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Saturday, November 27, 2021

The Real Reasons behind the Latin American Bitcoin Revolution

This Wednesday, June 9, 2021, Bitcoin was declared the official means of payment in El Salvador by the incumbent President Nayib Bukele. Government representatives from other Latin American countries such as Paraguay, Mexico or Panama have also announced that they are also flirting with Bitcoin integration. What are the real reasons for the crypto craze in the Latin American countries and what long-term consequences this has for the Bitcoin establishment.

Many Latin American countries are in serious economic trouble. High national debts and significant devaluations have ruined confidence in national currencies in many places: Just think of the many debt cuts in Argentina or the hyperinflation in Venezuela. In desperation, states can take extraordinary measures. One sees a new way out to escape the monetary vicious circle in establishing a new monetary system called Bitcoin.

El Salvador leads Latin American Bitcoin revolution


In El Salvador, Bitcoin is not only intended to become legal tender, but also part of an entire economic program. The fact that it can work in contrast to Venezuela’s failed Petro ICO is primarily due to the fact that it is explicitly not about a state crypto currency – no one demands that people have to place new trust in the state or the central bank of El Salvador.

In affluent countries with stable currencies, this may be difficult to understand. After all, the euro or the Swiss franc have proven to be a stable currency over the years. However, this trust has never been built in many Latin American countries. For most people, the constant devaluation of their national currency is too present. As in the example of El Salvador, there is often only the use of a foreign currency, i.e. the US dollar. The fact that currency reforms are now being carried out that depoliticize the domestic currency system is an opportunity for El Salvador and other Latin American countries with comparable problems.

Make a virtue of necessity

While there are currently only a few reasons in Germany why you should pay with Bitcoin from a cost and efficiency perspective, this is not the case in El Salvador. Around 70 percent of the people there do not have a bank account at all and cannot access the financial infrastructure that we take for granted. The result is that payments from abroad by expats, which are extremely important for the domestic economy, are reduced by massive fees from remittance service providers – sometimes 20 percent of the transaction amount – such as MoneyGram or Western Union.

Building a functioning banking system would be far too expensive for the small country. Out of necessity, lean financial infrastructures based on blockchain can therefore offer enormous added value. Access to credit and the opportunity to save are, after all, existential in order to develop an economy. Such a virtue can be made out of necessity. Instead of lingering on outdated financial infrastructures, a modern financial system can be built directly in the sense of a leap innovation.

Complete, not replace

The existing system will not be replaced, but simply supplemented by Bitcoin. The US dollar as the national currency will therefore remain, even if there is to be an obligation to accept it in the future, which should also apply to Bitcoin.

Rather, Bitcoin acts as a second safety net. The cryptocurrency enables greater independence from the US dollar and can help stabilize the economy by giving people an alternative. Especially since, in contrast to classic fiat currencies, you can speculate on a significant appreciation. The state can also become an investor and, through the accumulation of Bitcoin, ensure that private households, companies and public coffers benefit from asset growth. So if you pay your electricity bill at the local utility via BTC, then, unless an immediate exchange takes place, Bitcoin stocks are built up, which can lead to an increase in value. In line with this, the advertisement by the President of El Salvador by pointing out,are suitable for building crypto mining facilities.

This can be described as irresponsible, but every monetary policy action or every currency reform is associated with a great risk. After weighing the options, which are already risky, the opportunities may outweigh the risks.

Oh how beautiful is Panama: what it’s really about

Even if the individual government officials of Latin American countries may be Bitcoin enthusiasts and welcome a US dollar alternative, one decisive factor for the Bitcoin enthusiasm is likely to be another. The fact that Panama was also very positive about El Salvador’s Bitcoin plans suggests that taxes could play a central role. Even before the so-called “Panama Papers” the tax haven Panama was known for its “good-natured” financial and tax policy.

Finally, Bitcoin legalization in El Salvador also includes an abolition of taxes on cryptocurrencies. Without further ado, Panamanian Congressman Gabriel Silva declared that Panama must not fall behind in the crypto tax competition under any circumstances. In the new crypto tax location competition, Panama is also likely to take steps to make crypto financial transactions attractive to foreign investors and companies. (Bitcoin Lightning Network Integration On Twitter “Just A Matter Of Time”)

El Salvador “smaller” than the Saarland

So it is also about location policy and the hope of attracting companies and capital into the country through attractive tax laws. The leverage can be enormous for the small nations. After all, the gross domestic product (GDP) of El Salvador is just 27 billion US dollars, that of Paraguay 37 billion US dollars and even Panama comes to only 67 billion US dollars. For comparison: Even the Saarland has the equivalent of 41 billion US dollars. However, the markets have reacted to the report correspondingly unimpressed.

Rather, they are influenced by news from the US and China. China’s current tough crackdown on the crypto industry and the interest rate statements by Fed chairwoman Janet Yellen and the increased US yields have a significantly greater impact on the BTC rate than countries whose GDP is just a fraction of the Bitcoin market capitalisation matters. However, the long-term effects should not be underestimated.

Should the monetary reform in El Salvador achieve partial successes, larger countries such as Argentina or Brazil could follow suit. The Mexican government representative Eduardo Murat Hinojosa was also caught in the state Bitcoin fever. He reported on Twitter that an equivalent law should also be drawn up for Mexico. At the latest when G20 countries accept Bitcoin as an official means of payment – Brazil, Mexico and Argentina are among them – the effect on the markets should be significant. (Also Read: European equity markets finished trading without a single dynamic )

US dollars to suffer

Should El Salvador now trigger a bitcoin domino effect, then the US would suffer most from it. After all, a lot of US dollars circulate in Latin America. If foreign demand for US dollars falls as a result of evasive movements, this means a weakening of the USA. After all, the reserve currency status of the US dollar is an important part of American dominance. Accordingly, one can only hope that the USA will not put pressure on the Latin American countries to refrain from introducing Bitcoin.

From June 9, 2021, there will not only be a new public holiday among crypto enthusiasts, but also an essential stage victory for full Bitcoin recognition. The fact that a sovereign state declares Bitcoin its national currency has far-reaching (positive) consequences for the recognition of Bitcoin as a serious currency alternative by other states, institutions and banks.

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