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.
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.
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
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.
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
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,
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.