Today, we present a guest post written by Jeffrey Frankel, Harpel Professor at Harvard’s Kennedy School of Government, and formerly a member of the White House Council of Economic Advisers. A shorter version appeared at Project Syndicate.
El Salvador this month became the first country to adopt a cryptocurrency, Bitcoin, as legal tender. One says “the first” as if there will be others. But the idea is highly dubious.
I will admit, like many economists, that I fail to see what problem cryptocurrencies solve. They aren’t well designed to fulfill any of the classic functions of money — unit of account, store of value, or means of payment – in part because they are so extraordinarily volatile in price. This volatility is not surprising, since they are backed neither by reserves nor by the reputation of a well-established institution, such as a government or even a private bank or other trusted corporation.
The adoption of Bitcoin makes little sense for El Salvador in particular. Bitcoin and its fellow cryptocurrencies were born out of a semi-anarchistic distrust of central banks. It is true that many central banks, especially in developing countries, have a history of debasing their currencies. But El Salvador adopted the US dollar as legal tender in 2001, precisely to assure the monetary stability that had been missing from the predecessor currency, the colón. The country’s inflation rate had substantially exceeded 10 % during 1977-1995. The reform worked: Inflation has been much lower since the adoption of the dollar: below 2 % since 2012, and close to 0 since 2015 – a rarity in Latin America.
There are costs to giving up the monetary independence that having one’s own currency affords: particularly, the loss of the ability to adjust monetary policy in response to local economic conditions. The Central American country already accepted those costs when it adopted the dollar. The costs would be even greater if a currency as unstable as Bitcoin were the sole national currency. But President Nayib Bukele somehow decided to designate two competing legal tenders at once: Bitcoin alongside the dollar. The Salvadoran logic is surreal.
The interloper currency has not been well-received by domestic residents, who don’t want to be obligated to accept it in their daily life (as they must, technically, since Bitcoin is now legal tender). Nor has it been well-received by international financial markets. Moody’s downgraded El Salvador’s debt in July. S&P could follow. The interest rate that the government has to pay on its debt has risen sharply since the plan to Bitcoinize was first announced in June.
There is one function that cryptocurrencies do appear to serve; that is facilitating illegal transactions. Needless to say, this is not a function that should be encouraged. And, to make things worse from the vantage point of the general welfare, the mining (production) of cryptocurrencies like Bitcoin requires unbelievably large amounts of energy, thereby hurting the environment (as Elon Musk discovered, belatedly).
By the way, even if one accepts a role for one or two cryptocurrencies, the number that have been created is baffling: 6,000 or 11,000 (or as many as 70,000 tokens), depending what source one consults. The entire notion of the usefulness of money is that people choose to use the currency that others use, thereby minimizing transactions costs. They can’t evaluate and keep track of the creditworthiness of dozens of issuers. Money is a sort of natural monopoly, which is why governments long ago took over its provision.
In mid-19th-century United States, private banks and other institutions issued an estimated 8,000 competing private currencies. As Fed Governor Lael Brainard has noted, that period “is now notorious for inefficiency, fraud and instability in the payments system.” This is essentially why central banks were created.
The logic that works against having a large number of currencies at the national level, applies at the international level as well. This is why the dollar remains by far the leading international currency. The world does not have room for 11 international currencies, let alone 11,000!
If the United States’ chronic budget deficits and current account deficits had resulted in a strong long-run downward trend in the value of the dollar, one could imagine people shifting away from it and seeking alternatives. But this has not happened, particularly not during the period of the rise of cryptocurrencies. International investors continue to treat the dollar and US treasury bills as safe havens. And US inflation was remarkably low during this period (though lately it has risen in tandem with the economic recovery).
Some, including President Bukele, claim that cryptocurrencies will help promote financial inclusion, giving “unbanked” citizens access to banking services and lowering the transactions costs for small cross-border payments, such as emigrants’ remittances. Remittances are particularly important to El Salvador, amounting to a fifth of national income. But it is unlikely that Bitcoin is the solution. (Other ways of bringing down such transactions costs appear more promising.)
Holding or transacting in such an unstable asset is a particularly bad idea for low-income residents. They can ill afford to sustain price swings as large as 30% in a single day. Over a five-month period in 2011, the price fell 90 %, from $32 in June to $2 in November. It has quadrupled over the last year — bitcoin are selling at around $44,000 as of mid-September – which accounts for much of its current popularity. But what has gone up, will come down.
