types of decisions, one that pays for what’s left of the past, and one that’s based on forward thinking. See where the world is going and get there first so your citizens can benefit from it,” Bukele said. Wearing his signature white baseball cap, he said in the video, “We are already behind in the existing financial system, why not embrace a new system? Why leave the future of monetary policy to others? They neither Will consult with you and will not care about the impact (those decisions) on your people.”


  ”If 1% of the world’s Bitcoin is invested in El Salvador, it will drive GDP growth of 25%.” On June 6, 2021, on the eve of the “Bitcoin Bill” vote in Congress, Bukele wrote in English on Twitter. .
  He then listed several reasons why cryptocurrency investors and businesses should move to El Salvador, including good weather, world-class surf beaches, beachfront properties for sale, permanent residency upon investment, and more. Bukele stressed that bitcoin transactions will not be subject to capital gains tax because they are no longer an investment asset.
  However, even for this small country with a population of only 6.5 million, it will not be easy to complete the transition to “Bitcoin Nation”. Although the support rate has been as high as 75% during his tenure, Bukele still encountered a lot of resistance in the promotion of Bitcoin. On the eve of the official entry into force of the “Bitcoin Act” in September 2021, a poll of 1,281 people by the University of Central America in El Salvador showed that 70% of the respondents wanted the Act to be repealed, and nearly half believed that the implementation of the Act would lead to economic deterioration.
  El Salvador mainly deals in cash, and 70% of the residents do not have bank accounts, but its Internet penetration rate has reached 55% (Note: China’s Internet penetration rate in 2020 is 64%). In order to promote bitcoin at the public level, the government promised that every citizen who downloads the cryptocurrency application “Chivo Wallet” (Note: Chivo means “cool” in El Salvador) will receive $30 worth of bitcoin at the beginning of the bill. . Although Bukele tweeted in January 2022 that the app had 4 million users, multiple recent surveys have shown that the actual penetration of bitcoin transactions at the merchant and consumer level remains low.

  In March 2022, a survey of 337 SMEs released by the El Salvador Chamber of Commerce showed that 86% of the respondents had never used Bitcoin for sales, and only 3.6% believed that Bitcoin would help increase sales. Forehead. In April, a field survey of 1,800 people released by the National Bureau of Economic Research showed that only 10 percent of users would continue to use the app after consuming registration benefits. Those respondents who refused to download were mainly out of distrust of the application system and Bitcoin itself.
  Unlike traditional assets, Bitcoin lacks an anchor of value and its price depends on people’s willingness to buy. The highly volatile and unpredictable price of Bitcoin makes it more like a long-term option, making it difficult to be a good store of value. Once the value of the currency falls, economic entities holding Bitcoin balances may face large fluctuations in wealth, taking on the risk of hard work and losing money. This is even more difficult to accept for the large number of low- and middle-income groups.
  Bitcoin has experienced dramatic price volatility over the past year or so. In April 2021, the price of Bitcoin first surged to an all-time high of $63,000, then fell below $30,000 in July, approached $70,000 again in November, and fell below $20,000 in June 2022.
  On September 6, 2021, Bukele announced that the government of El Salvador had purchased the first 400 bitcoins. Statistics from CoinDesk (Bitcoin News Resource Network) based on Bukele’s tweet show that as of July 1, 2022, when the latest purchase occurred, El Salvador had purchased a total of 2,301 bitcoins, with a total investment of approximately $103.9 million. , while its real value has shrunk to $46.6 million.
  Salvadoran Finance Minister Alejandro Zelaya said in an interview with local television that because bitcoin has not yet been sold, “floating losses” do not mean actual losses. Bukele also tweeted in mid-June 2022 in response to the “worry or anxiety” of the outside world, “My suggestion is to stop looking at the charts and enjoy life. Investing in Bitcoin is safe. After crossing the bear market, Bitcoin will Soaring.” He emphasized, “Patience is the key.”
  But for El Salvador, this “patience” seems extravagant and ethereal. According to a CNBC report released at the end of June, Bukele’s “bitcoin gamble” has cost about $425 million in public funds. In a country with a GDP per capita of $4,400 and a debt-to-GDP ratio of 84%, betting public money in a highly speculative market could be even deadlier.
Fork in the road

