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How bullish is the El Salvador news for crypto?

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Dear Bankless Nation,

Bitcoin was approved as legal tender in El Salvador on June 8th 2021

This event is absolutely massive. Bitcoin, the world’s first and largest crypto asset is now the native currency of a nation state. This is a testament to how far this entire industry has come; from virtually nothing to legal currency of a nation-state in 12 years is a breakneck adoption speed.

El Salvador had its own native fiat currency called the colón from 1892 to 2001. But in 2001, the country ‘dollarized’ and adopted the dollar standard in an effort to stabilize inflation.

As a result, El Salvador has not experienced the rampant inflation that many other Latin American countries have (famously Argentina and Venezuela). Economists use the El Salvador transition to the dollar as an example of Gresham’s Law, in which ‘bad money drives out good money’. Put in other words, people spend the money that is losing value, while holding the money that is retaining value.

If you believe the narrative, we are about to watch this unfold again, except now the dollar is in the position of the former El Salvadoran colón, and Bitcoin is in the position of the dollar.

A nation-state adopting Bitcoin as its native currency is the manifestation of Bitcoiner gospel, touted in controversial books like The Bitcoin Standard.

According to President Bukele (when he spoke in Nic Carter’s twitter space last week), El Salvador has no plans to remove the dollar as a legal currency. It just wants its citizen to have a choice.

The dollar or bitcoin? El Salvadorans get to choose.

Which currency they prefer will be a key thing to watch over the coming years.

Is the Final Boss Awakening?

El Salvador adopting Bitcoin seems to have activated the attention of some high profile figures in government. It may be no coincidence that last week Elizabeth Warren decided to record her 7-minute tirade on why Bitcoin is bad.

Her facts were uninformed at best—many in crypto regarded them as intentionally malicious. As usual, Bitcoiners showed up to refute and defend:

More directly the IMF was compelled to raise their ‘concerns’ about El Salvador adopting Bitcoin, citing that it “raises a number of macroeconomic, financial and legal issues that require very careful analysis”.

Careful analysis. I don’t speak banker but is that a threat?

As a result of El Salvador adopting Bitcoin, foreign investors have demanded increasingly higher premiums to hold Salvadoran debt, signaling that the market is seeing increasing risk on the horizon for the country.

My takeaway?

Success breeds haters. Bitcoin is now on the same field as Nation States. This is a game of Risk and Bitcoin just claimed El Salvador.

Now that it’s at Nation State scale (albeit a small country of 6.5M), it’s now on Nation State radar more than ever.

In some ways, this is good for Bitcoin. It’s finally found itself on the battlefield that it’s always wanted to be on. In other ways, this is going to be Bitcoin’s biggest test.

Is it ready for the Final Boss? Because ready or not, it’s now on a collision course.

Strike… Strike?

The specific details as to how Bitcoin will be ‘rolled out’ to El Salvadoran citizens is yet to be fully understood.

What is known is that Jack Mallers, creator of Strike played a large part in working with President Bukele. Strike is a Bitcoin bank in an app, and has some interesting Bitcoin-enabled features that make it usable on a global scale, regardless of nation state and regulatory boundaries, and apparently is going to be helping onboard the El Salvadoran citizens to their first Bitcoin wallet.

Strike is a custodial Bitcoin wallet that is connected to both the Bitcoin mainchain and the lightning network. Two users of Strike can send BTC between them in the same way that two Venmo users can send USD between them.

It’s a centralized database, so payments are free an instant (but not bankless). Interestingly, users of Strike can denominate in dollars, even though the Strike collateral is Bitcoin. To accomplish this Strike uses a neutral trading strategy in the back-end to maintain solvency while allowing users to send synthetic dollars to each other while using BTC as the underlying collateral.

The main feature is that you can send dollars to other Strike users anywhere in the world, because Strike uses the Bitcoin payment network rather than any local banking rails. Strike doesn’t need to be hooked into the banking system—with the Bitcoin network it can bypass SWIFT (and bypass sanctions? 👀).

The approach seems a bit convoluted—why not just use crypto dollars?

Whatever. Baby steps.

The Skeptics Reply

All this sounds good, but I think we should be cautious before heralding this news as unequivocally positive for crypto.

Who is President Nayib Bukele?

Nayib Bukele once marched the military into the El Salvadoran Congress to force lawmakers to sign a bill that would approve a $109m loan for security equipment, including police vehicles, uniforms, surveillance equipment, and a helicopter.

He also removed 5 judges and the attorney general that would not support his regime, in an act that Nayib said was cleaning house…others called it a coup.

Nayib has been categorized as an authoritarian populist.

Should we join shoulder-to-shoulder with a man who doesn’t represent freedom and human rights? Are Bitcoiners okay with supporting individuals who espouse anti-crypto values and turning a blind eye to oppression, so long as its good for Bitcoin™️

Alex Gladstein had a good tweet thread about this.

A question to leave the reader: Is Nayib Bukele the President of El Salvador, interested in promoting the welfare of his citizens? Or, is he a card-carrying Bitcoiner, using his presidency to impose Bitcoin upon an entire country?

He’s got the laser eyes, after all…

The Mises Institute had a good take:

If the president really wants monetary freedom for El Salvador, he should not have presented them with what, effectively, is a government handout for bitcoin hodlers and the companies behind the Strike app and other potential intermediaries. Instead, he should simply have repealed existing legal tender provisions and announced that people would be free to use whatever medium they prefer for their transactions.

Wait and See

There’s a ton of unanswered questions about this. Rob Paone (Crypto Bobby) summed up my feelings on this pretty well:

There’s a lot of moving parts with this story, and a lot of unanswered questions…

  • Do El Salvadoran citizens actually want Bitcoin?

  • Will the Lightning Network actually have its debut?

  • Will the Final Boss bite back?

  • Is Bitcoin going to serve as a gateway to DeFi?

  • Are we on a path to hyper-bitcoinization?

We’re bringing Nic Carter on tomorrow’s State of the Nation live stream to help get to the bottom of these important questions.

The El Salvador Live stream starts at 2pm EST (11am PST)—set a reminder here!

This is a historic moment in crypto—don’t miss it.

- David


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