Another disadvantage is that even the digitally savvy run the risk of forgetting passwords and thereby losing their Bitcoin. Moreover, at least half of the residents of El Salvador do not have access to the internet to begin with.
Many aspects of cryptocurrencies are baffling, including the success of some joke coins like Dogecoin. But the official Salvadoran adoption of Bitcoin is perhaps the most surreal example of all.
This post written by Jeffrey Frankel.
Bukele seems to have been a good mayor, at least in Nuevo Cuscatlan. Heck, by comparison to some of his recent predecessors, he may be an OK president, though he certainly has gotten carried away with his own authority. The bitcoin business, though, looks like a lack of maturity. Shootin’ the moon is for those who have money to burn. El Salvador doesn’t.
“They aren’t well designed to fulfill any of the classic functions of money — unit of account, store of value, or means of payment – in part because they are so extraordinarily volatile in price.”
I’d argue with that.
Bitcoin as means of payment or with other frequently used word “medium of exchange” works quite well. Durable, transportable, divisible, fungible and non counterfeit-able. These are what make something a good medium of exchange. Payments via the bitcoin lighning network are just as fast and efficient as a credit card POS payment.
Bitcoin as a store of value…. This is something we can say only about the past, as we don’t know the future. A good store of value holds its value on the long term. In the history of bitcoin it not just held its value on the long term but multiplied its value several times. In the past of bitcoin if you any time purchased some BTC and held it for at least 3 years its value increased, no matter when you purchased it. Of course this doesn’t necessarily indicate the future. There’s still room for improvement in this function I admit. But store of value in term of 3 years… that’s good for stocks and ETFs too, I think.
Peter Gal: Your comment is one of the funniest things I ever read.
You rarely hear about issues of liquidity with bitcoin from those who sing its praises. By that, I don’t mean that liquidity is not a major problem (it is) but that no one hands out drug-laced candy or drug laced children’s stickers and then tells the young people they give it to about its addictive properties. It is chosen not to be ever discussed.
Ask a fan of bitcoin how they turned that bitcoin into cash or valuable assets. You’ll find the room gets suddenly and mysteriously quiet. But….. I would LOVE to hear Peter Gal “regale” us all with personal narratives and personal grandiose chronicles of how he turned bitcoin into cash or valuable assets. Just prepare yourself for several bulldozer trips of cr*p.
https://www.ft.com/content/8824be5b-cfaa-3d0e-93ab-1807cba3f31d
It is not that tricky as you try to describe it. Let’s assume you are really interested.
1. You can simply purchase things with bitcoin at a few places. In our Hungarian dictatorship we have a department store which accepts straight bitcoin payments: alza.hu – While you can purchase a lot of things there, I admit this is rather the exception, not the norm right now, so let’s move on.
2. You can use bitcoin loaded debit cards for your purchases. There are several of such cards. Really. You load it via bitcoin, the provider exchanges it to fiat at the time when you want to use the card. example: https://www.coinbase.com/card (There are really several dozens of such card issuers, so I don’t make a list here)
3. For small amounts you can use BTC ATMs – for larger sum, you can exchange BTC on crypto exchanges….
I don’t see what’s the big deal about exchanging BTC into other valuable assets… By the way, I am surprised by the tone of these seemingly angry responses. If I knew I touch such a sensitive subject here, I would have stayed away.
@ Peter Gal
A decent segment of Menzie’s audience is a well-educated crowd. What a pity for a bitcoin salesman that they are. So, anyway, which one of the above examples you named have you personally used to turn bitcoin into cash and/or assets, and what were those?? Everyone here is dying to know how bitcoin transactions in your daily life have been “a windfall” for you. I know I am dying to know anyway. The Hungarian department store example was very exciting to all of us. What an adrenaline rush that was.
Friendly footnote~~ due to the breadth of reading Menzie does, he probably already knows this. For those who don’t “HODL” is crypto slang for “Hold On For Dear Life”.
The phrase “Buy low, Sell high” is rarely ever used in crypto circles. You’re welcome to conjecture why that might be.
Either someone is having fun with internet pseudonyms, or there’s no way this is coincidence:
https://www.chipin.com/bethereum-cofounder-peter-gal-interview/
Some of the quotes are “interesting”, maybe even funny.