  In early 2021, El Salvador opened negotiations with the International Monetary Fund (IMF) for a loan of about $1.3 billion. Negotiations, however, stalled over IMF concerns over Salvadoran’s bitcoin policy.
  Over the past year, the IMF has repeatedly warned the Bukele government that the fiatization of cryptocurrencies could pose significant risks to financial and market integrity, stability, and consumer protection. But the Bukele government disagreed. In February 2022, it again rejected the IMF’s proposal to “dissolve the $150 million trust fund created for cryptocurrencies and return the unused portion to the treasury.” The three major international rating agencies have successively downgraded El Salvador’s credit rating due to the decision that the country’s financing options have narrowed.
  Loans provided by the IMF are different from general commercial loans, often requiring borrowing countries to implement austerity fiscal and monetary policies, complex negotiations, harsh conditions, and often political terms. In order to reduce its reliance on IMF loans, the Bukele government had planned to issue a ten-year $1 billion bitcoin bond in mid-March 2022. This plan was not implemented as scheduled. El Salvador’s Finance Minister Alejandro Zelaya said in an interview in March that the volatile international situation had affected the plan’s implementation.

  Visible positive changes are reflected in tourism as “one of the main engines of the national economy”. In February, El Salvador’s tourism minister said in an interview with local English-language media that since the implementation of the Bitcoin Act, El Salvador’s tourism industry has grown by 30%, with 60% of the tourists coming from the United States. But this is not enough to dispel the cloud that the “Bitcoin Winter” has cast on the country’s economic outlook. El Salvador has invested heavily in Bitcoin and its related infrastructure, and has reduced financial spending in other areas to do so. For Bukele, who appeared as a “political strongman”, it was a gamble that was hard to turn back.

