From Cyberpunks to Nation States
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Crypto Continues to Struggle
From Cyberpunks to Nation States
Bitcoin is legal tender. These are words we didn't really expect to hear in 2021. Yet, somehow, on the 8th of June 2021, in Central America, the country of El Salvador passed a bill that officially recognises bitcoin as legal tender in its country. It took 12 short years to go from the online chatrooms of Cyberpunks and computer scientists to nation-state money. To say we are proud is an understatement.
Today, we will discuss what this means for El Salvador, bitcoin and the implications of its legal standing across the globe.
Let's start with what this means for El Salvador and how it will work. Under the new law, "every economic agent must accept bitcoin as payment when offered to him by whoever acquires a good or service". This is the basic idea of legal tender, but it does extend beyond this. The bill that passed stipulates how and when bitcoin can be used. Below are excerpts from the bill that address these issues:
Art. 1. The purpose of this law is to regulate bitcoin as unrestricted legal tender with liberating power, unlimited in any transaction, and to any title that public or private natural or legal persons require carrying out.
Art. 2. The exchange rate between bitcoin and the United States dollar, subsequently USD, will be freely established by the market.
Art. 3. Prices may be expressed in bitcoin.
Art. 4. Tax contributions can be paid in bitcoin.
Art. 5. Exchanges in bitcoin will not be subject to capital gains tax, just like any legal tender.
Art. 6. For accounting purposes, the USD will be used as the reference currency.
Art. 7. Every economic agent must accept bitcoin as payment when offered to him by whoever acquires a good or service.
The bill also continues to address practical considerations that may arise when using bitcoin as money. They make an exception for "those who, by evident and notorious fact, do not have access to the technologies that allow them to carry out transactions in bitcoin are excluded from the obligation expressed in Art. 7 of this law.” What is also extremely important is that they educate their civilians on how to use bitcoin and its supporting technology properly. They intend to do this as the "State will promote the necessary training and mechanisms so that the population can access bitcoin transactions".
In addition to this, as the dollar is also recognised as legal tender in the country, some public and private parties may want to receive dollars instead of bitcoin. The Salvadoran government has put effective measures in place to address these concerns and try to make the transition for people more seamless.
Art. 8. Without prejudice to the actions of the private sector, the State shall provide alternatives that allow the user to carry out transactions in bitcoin and have automatic and instant convertibility from bitcoin to USD if they wish.
They will achieve this by establishing a $150 million trust at the Development Bank of El Salvador. This should address the concerns some people may have regarding its volatility and deem it too risky to hold on their balance sheets. This approach should promote an organic adoption of bitcoin in the country.
When you consider the fact that around 70% of Salvadorans are unbanked, you begin to see the extensive applications of this technology and how it can completely transform the country and provide the necessary infrastructure it has been lacking.
The Salvadoran government has also made plans to start bitcoin mining operations using its vast reserves of clean, renewable, zero-carbon geothermal power. It is estimated that two-thirds of El Salvador's geothermal energy is untapped. According to the president, this is due to the high cost of transporting the energy to cities. If they redirected this to mining operations, they could power at least 3 to 4 percent of the network.
What does this adoption mean for other countries across the globe from a legal standpoint? This varies from country to country and can become rather complicated. Let's take Swiss law as an example; currently, it is viewed as a pure payment token and viewed as a debt in kind. This means that creditors will owe a certain amount of bitcoin independent of their fiat value. It becomes more complicated when a country recognises it as legal tender. In any country that recognises El Salvador's sovereignty, bitcoin essentially becomes a foreign currency. This means if you sell your house for bitcoin, it may be considered a debt in foreign currency. There are also a couple of other views on the way it could be treated. However, what this all boils down to is that governments and regulators worldwide need to step up and issue clarifying statements around the status of bitcoin within their own country.
This bill will create a historical use case from a monetary and legal perspective. Suppose the bitcoin law and implementation are successful within El Salvador. In that case, the country will have now proven that it is possible to use bitcoin as both a store of value and a medium of exchange at a sovereign nation-state level. This will pave the way for a future where we may just see a global Bitcoin Standard arise.
Etherbridge is Expanding
We are incredibly excited to welcome Wade Gunning to the Etherbridge and Lima Capital team.
Wade Gunning obtained his undergraduate degree in Investments and Financial Management at Stellenbosch University, his Honours degree (Cum Laude) in Financial Analysis and Portfolio Management at the University of Cape Town and his Master's degree (Cum Laude) in Financial Engineering at the University of Pretoria.
Embracing the gig-economy, he has elected to operate as a freelance contractor, engaging with multiple employers who require his input and expertise. For EY, South Africa, in his data scientist role, he investigates and assesses quantitative aspects of IFRS 9 audits and develops bespoke credit, market and liquidity risk models for major South African institutions. Yara International, a Norwegian non-profit organisation with a global reach based in Singapore, uses his skills to build and calibrate credit risk models (such as scorecards and multiple regression) to assess obligor creditworthiness for farmers. He has worked on an IFRS 9 model implementation project for a major central bank in the Middle East. He is currently working with another central bank in the region, validating their IFRS 9 retail and corporate risk models.
His passion for investments and portfolio management has generated international publications in academic journals on the topic of active fund risk management. This research is what drew him to Etherbridge, where as the firm's risk and performance analytics expert, he helps manage asset allocation, portfolio assembly & construction and assesses portfolio risk & performance.
Notable Articles and News Stories This Week:
Deutsche Bank Issues Stark US Inflation Warning, Seeing Economic Parallels to 1940s, 1970s
Deutsche Bank, the largest lender in Germany, has warned that the US may be headed for one of its worst inflationary periods in recorded history. A combination of loose monetary policy and increased government spending may create similar conditions to those experienced in the 1940s and 1970s. Another added pressure is the additional $2 trillion in "excess savings" that consumers have accumulated over the past year or so. Deutsche Bank believes that "consumers will surely spend at least some of their savings as economies reopen" and that "this raises the very real specter of consumer-driven inflation".
Read more of the report here
Warren Versus the Volcano
Elizabeth Warren put bitcoin on trial during a meeting about Central Bank Digital Currencies (CBDC's) on Wednesday. According to her, it has failed in its functional goals while at the same time enabling crime and harming the environment. Uh-oh, seems like Warren has an agenda. Or she just hasn't done her homework. Both are pretty disappointing if you ask us. The criminal argument is becoming tiring and very easily dismissed. The environmental argument is harder to dismiss because, yes, bitcoin does use a lot of energy. However, we know that 39% of the total energy used for Bitcoin mining is done with renewable sources. This is also increasing year on year. Regarding its functional goals, well, it was designed to be a peer to peer cash, and we think the fact it has just been adopted by El Salvador as a legal tender may just prove that point incorrect; for a 12-year-old technology, we think we are doing pretty well.
If you want more detail as to how we can debunk these statements, you can find them here
Jack Dorsey Suggests Twitter Likely to Integrate Lightning Network
Jack Dorsey, the founder of Twitter, has hinted in a tweet that they may integrate the bitcoin lightning network; it's "only a matter of time". The Lightning Network is a layer atop the Bitcoin blockchain designed to enable faster and cheaper transactions by enabling user-generated channels for sending and receiving payments. This could help make bitcoin usable in the Twitter ecosystem.
Read more about the move here
Whilst we all have the option to look, to seek to understand, it’s often easier not to. Bitcoin, Ethereum and distributed ledger technology are complex systems that require significant due diligence. At Etherbridge, we aim to lower the barriers to understanding this fast-growing digital economy.
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This is not financial advice. All opinions expressed here are our own. We encourage investors to do their own research before making any investments.