My personal favorite of the quotes:
Question: “Gambling has been accused in many instances as a tool for money laundering. Is there a way for you to prevent these issues within the Bethereum network?”
Answer: “There is no money used on our platform.”
There are other knee-slappers as well.
Funny as in weird:
“Bitcoin as a store of value…. This is something we can say only about the past, as we don’t know the future. A good store of value holds its value on the long term. In the history of bitcoin it not just held its value on the long term but multiplied its value several times.”
If one only looked at the price of gold over the last few years – one can say the same thing I guess. But our new friend must think something can be “durable” and volatile at the same time. Boggles the mind!
BTW – lots of people have lost lots of money playing the gold market and the same can be said about day traders in the bitcoin market.
But this dude probably is also into encouraging betting on sports. I’m sure his clients went in big on the Steelers and the Bucs this weekend!
Then probably you did not understand it,
Let’s take for example the Bitcoin Lightning Network. For the six pack joe it is seems to be an ironical term. Actually it is a layer 2 solution which makes almost immediate bitcoin payments possible. (Contrary to the blockchain – layer 1 transactions – which take at roughly 10 minutes for one confirmation, and needs 2-3 confirmations (20-30 minutes) to be sure enough that the transaction is actually valid)
Other than that, I don’t see what makes my comment looking funny, unless the concept of money and its three most common functions are new to you.
It seems you are insisting to have it both ways, strongly implying in one comment it meets all the definitions of money (out of the left side of your mouth), and in the next sentence, out of the right side of your mouth (I presume in case of future lawsuits) saying that “it is not money”. I agree with you that bitcoin and cryptocurrency are not money. What makes it obscenely humorous is seeing the statement from someone who possibly spends a large deal of his time trying to convince the easily duped to believe that “it IS money”. This, by the way, is a common form of something called “circular logic” common to hucksters. “It is money….. it isn’t money…… it is money…… it isn’t money”
I am not accusing you, just saying it’s a common trait to hucksters.
BTW, do you know what most TBTF bankers said in defense of themselves robbing the public blind with credit derivatives and swaps that largely brought on the financial crisis of 2007–2008?? A common refrain among the TBTF bankers was that the instruments were a stroke of genius, but that the public “did not understand it”. I wonder how TBTF bankers’ savings depositors, who had nothing to do with the derivatives and swaps, felt about that opinion??
Guys, you are amazing :))) – I thought places like this didn’t exist. But it does! Surreal but great experience!!! Have fun!
It’s funny you say that, because used car salesmen, roof shingles repairmen, unlicensed journeymen asking grandmothers and/or widows to pre-pay for supplies to resurface her driveway, carnival game workers, insurance companies that rarely pay claims, doctors that take kickbacks and free vacations to prescribe largely untested drugs, internet fishing scams, etc. etc. etc. are all a dime a dozen in American society.
I’m afraid you’ve communicated so predictably to nearly bore me to tears.
Just a general statement to all readers assembled: Long cons are harder to pull off than short cons.
Peter,
So, everything cool with Tether and bitcoin’s dependence upon it? Are all those regulators worrying about the stability of Tether and other so-called stablecoins just a bunch of out of it and silly worry warts?
And do you favor bitcoin over say ethereum despite bitcoin’s notorious energy inefficiency? Or are you one of those folks who think that is not a problem? Somehow expanding the supply of other kinds of “currency” does not involve massive amounts of pollution. Are the wonderous supposed benefits of cryptos, Joe Six Pack buying things he could buy anyway with other means of payment, worth all that pollution?
OK – next time I am in Hungary looking for a 6 pack of beer, I’ll bring some bitcoin.
I don’t know how things are in Hungary, so this may not apply. But, if you are somewhere that is unstable, and that makes it likely that the local situation will fall apart any time, I suppose bitcoin might make some sense because it’s portable up to a point. Provided you have a way to get to it. But, I don’t see the difference between bitcoin and electronic banking in another currency. With the exception that bitcoin uses enough power to dim the lights in Tacoma and normal banking doesn’t.
Efficiency is one of those things that is frequently mentioned in praising crypto-currencies. It seems to be one of the mandated talking points.