  On July 8, Bukele tweeted the New York Times story and said, “They say we are heading for a default. If we paid everything on time, would they publish an apology?” At the end, Buckley attaches a winking and smiling emoji.
  The price of default is severe. Rising global oil prices, inflation, and interest rate hikes in the United States have successively impacted the already weak economic foundations and fragile financial systems of emerging markets. The first “thunder” in 2022 is Sri Lanka, a South Asian country that has declared “national bankruptcy”. In late May, Sri Lanka defaulted on its sovereign debt for the first time in 70 years. In the following two months, due to insufficient foreign exchange reserves, there have been shortages of basic necessities such as fuel, food and medicine in Sri Lanka. The domestic consumer price index rose 54.6% in June from a year earlier, and food prices soared 80%. The worsening economic crisis has further triggered a political crisis. Just the day after Bukele ridiculed the “New York Times”, large-scale demonstrations broke out again in Colombo, the capital of Sri Lanka. Demonstrators successively occupied the presidential residence, the presidential office and the Prime Minister’s Office, and set fire to the Prime Minister’s Office. The Prime Minister and President of Sri Lanka announced their resignation one after another.
  Even if El Salvador’s exploration in the direction of “Bitcoin Nation” is bumpy and is considered “negative outlook” by mainstream rating agencies, this path is still quite attractive for some peripheral countries that lack sovereign currencies or are deep in inflation. In April 2022, the Central African Republic passed a cryptocurrency regulation bill, making it the second country in the world after El Salvador to have bitcoin as its official currency.
  The move also drew strong opposition from international and regional financial organizations such as the IMF, the World Bank and the Bank of Central African States. There are also criticisms that the bill is not a simple transformation of monetary policy, but a “populist statement”. President Touadella responded that the conventional economic form is “no longer an option” for Central Africa, and he hopes to build Africa’s first tax-free “encryption center” in Central Africa in the future.
  The World Bank report shows that despite its rich natural resources, the Central African Republic remains one of the poorest and most vulnerable countries in the world. Chronic political instability, rampant violence and heavy reliance on natural resources have resulted in a low economic diversification and a lagging private sector development in the country. In addition, according to the “2020 Human Development Index (HDI) Ranking of Countries in the World” released by the United Nations Development Program, China and Africa ranked second to last among the 189 countries announced.
  Previously, the legal currency of Central Africa was the CFA franc, all six member states of which were former French colonies. The CFA franc adopts a fixed exchange rate system closely pegged to the euro, and member countries must deposit half of their foreign exchange reserves with the French central bank to obtain a guarantee from the French Ministry of Finance. Opponents see it as “a relic of the French colonial era”. The price of lower inflation is fiscal austerity and limited macroeconomic options that ultimately limit economic growth. In recent years, the voice of the Franc zone for monetary sovereignty and getting rid of “voluntary slavery” has been increasing.
  At the end of 2019, the West African Monetary Union, which also belongs to the franc zone, has taken the lead in reaching an agreement with France to launch a number of currency reform measures, including the renaming of the African franc to Eco, and the transfer of foreign exchange reserves from France. There are representatives on the board of directors of the central bank. The plan was originally scheduled to launch in 2020. However, due to multiple factors such as the impact of the epidemic, economic recovery and geopolitical games, the launch time has been delayed to 2027.
  The transition of the ecosystem has been long and bumpy, and China and Africa have opted for a different path. Central African President Touadera declared in an interview that the system left over from history seems to have built an insurmountable bureaucratic wall, leaving China and Africa stuck in the existing system, deprived of opportunities for development and unable to fully Utilize the rich local resources. Instead, smartphones and bitcoin will serve as replacements for traditional banking, currency and financial bureaucracy, offering a “new path to a brighter future.”
  Like Bukele, Touadella described cryptocurrencies as the key to achieving financial inclusion in the country. However, according to data released by WorldData in 2020, only about 10% of the population in Central Africa has access to the Internet. According to data from the World Bank in 2022, only 14.3% of the country’s residents have access to electricity. In the short term, the vast majority of citizens do not have the necessary digital infrastructure and expertise to practice “inclusive benefits” and participate in this “curve overtaking” experiment.
  But what cannot be avoided is that the “thunder” is getting closer and wider, and the coverage is getting wider and wider. The World Bank’s “2022 International Debt Statistics Report” shows that the debt vulnerability of low- and middle-income countries has increased sharply, and “half of the world’s poorest countries are facing external debt crisis or high external debt risk.” In the context of high inflation, crises and risks have caused chronic diseases in many countries to burst, and the waiting areas of emergency rooms are overcrowded, but there are not enough rescue medicines and resources.
  In May 2022, El Salvador hosted the annual meeting of the Alliance for Financial Inclusion (AFI), welcoming representatives of 32 central banks and 12 financial institutions from 44 countries. The participating countries include Nigeria, Rwanda, Egypt, Nepal, Pakistan, Haiti, Paraguay and other African, Asian and South American countries. Before the summit, with regard to the fiatization of Bitcoin, participating countries generally expressed concerns and concerns on issues such as anti-money laundering, combating the financing of terrorism, consumer and investor protection, and introducing complex products to people with weak financial and digital foundations. They look forward to some answers during their trip to El Salvador.
  Bukele attended the summit and posted a group photo. “Sow the seeds,” the president tweeted, in a “pioneer” gesture.
  Whether it’s a ladder or an abyss, the exploration of “Bitcoin Nation” offers an opportunity to validate a range of widely debated topics. What needs to be weighed is the economic cost and potential economic benefits of the experiment, as well as other costs that may be paid in the process.
  For Lu Bingquan, when conditions permit, he may go to distant El Salvador to “play a card”. In his view, this is a kind of win-win situation: for people in the industry, especially some “grassroots”, people need to find and verify their beliefs in larger and more tangible things; for the founders of “Bitcoin Country” , they create a kind of “spiritual totem”, and also enjoy the gathering and harvesting of attention.
  No one knows how long this “win-win” will last. The only certainty is that Bitcoin is not a panacea and cannot solve the structural problems of a country’s political and economic aspects, which will ultimately determine the possibility of development.

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