El Salvador’s new Bitcoin Law is a solution in search of a problem, according to long-time economist Steve Hanke.
During midnight on June 8, El Salvador passed a law that turned Bitcoin into legal tender. The Bitcoin Law is a creation of the populist president of El Salvador, Nayib Bukele. Its most controversial feature is Article 7, which stipulates that every economic agent in El Salvador must accept Bitcoin as payment for goods and services. Consequently, after September 7, Bitcoin will not only be of legal tender, but also of forced exchange. To make this radical change more acceptable, the government promises to put $ 30 into the digital wallet of every Salvadoran who downloads the government’s digital currency app (Chivo).
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President Bukele’s radical cryptographic initiative was news around the world. He also made him a popular hero in the digital currency community. But in El Salvador, Bukele received little more than cynical looks. After all, since El Salvador got rid of the colon and replaced it with the US dollar in 2001, its average annual inflation rate has been only 2.03%, the lowest rate in America Latin. And if that’s not enough, even though the dollar is legal tender, all currencies are legal to use in El Salvador. Then Salvadorans ask, “Why change our dollarized competitive exchange rate regime?” It works best. The World Bank and the International Monetary Fund (IMF) have made the same observation and asked the same question. And rightly so.
They will not be the only institutions to ask questions. So will the International Financial Action Task Force (FATF), the International Police Against Money Laundering and Terrorist Financing. From a FATF regulatory perspective, El Salvador has been as clean as a dog’s teeth. This will change if the Bitcoin Act is implemented on September 7th.
The Bitcoin Law, approved on June 8, will enter into force on September 7. Photo EDH / Archive
In an Applied Economics Studies working paper from Johns Hopkins University, I identified 27 FATF regulations related to virtual asset transactions that will be nearly impossible for banks, companies, and their Salvadoran customers to comply with. the new law. For example, the FATF requires that parties involved in virtual asset transactions provide a complete and sufficient knowledge of their client’s information. It also requires senders and recipients of virtual assets to obtain accurate information and knowledge about “the transaction, the origin of the funds, and the relationship with the counterparty.” The chances of Bitcoin transactions meeting these requirements are slim or nil.
If asked if the FATF and other regulatory bodies will set their sights on the dark side of the Savior on September 7, the answer is an unequivocal “yes”. Just look at what the US State Department has recently done. UU. On July 1, it published a list of corrupt and / or undemocratic actors in the North American Triangle of Central America (El Salvador, Guatemala, and Honduras). Of the 55 Central Americans now excluded from the United States, 14 are Salvadorans. They include high-level members of President Bukele’s administration, including his chief of staff (Carolina Recinos), labor minister (Rolando Castro), deputy security minister (Osiris Luna) and legal adviser (Conan Castro). They have been nailed by a long list of charges such as money laundering, accepting bribes and undermining democracy.
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Bukele himself has a history of overstepping his democratic powers, including the use of the armed forces to influence Congressional legislation and the dismissal of five Supreme Court justices who had previously ruled against him. More recently, Bukele ordered the arrest of former President Salvador Sanchez Ceren and nine former government officials.
If all these concerns and questions are not enough, some Salvadorans wonder if the Bitcoin Law could be passed constitutionally. Accordingly, Bukele proposes to rewrite the Constitution of the Savior. The proposed new constitution, specifically Article 111, would allow the government to grant legal tender currency to currencies that do not exist in physical form (read: digital currency).
As Bukele moves forward, as expected, markets are in decline. Following the passage of the Bitcoin Act, Moody’s downgraded the long-term foreign currency issuer rating and the unsecured senior ratings of El Salvador. As night falls into the day, El Salvador bonds denominated in US dollars maturing in 2035 have also plummeted since the Bitcoin Act was passed and recently reached a nine-month low. And El Salvador bonds maturing in 2029 are trading near difficulty levels, with a massive spread of 945 basis points over US government bonds. UU. Comparable.
Markets tell us that Bukele’s authoritarian tendencies and the wacky ideas of digital currency will result in monetary chaos and economic collapse. For the United States, this would mean another wave of migrants from an unstable failed Central American state.
– Text published with the author’s permission –
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