beyond the valley
Hello, and welcome to another episode of CNBC's Beyond the Valley. I'm Arjun Kharpal in Guangzhou,
China, but today we're going to be speaking about El Salvador because it's become the first country
to adopt bitcoin as a legal currency. Now, this is a really big deal because for such a long time
bitcoin proponents around the world have been urging countries to adopt bitcoin, to embrace
the digital currency, and now we have our first real world example of that. Our first real world
experiment to see how that plays out. Now it was president Nayib Bukele, the president of El
Salvador, who introduced the bitcoin law into the legislative system. It passed the congress's vote
and has now been adopted as law and that law is interesting because it gives some of the reasoning
around why El Salvador wanted to adopt bitcoin as a legal currency. I just want to read some of that
for you. Because in there, it says 70 percent of the population does not have access to traditional
financial services, and bitcoin is seen as a way to potentially help solve that problem
as well. Now another big part of the picture here is remittances. This is money Salvadorans outside
of the country are sending back home to their families. For example, remittances in 2020 the
country received nearly six billion dollars worth of remittances, accounting for nearly
25 percent of its GDP, and bitcoin is touted as a way to make remittances, that money transfer
process faster and cheaper as well. President Bukele has also claimed that bitcoin could give
the country a GDP boost. But adopting bitcoin as legal tender, as a legal currency, what does that
actually mean? Well according to the law, it means prices can be expressed in bitcoin. Taxes can be
paid in bitcoin. It means exchanges in bitcoin are not subject to capital gains tax as well. There
is a line in there which is interesting because it stirred a bit of controversy, and that line
says this: "Every economic agent must accept bitcoin as payment when offered to him by whoever
acquires a good or service." Now, the reason it stirs some controversy is because it appears
to compel everyone selling a good or service to accept bitcoin, but what if they don't want to?
That's just one of the many questions here, on top of the fact that we know bitcoin is
extremely volatile. If you're a merchant, one day you accept bitcoin as payment and that moves ten
percent down or ten percent up in the next hour or so. That volatility, that uncertainty could
be quite unsettling as well. There's so many other questions. For example, is El Salvador's digital
infrastructure ready? Given the fact that this is a digital currency, there's going to be a lot of
infrastructure that needs to be put in place, as well as education for people who may not ever have
heard of bitcoin. So certainly lots of questions. To get to the bottom of these questions,
I'm joined now by Rachel Ziemba, an Adjunct Senior Fellow at the Center for a New American Security.
Her focus is very much on finance economics and the links between those and security issues as
well. So Rachel, there are a lot of questions and concerns about El Salvador's move to make bitcoin
legal tender. One of those is the fact that the US dollar is already the official currency
there in El Salvador. What does it mean then by bringing something like bitcoin into the system?
So the biggest thing is that the government of El Salvador is introducing bitcoin as this
alternate legal tender, which basically means that if one goes into a store
and does a transaction or has a debt with another individual, that they have to accept bitcoin.
So El Salvador is a little bit unique because it's one of the few countries that uses another
country's currency as its legal tender. So there's some countries that peg to the US seller. There's
other countries that sort of use their own. But El Salvador is already using another currency
so they've already ceded monetary control. What they're doing now
is they're saying that private sector, that individuals, have to accept bitcoin. So what's
unique about that is they're moving from what has been a rather cash-based economy,
to one in which bitcoin is a digital asset. So they're in some ways making several leaps at once.
Yeah there's a lot to unpack there. I mean, just practically,
other examples of countries having two
currencies as legal tenders. I mean, how do sort of multiple currency systems work in the world?
Sure, so one thing that's unique about El Salvador is that they have two official
currencies as legal tender. There's plenty of countries where you might have one currency,
but then you go into a shop and they'll accept another currency - US dollars or euros often - or
individual transactions will take place in those countries. You see that a lot in countries
where the currencies are volatile. Places like Nigeria, places like Turkey,
but that's not necessarily official, and so that doesn't require the shopkeeper
or whoever to accept that other currency. What's unique about this beyond the fact of it being
bitcoin, is that there's two assets that are not co-moving and one that's very volatileS
o beyond the digital question, you have a whole sort of society that is probably not
used to the sheer volatility of bitcoin and questions about access to it.
