El Salvador's Bitcoin Policy
Discussion
From an interview by Evgeny Morozov:
Yanis Varoufakis devastating evaluation of El Salvador’s Bitcoin policy:
EM: “What do you make of what is going on in El Salvador? Not only has it made Bitcoin legal tender (shortly after announcing the Chivo Wallet with some money placed in it to incentivize use) but it will also be issuing the so-called Volcano Bonds, which have attracted their share of controversy. Is there a way to look at these bonds as a tactic that expands El Salvador’s options in negotiating with the IMF? Based on your own experience negotiating with that institution, do you think they stand any chance of success?
YV: It is a preposterous stunt. For the life of me I cannot even begin to answer those who say to me: ‘Had you, Yanis, adopted Bitcoin back in 2015, all of the Greek people’s problems would have gone away!’ Why would they? The poor of Greece or of El Salvador would have no way to get their hands on Bitcoin anyway. Then the only beneficiaries would be Bitcoin hoarders (of whom very few live in El Salvador or Greece), who suddenly benefit from a spike in Bitcoin demand and from being able to spend their stash in El Salvador without the cost of converting them to dollars. The only poor El Salvadorians who may gain something are the expats sending money home in the form of remittances – people who are, now, fleeced by Western Union and the like.
On Volcano Bonds, this is a dangerous development. A government is inviting speculators to buy cryptocurrency backed by an impoverished state. Early Bitcoin enthusiasts were motivated, partly, by a loathing of governments that took on unsustainable debt – before indulging domestically in financial repression and austerity – in order to be able to extend-and-pretend their debt. The worry was that, at some point, Wall Street and other grubby conventional financiers would start building similar pyramids on… Bitcoin. And, the ultimate fear was that the state would join in. Well, Volcano Bonds are making this nightmare a reality, allowing speculators to speculate on a cryptocurrency using an impoverished sovereign state as backup.
More generally, and lest we forget, El Salvador’s public debt is in dollars, and thus impervious to whether Bitcoin is made legal tender or not. Making Bitcoin legal tender just adds enormous costs on small businesses, and ensures that those who do accept Bitcoin effectively exit the domestic fiscal system – leading to a substantial loss of fiscal space for the government, a development that increases its long term dollar debt burden.
As for the argument that, by adopting Bitcoin, Bitcoin will flood into the country thus boosting investment and giving the government more degrees of freedom vis-à-vis the IMF, again I cannot see the logic here. Bitcoin business moved into the Baltics, Puerto Rico, and elsewhere because of low costs, low taxes, and negligible regulation of their activities. They did not care if the local corner store is forced by law to accept Bitcoin. (In any case, most of these businesses are ultimately using Bitcoin to earn large amounts of… dollars!).
In view of the above, I cannot see why anyone would think that, in making Bitcoin legal tender, the El Salvador government is improving its bargaining position vis-à-vis the IMF. The fact that the IMF is utterly opposed to Bitcoin being granted legal tender status in El Salvador, as well as to its president’s Volcano Bonds, does not mean that the IMF is worried that its bargaining power vis-à-vis the El Salvador government is weakened. Quite the opposite: They predict that the Bitcoin experiment will deplete the El Salvador government’s fiscal space, boost the IMF’s power over El Salvador, but, at the same time, put more pressure on the IMF to commit more bailout funds to a failed El Salvador. After the recent IMF fiasco of huge bailouts to the radically right-wing Macri government in Argentina, it is not something the IMF folks cherish.”