Having been associated with the financial sector for three decades, I have rarely heard complaints about the technical efficiency of funds transfer. Who know,, maybe I didn’t care enough to pay attention. Of course,
there are intentional delays in payment, your bank delaying completion of a transfer in order to play in the repo market for a day or so. That’s not a technical problem.
The Fed wire and similar systems don’t create real problems through a lack of efficiency. Crypto-currency efficiency seems to be a solution in search of a problem.
This has all the intellectual heft of an ltr comment about China.
Frankel says “X” and writes at some length to explain his view. Gal writes “not X” without saying anything useful to support “not X”. Just saying “Is not!” doesn’t cut it.
@ macroduck
Speaking of featherweight intellectual heft……..
Remember our friend Barkley Junior’s comment on September 25, 3 days ago?? I’m pretty certain macroduck, you are the “somebody else” clueless in Harrisonburg is referring to here.
Allow me to quote Barkley “Skewed Distribution” Rosser verbatim: “And you and somebody else also do not know anything about it, although the two of you have been making various apparently definitive pronouncements about it while slapping each other on your backs.”
More “shocking” news for Barkley Junior: https://www.reuters.com/world/china/china-asking-state-backed-firms-pick-up-evergrande-assets-sources-2021-09-28/
I guess this is what happens when a credentialed academic economist who is confused on when SAAR is used comments on financial/political issues he clearly cannot get a handle on.
Moses,
That is a nice article. So an SOE in Guangzhou is buying a soccer stadium for $1.9 billion while Evergrande’s publicly acknowledged debt is at $305 billion. Wow, that sure takes care of things, even though there is no report that Evergrande will make its next payment due tomorrow after missing one last Friday. This purchase will not fix that. Oh, but apparently there might be some other such purchases. Whew! And the Shenzhen government is investigating! Wow, that will take care of things.
But getting back to you and maybe others here not knowing what they are talking about, are you able to lay out the nature of the relationship between Evergrande’s reportedly flakey financial situation and the shadow financial system that knowledgeable people in China have been very worried about? How about your knowledge about any legal complications in the nature of the properties that Evergrande owns? You got some knowledge on that one? How about some other people here you like to praise? No? Did not think so. But this is what we really need to know.
So this article tells us that Chinese government is pressuring some SOEs to try to help out, and one has so far. But this does not remotely provide information regarding the points that are serious problems as I informed people here and which no media stories I have read have yet so far have added any substantial information on. This article did not so so, not in the least, although it does report an interesting, if unsurprising, development.
Here’s an old Econbrowser post on the subject of the shadow financial system in China (it differed from the US version)
Thanks, Menzie. Somehow I missed that post. As it is, my information on this both precedes as well as comes later than your post, with the last direct inputs on this about four years ago when i was last there. I gave talks at two universities in two different major cities, with the second one a conference with a lot of Chinese economists, although there were plenty at the first one also. When some of them got going on how worried they were and how totally opaque the shadow banking sector is there, I did not hear anybody disagreeing with them.
Of course in the current situation, as I have pointed out, we do not know the nature or extent of Evergrande’s involvement in all that. But it has been reported that the nature of a lot of their borrowings is highly questionable. Looks pretty likely they are in deep, although I have yet to see any report discussing this at all, and cettainly none of our other interlocuters here have had a shred of anything useful to add to this, given their utter lack of knowledge about any of it.
@ Barkley Junior
I know you’re kinda dull and witless most of the time, but let me give you a slight clue on how things are done over there, that I didn’t have to make up fictional characters who “whisper in my ear” and “I could tell you their names but then I’d have to kill you” just to impress people I don’t know personally on some blog. They’re not going to announce all the details like America did under TARP, Beijing is not going to publicize a mitigation of one company’s (Evergrande’s) spillover effects into the broader economy.
Let me say that again, because I know very well Barkley, you are conveniently of mammoth-sized brainlessness whenever having a brain results in your self-realization of being wrong about something. REPEAT FOR IDIOTS: They’re not going to announce all the details like America did under TARP, Beijing is not going to publicize a mitigation of spillover effects into the broader economy of Evergrande.
Got it?? NO?? Sorry, I never taught politics for kindergarteners.
But Moses, here they are making a big whoop for the media about some SOEs buying some of Evergrande’s troubled assets. Indeed, that looks like an obvious thing to do as they attempt what the article you linked to described as a “major restructuring” where as of right now they are not making interest payments on time. Not only is this not being kept secret, they are publicizing it with the obvious hope that people like you and ltr will be convinced that they have everything under control.
