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  • 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 hereon 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 questionsTo 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. But  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 volatilePlaces 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. What's  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 havewhole 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 itRachel? The volatility of bitcoin. You know,  

  • I'm a merchant and someone pays me a bitcoin  today. 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 meanis 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 thereAs the law seems to be written right now,  

  • and there are many questions about that. It  seems to require any transaction, that debts  

  • should be allowed to be settled in bitcoin, butthink 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 madebut 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 involvedincluding 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 formatthat can make things very difficult, right?

  • I think that's that's true. El Salvador iscountry 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 meanthe 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  super stable. It fluctuates against other major  

  • currencies. It fluctuates against commoditiesIt 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 ischallenge 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 dollarsIf 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 sandboxWithout 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 infrastructureJust having a certain amount of bitcoin present in  

  • the country doesn't necessarily increase GDPGDP 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? Sowould 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 transactionsand 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 spokenlot 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 Salvadorbitcoin. 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 ValleyCertainly 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.

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El Salvador made bitcoin a legal currency. Now it gets interesting | Beyond The Valley

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