And that's really a huge point isn't it, Rachel? The volatility of bitcoin. You know,
I'm a merchant and someone pays me a bitcoin today. Then there's a big eight or nine percent
crash the next day, and now I've lost that value. You know, the other question is if you're
talking about any kind of debts or anything like that. What price is this going to be determined
in? Is it going to be in bitcoin, USD? I mean, is it going to be from the point at which you got
the debt or when the debt is due? There's so many questions around that volatility, isn't there?
There are, and I think that's going to mean a lot of people could lose a lot of money
or perceived money and value. Particularly given that El Salvador is a country that
relies a lot on remittance flows being sent from the US in particular. It's one
of the countries that's reliant heavily on these transactions, and so there might be an
anticipation that x amount of this transfer is going to buy y amount of goods at home,
and there could be a lot of questions there. As the law seems to be written right now,
and there are many questions about that. It seems to require any transaction, that debts
should be allowed to be settled in bitcoin, but i think there's a real sort of question about that.
There are plenty of other transactions globally that might be conducted in bitcoin. You know,
rents that are taken, purchases that are made, but often they're quickly converted into a fiat
currency. I think there's a real question mark about how that's going to work in El Salvador,
and who's going to bear that cost of that volatility. The risk is that some of the
average citizens are going to be the ones that pay for that, as well as the private sector entities
that are going to be struggling to think about how are they hedging these risks. There's not a lot of
tools. There are also other risks involved, including transaction costs of converting.
And if read the law as it's written, it compels people, merchants or anyone to to accept bitcoin,
and they can't refuse that. But the other point that you've mentioned is
the fact that there is this kind of digital divide to some extent in El Salvador. Given the fact that
that bitcoin is seen as a digital format, that can make things very difficult, right?
I think that's that's true. El Salvador is a country where the majority of transactions to this
point have been cash based. Because the US dollar is legal tender, that actually has meant that
the government has had to import and make sure there's sufficient dollars available.
The u.s government you has facilitated. I mean, the amount of dollars used in El Salvador are a
drop in the bucket of the turnover of the US dollar markets on a daily basis.
But that sort of transition, question marks of what happens if cell service or wi-fi service goes
down. What about people losing access to perhaps their accounts? There's all sorts of things that
we see in other countries that I think could be magnified if this was something that was
going to be legal tender, as opposed to just an alternate means to say get money out of the
country. In El Salvador's case, I do think this is really a story of trying to rebrand the country,
provide some buzz, but also try to perhaps reduce some of the reliance on the US.
But I think it may create a whole number of other problems while trying to alleviate one problem.
What would you say are some of those other problems?
Sure so I think this question of connectivity This question mark of whether there's going
to be local mining of bitcoin and what the electricity bill would look like for that.
Question marks about whether this is going to backdate past transactions versus future
transactions. Question marks about what happens if the volatility leads to significant losses.
What would you say then are the main motivations behind El Salvador's decisions there? Because you
mentioned an interesting one just now, and that was around reducing reliance on the US dollar. Why
is that important, and what do you think some of the other considerations or motivations are here?
Sure. So El Salvador adopted the US dollar more than, around 20 years ago,
and they did that. They're not the only country that uses the us dollar as legal tender.
Countries like Ecuador do it as well. Other countries peg to the US dollar: Hong kong,
the Gulf states, just to name a few. All of these countries in different ways are looking
for currency stability that comes from sort of pegging to an external hegemon or external entity.
Now we could look at it and say the dollar is not super stable. It fluctuates against other major
currencies. It fluctuates against commodities. It fluctuates against these issues. But a
country like El Salvador, which had gone through cycles of boom and bust and inflationary cycles,
they were basically tying their hands and saying we can't manage our own monetary
policy, and so we'll just sort of import the monetary policy from the Fed. That can create
its own problems because the Salvadorian economic cycle doesn't always line up with that of the US.
So you could have monetary tightening at a time when the alternate was needed in El Salvador,
but I digress. The main issue here I think is a challenge that because of the reliance on the US
dollar, there's a need for strong correspondent banking relationships with the US. There's a
need for intermittent importing of the physical currency, particularly sincedollar bills do wear
out right over time. And as the US has more and more of a focus and concern about anti-corruption.
We've seen the White House label corruption as a national security challenge. We have
several members of the government of El Salvador under investigation for money laundering issues.