As it is, they probably are doing some things that are not being publicized, especially with regard to the shadow banking part of all of it, which, as I keep pointing out, nobody is reporting on. But your claim in bold letters that somehow they are “not going to publicize a mitigation of sppillover effects” is clearly false, as the article you so triumphantly linked to makes clear.
Gosh, got it? As it is, sorry, but I also do not “teach politics for kindergarteners.”
Oh, one other thing I have seen in the media sources recently that I have not seen any comment on here, including in this linked article, is a report that part of what may be pat of all this massive restructuring and missed payments is that the Chinese government will make a major effort to make sure that those who take the biggest haircuts will be foreigners while trying to minimize the damaging spillovers to domestic interests. I do not know how large are the foreign interests are that are in danger in this situation, and it may not be all that big, but it does seem that markets for now have decided this is not that much of a problem, worrying much more now about the problems in the US Congress as we face a possible shutdown and default on the national debt, which would certainly be a much more damaging event than anything that might happen due to Evergrande’s problems.
Hopefully it doesn’t do damage to the Salvadoran working man. China taking the machete to it probably didn’t help matters.
Funny. I once heard a guy whose paycheck came from touting crypto asked about the environmental cost 9n mining. “That’s not a problem with mining. That’s a problem with China’s power generation.”
Congrats, crypto-flack. You (hypocritically) identified a problem and China fixed it!
I think you were just relaying an interesting and ironically humorous story (which is how I took it). But for extra emphasis and clarity (directed from myself to ALL Econbrowser readers), I want to state, my comment on “China taking a machete” to crypto was not a criticism of Chinese government policy on this specific issue. I 98% applaud the policy move to make crypto transactions illegal (Although I suspect this Chinese government action is more related to capital controls than any objections from a morality standpoint). I think this is a good move by the Chinese government. But it still remains that hurting some Salvadorians may have been a negative byproduct of the move.
http://www.news.cn/english/2021-09/24/c_1310207607.htm
September 24, 2021
China to tighten regulation on virtual-currency trading, speculation
BEIJING — Chinese authorities have moved to forestall and handle the risks related to virtual-currency trading and speculation, according to a notice made public on Friday by the People’s Bank of China.
“All virtual-currency-related business activities are illegal and should be strictly prohibited and cracked down upon in accordance with the law,” said the notice jointly issued by the central bank and nine other government departments.
It is also considered an illegal financial activity for overseas virtual-currency exchanges to provide services for domestic residents via the internet, according to the notice.
China’s policies for virtual currencies are consistent, the PBOC said in a Q&A statement, reiterating that virtual currencies do not have the same legal status as fiat currencies and cannot be circulated in the market.
A raft of measures will be rolled out to strengthen virtual-currency regulation. Financial institutions and non-bank payment institutions are banned from offering services for virtual-currency-related business activities, according to the notice.
China will enhance the management of internet content and access, market entity registration and advertising related to virtual currencies, the notice said.
Efforts will also be made to impose a harsh crackdown on virtual-currency-related illegal financial activities and criminal activities.
In recent years, the rampant expansion of virtual currencies such as Bitcoin has disrupted the economic and financial order, bringing about criminal activities such as money-laundering, and severely endangering the safety of people’s property, said the central bank.
China has taken a tough line on virtual currencies. Also on Friday, the National Development and Reform Commission, the country’s top economic planner, published a notice to step up its crackdown on virtual-currency mining.
https://fred.stlouisfed.org/graph/?g=H6ux
August 4, 2014
Real per capita Gross Domestic Product for Mexico, Guatemala, Honduras and El Salvador, 1971-2020
(Percent change)
https://fred.stlouisfed.org/graph/?g=H6uD
August 4, 2014
Real per capita Gross Domestic Product for Mexico, Guatemala, Honduras and El Salvador, 1971-2020
(Indexed to 1971)
https://fred.stlouisfed.org/graph/?g=H6Al
August 4, 2014
Real per capita Gross Domestic Product for Mexico, El Salvador and Nicaragua, 1971-2020
(Percent change)
https://fred.stlouisfed.org/graph/?g=H6Ap
August 4, 2014
Real per capita Gross Domestic Product for Mexico, El Salvador and Nicaragua, 1971-2020
(Indexed to 1971)
The problem that needs resolution is why there has been no reasonable development in Guatemala, Honduras, El Salvador or Nicaragua and why development in Mexico has faltered since the early 1990s and the coming of NAFTA.
I largely agree with this post and could say a lot about it, but will just note a few things he does not mention.
One is that while the move by the PRC to ban (private) cryptocurrencies may show the authoritatian nature of the PRC government, the move by the El Salvadoran president to impose one on his economy against the wishes of most of the population also seems to be part of a general move by him to becoming a full-blown dictator.
One is that I do think there are a few legitimate useful things cryptocurrencies can do, although Frankel argues probably accurately that there are alternatives. Thus, while much of this being done is for illegal transactions, it is currently very expensive to make large cross-border financial transfers for many parties using means that do not involve cryptocurrencies. There is one legal usage where they do currently serve a useful function. Mostly otherwise the idea that somehow they are going to become this widely used medium of exchange is just a fantasy.
The main item not addressed in this post, and it is not directly an issue for what is going on in El Salvador, although it may well end up being so, is the matter of stablecoins, especially Tether. This seems to be the largest concern of US regulators in both the Treasury and the Fed as well as other parts of the US government concerned with managing money. Apparently most trading being done in the leading cryptos like bitcoin and ethereum involves transactions in one or another of these stablecoins, especially the poorly-backed-up Tether, which has already been involved in prosecutions for fraudulent transactions. These are tied in value to existing currencies, especially the US dollar, and in a sense show that it is the USD that is the global currency, not any of them. But these regulators are quite concerned about these coins for various reasons.
Ironically, having El Salvador get seriously on bitcoin means that they are effectively on Tether, which is the link between btc and their other currency, the USD. I suspect the El Salvadoran president is not aware of this or what it portends potentially. There have been claims made by some well-informed observers that a collapse of Tether could collapse almost the entire cryptocurrency market, although this is probably a very low probability event.
Oh, and if one were to make one of these an official currency, ethereum would have been better than bitcoin, not onlly because it has many potential uses bitcoin does not, but also because it is a lot more energy efficient than bitcoin is, an important issue Jeffrey highlights but that a lot of crypto enthusiasts seem to ignore, even as many of them are otherwise often very noisy about worrying about climate change.
Energy consumption is an issue today but it is a very solvable problem. Not what i would consider a long term issue. Ethereum already is moving to proof of stake, which will result in faster and cheaper ether. One thing people overlook is that most crypto currencies have the ability to change and evolve much more quickly than traditional financial markets. That is a hallmark of fintech in general.
With none of the others needing to worry about this pollution problem because none of them generate any pollution at all, or essentially miniscule amounts.
there is really nothing that would stop bitcoin from modifying its operation to become more efficient. just because it has not made that change today, does not mean it cannot make the change tomorrow. those who hold bitcoin (and other cryptos) simply vote on the proposals, and adopt the ones that are voted in. this is what i mean by the fact the cryptos can evolve rather quickly, if they want to. you see how quickly our present financial sector evolves? you need to wait a week to cash a check you just deposited.
Except that it seems there is nobody really in charge of bitcoin. Its mysterious founder is probably dead. Oh, the virtues of decentralized finance!
Not sure how the status of nakamoto has anything to do with bitcoin today. Bitcoins ability to change over time does not depend on nakamoto at all.
bafling,
Really? How is it changing? Who is doing that changing? I see no moves to reduce the massive pollution coming from their mining. We know who is in charge of ethereum, and he is making lots of changes, wdely and publicly announced. It is improving, more efficient than bitcoin, and with more uses. If one wants to focus on one of these, it is clearly superior to bitcoin except for there being more bitcoins out there.
barkley, here is a short readable primer on how the protocol process works in bitcoin (and similar to other cryptos)
https://galea.medium.com/bitcoin-development-who-can-change-the-core-protocol-478b8ac5fe43
you argue there is nobody really in charge of bitcoin. that is not actually true. there is no “leader”, sure, but that is one of the draws of defi processes. that does not mean things cannot and will not be done. the community and stakeholders control the direction, not a single leader. rather democratic if you ask me-probably one of the reasons defi has been so castigated in china.