It strikes me that looking for alternate ways of transferring funds, of transferring
wealth and generating wealth, that don't have as much of a US exit would be attractive. The
challenge is that the US Treasury has a long arm, and we know that there's a lot of extra
territorial application of sanctions and other measures, not only when you're using
the US dollar. So I don't think that this move to bitcoin necessarily removes these concerns.
Rachel, I do want to ask, is there is there an economic
argument here? I want to read you something that President Bukele said. He said,
"Bitcoin has a market cap of 680 billion dollars. If one percent of it is invested in El Salvador,
that would increase our GDP by 25 percent." Obviously, that's not entirely correct,
but will this have effect on growth at all? Or can it have an effect on growth at all in El Salvador?
So i think it can have an impact. The question mark goes back to, does adopting bitcoin as
a legal tender lead to new innovation in bitcoin and blockchain technology?
Does the government do other policies perhaps to encourage bitcoin farming or
that innovation? And we've seen other countries in places like Bermuda and elsewhere, sort of
invest a lot in kind of digital sandbox. Without adopting another currency, they've
been able to sort of develop this industry. I think the key is it's not just about the
adoption. It's about all the other infrastructure. Just having a certain amount of bitcoin present in
the country doesn't necessarily increase GDP. GDP is about what's produced in the country, so
the assets matter. The question is, are the assets being deployed to build new real estate projects?
Are people investing in new businesses? So I would say that domestic economic policy, any sort
of government investment projects, those probably matter more than just the use of bitcoin. I mean,
anything that makes it easier for foreign and local investors to set up businesses, to create
value, that's going to be what the game changer is moreso than just what's the legal tender.
Great. Rachel, do you think there are other countries at this point looking at this?
Can you see any countries around the world that might find bitcoin
an attractive option also to make it legal tender?
Sure. So there are. I've heard of some other countries that are considering it, particularly
some of El Salvador's neighbors. In fact, there does seem to be a little bit of copycat sort of
activity. I think in general, what i think we'll see more of, is countries using and adopting
blockchain technology and perhaps developing their own digital assets. We've had a big increase,
and I'm sure you've talked about it a lot on the podcast, we've had a big increase in central
bank digital currencies interest, obviously pilot projects. That lowers transactions costs. It also
probably increases the ability of governments to monitor activities. For some countries, that
might be a design feature, not a flaw. I could see more countries wanting to make it easier for their
population to engage in financial transactions, and lower those costs, reduce some of those
transactions costs, and while the government and the central bank still maintains a degree
of control over capital inflows. So I definitely see that happening more with large countries,
but even some of the smaller ones, you know moderate size emerging markets, I see them
preferring that sort of control over what's transiting through their their financial borders.
Great. Rachel, yeah we certainly have spoken a lot about central bank digital currency. It's
an interesting topic. I think that's gonna have to be another episode though at this point. Thanks so
much for talking to me today about El Salvador, bitcoin. It's been fantastic having you on.
Thanks, pleasure. Pleasure to chat.
So all eyes are going to be on what country is next, which country is going to follow
El Salvador's example in adopting bitcoin as legal tender. Now the El Salvador decision has certainly
caused some stir globally amongst financial institutions. The World Bank actually rejected
the country's request to help it with implementing this bitcoin rollout. The World Bank citing
environmental and transparency shortcomings related to bitcoin. Now you heard Rachel. They've
also mentioned central bank digital currencies or CDBDs. They're effectively digital versions
of fiat currencies being developed by central banks around the world,
and that's going to be interesting to see how that plays out and what kind of impact that will have
on other digital currencies like bitcoin as they continue to roll out. Of course, remember central
bank digital currencies are very very different from bitcoin, in the sense that the central bank
digital currency is issued by a central bank, a central entity. Of course bitcoin is known as a
decentralized currency. But we've got a whole episode on central bank digital currencies,
if you want to know more on Beyond the Valley. Certainly take a listen as well. But there are
certainly lots of questions going forward as we watch this El Salvador experiment play out. It's
going to be a fascinating one. I'd love to hear your thoughts. You can get in touch with me on
Twitter. I'm @ArjunKharpal. You can also comment below in the comment section, and don't forget to
subscribe to CNBC International's YouTube channel as well. That's it for another episode of CNBC's
Beyond the Valley. I'm Arjun Kharpal. Thanks for watching and listening. I'll catch you next time.