and to be clear, i am not advocating for bitcoin directly. my discussion is more general, applying to many of the cryptos. none of them are perfect, and they do have flaws. my personal fav is ethereum. but they also have the mechanisms in place to change and fix those flaws, if the community feels that is what should be done. that is exactly what has happened with ethereum, as it pushes from proof of work to proof of stake protocols. elon musk has been pushing the bitcoin community for change as well. there could be results to that soon. the point is, it can actually occur. there is no one individual that can keep this from occurring-only the bitcoin community can keep it from occurring.
all of these defi cryptos need a founding group to get it moving, sure. the better cryptos have a better group of founders, who create a robust initial model to run the system. but that is not permanent. as more people join the system, they begin to obtain the power to control the system. sure, somebody could corner the market on bitcoin and effectively control how it is run. but that may also drive the community away-towards other cryptos. so that person may corner a market that nobody wants-not much value in that. this defi crypto space is really an interesting experiment running in real time.
baffling,
Fair enough, there is a system for changes in bitcoin. But it remains that there have been very few changes with bitcoin being massively polluting and very bad compared to other cryptos in many ways. Ethereum has a clear and competent leadership and there have been many more changes there.
Barkley, i dont disagree. But if i were a betting man, i would bet bitcoin is faster and less energy intensive three years from now. But its blockchain is not as pliable as ethereum and some others. I expect those to grow in importance due to smart contracts, etc. but only energy sipping cryptos really have a future long term. Bitcoin will have to join them or become secondary.
‘In mid-19th-century United States, private banks and other institutions issued an estimated 8,000 competing private currencies. As Fed Governor Lael Brainard has noted, that period “is now notorious for inefficiency, fraud and instability in the payments system.” This is essentially why central banks were created.’
Of course renowned economic historian JohnH will excuse all the macroeconomic instability back then because growth still occurred!
Catching up on the Sunday talks shows, I see Tim Scott’s explanation why the George Floyd police accountability proposal is dying in the Senate. Senator Scott actually claims that the Democrats want to “defund the police”. OK Senator Scott is a pathetic liar. But Cory Booker will not call this liar on such utter BS?
https://www.theguardian.com/us-news/2021/sep/26/republicans-democrats-defund-police-tim-scott-cory-booker-karen-bass
German politics had an interesting twist. Angela Merkel’s party could not even win her old district. But Merkel will remain head the government for the next few months. I bet Trump is trying to figure out how he could pull the same stunt!
https://www.theguardian.com/world/2021/sep/27/rival-spd-party-wins-district-held-angela-merkel-1990-anna-kassautzki
Now that Liz Cheney has been throwing her sister Mary under the bus for the last 8 years, it seems Liz has finally decided she was wrong:
https://www.thelist.com/483499/how-liz-cheney-really-feels-about-her-sister-mary-cheneys-sexual-orientation/
The adoption in El Salvador of a cryptocurrency as a national currency, was proposed by the president and approved by the congress. Characterizing the action as that of a president moving to be a “full-blown dictator” is incorrect and offensive.
https://fred.stlouisfed.org/graph/?g=H9ae
August 4, 2014
Real per capita Gross Domestic Product for Mexico, Guatemala, Honduras, El Salvador and Nicaragua, 1971-2020
(Percent change)
https://fred.stlouisfed.org/graph/?g=H9aj
August 4, 2014
Real per capita Gross Domestic Product for Mexico, Guatemala, Honduras, El Salvador and Nicaragua, 1971-2020
(Indexed to 1971)
[ The struggle for economic stability and growth in El Salvador extends for decades. ]
ltr,
I am sorry, but someone who never finds anything to criticize about the dictator Xi Jinping has no credibility at all on the matter of dictators. Heck, Xi gets his mandates passed through official bodies too.
As it is, Bukele himself is bragging that he is a dictator, not only that, but that he is “the coolest one in the world,” sheesh. See theguardian.com/world/2021/sep/26/naybib-bukele-el-salvador-president-coolest-dictator .
The president of El Salvador expressed concern about the limited extension of banking in the country, and this is an important concern but a concern that is being methodically overcome in Ethiopia, Kenya and Uganda which have extensive 4-G internet connections. However, the use of Bitcoin as a currency means there must be widespread internet use in El Salvador. Why then not just provide for online banking through the country?
This has not been explained.
Ever count the days need for a check to cash and clear? It takes 30 days to close a credit card payment. How much does it cost to wire transfer money? Lots of inefficiencies in current financial system have prompted people to find other solutions.
The author destroys his own credibility by failing to note that El Salvador has already enshrined the US dollar as legal currency.
Furthermore, El Salvador’s own currency was previously pegged to the US dollar, this “sovereignty of currency” didn’t exist there to start with.
While I agree that the cryptocurrencies serve to real function, it so equally difficult to assign them harms arising from being legal tender.
I am equally amused by “protests” against bitcoin in El Salvador: if there are multiple legal tenders, why does one of them being bitcoin matter?
We have already established that El Salvador doesn’t control its own money supply, and having multiple legal tenders means no consumer is forced to use bitcoin.
This article and others like it only harm their own and their author’s messages with such poorly constructed, factually wrong commentary.
Lots of inefficiencies in current financial system…
[ I much appreciate the response, which strikes me as correct with a private banking system in which the banked need to be productive for the bank. However, for customers who are not productive for a private bank there is another answer and that is public banking. There is no public banking in El Salvador. Just as there was no public water distribution system in Bolivia before the private supplier was forced from the country by being ordered to supply water to indigenous (poorer) Bolivians. Now, a public system supplies water to Indian communities in Bolivia. ]
i am not sure i follow your argument. exactly what and how would a public bank change the situation?
A public bank can offer no or minimal fee digital saving-checking accounts and currency transfers. Accounts and transfers are immediately recorded and completed online and can be taken as a personal business accounting system in a phone. A rural bed and breakfast owner runs the business through a phone, public bank fees are no more than minimal.
I think this is most important.
ltr, i think you have a very naive view of banking costs. there is a cost to those activities. perhaps they are not paid directly as a line item by the account holder. perhaps they are simply paid by lowering the interest paid on the savings account. it is absolutely false to assert a public bank can conduct these transaction for free.
if i electronically transfer money from one bank account to another bank account, the money is not immediately available for use. in the public banking model that you seem to like, i don’t see how that issue disappears. The important issue is the time and cost associated with verifying the transaction. the decentralized finance model seems to be doing this faster, with the ability to continue to get cheaper. i have yet to see a public bank do better. ltr, i think the issue is you have not yet educated yourself on how the crypto ecosystem actually works. it is quite interesting. perfect? no. but very interesting.
The point of a public bank in a country such as El Salvador is to allow for essentially free digital banking or small business transactions. The infrastructure need is fairly complete internet coverage, but wide crypto currency use takes such internet coverage. (I appreciate the questions and will add to this.)
Bitcoin is not a currency it’s an asset. A country has only one currency, the one that denominate prices of all products (even Euros are just speculative assets here in the US). So far the currency in El Salvador is still the US dollar, but some people have been forced to also post a different price in bitcoins. As far as I know those who accept bitcoin payments immediately converts it to dollars and adjust their bitcoin prices to reflect current exchange rates to dollars. Come back in 3 months and show me that a sack of potatoes held its price in bitcoins, but wildly fluctuated in dollars – then we can talk about whether El Salvadors currency is bitcoin.
The President is a pretty good guy who got duped by internet memes. He was rightfully angry that the money send home to his country from expatriates, was subjected to absurdly high fees skimmed off by big US banks. That does not happen if people instead transfer bitcoins to their family at home. The illegals in US would have a safe and cost free transfer of money with the use of bitcoins. We shall see how big a fraction of the currency transfers switch over to bitcoin – I doubt it will be that much – even after the families at home supposedly can go buy groceries directly with their bitcoins.
The President is a pretty good guy who got duped by internet memes. He was rightfully angry that the money send home to his country from expatriates, was subjected to absurdly high fees skimmed off by big US banks….
[ Importantly so, I know that this is a particular concern with transfers made to African countries such as Nigeria and Ghana. How can bank fees be limited with straight currency transfers? ]
I know the Fed has been talking about making a $ crypto currency. There will always be some skimming if you have to convert to local currencies but it could cut out the big US banks – and they will probably block the Fed from making a $ crypto.
Ivan,
Sorry, but El Salvadoran President Bukele is not “a prertty good guy.” He is a dictator and is bragging about it, claiming he is the world’s “coolest dictator.” Really. One cannot make this stuff up. As it is, none of the leaders of the Troubled Triangle (El Salvador, Guatemala, Honduras) are anything to write home about as either leaders or even as human beings.