Thread by @danielmunevar

Been thinking about El Salvador and #Bitcoin . Looking at it from a sectorial perspective, it looks like a desperate play to shore up public finances with the support of nefarious actors 🧵

There are three key issues to remember. 1. SLV will have a dual currency system with USD and BTC. 2. Due to high volatility, BTC is not a particularly good store of value. 3. Because of this, USD will remain as the currency for accounting and tax purposes.

What does this mean for the different sectors in the economy? Households in SLV can get BTC through mining, remittances or salaries. They can either use it for consumption or save it. What will they do?

GDP per capita is USD 3.7k. Around 30% of people in SLV live in poverty. As prices and goods will remain denominated in USD, their tolerance for BTC volatility is minimal. As soon as they get BTC, they will likely exchange it for USD through SLV public facility.

Business are in a similar position. Their credits, supplier bills (inc. imports) and taxes will remain denominated in USD. Sure they can pay those in BTC, but why take the risk of high intraday volatility that can mess up their capacity to settle bills at the end of the month?

So, just like households, every time they receive a BTC for a payment of a good or service, they will proceed to exchange it for USD in order to protect themselves from volatility and meet their bills (they might set some aside as a speculative investment)

What about the government? They will put in place incentives for households and business to exchange their BTC for USD through a public facility. This sets up a system where the government is in a position to receive a steady inflow of BTC matched by USD outflows.

Why they would do that? You cant settle imports nor meet debt payments with BTC. For that you need USD. The only scenario where SLV would want to structurally accumulate BTC is if they are convinced the price will always go up in the long run.

This is the desperate part of the play. SLV government seem to assume they can handle the short term volatility and profit from a never ending long-term appreciation of BTC vs USD. Risky play but if you are already talking to the IMF for a loan, there is not much to lose.

The nefarious part comes via the external sector. SLV is not a big exporter nor a an attractive FDI destination. BTC does not change this. However, the new law does allow SLV to sell potentially attractive money laundering services (at least initially)

The new law effectively allows BTC holders to buy anything they want in SLV skirting AML regulations. No matter where the money has come from they are free to buy properties skirting banks and the financial system all together, as the BTC goes from wallet to wallet.

So, if you are involved in some shady line of work, SLV gives you an easy way to launder your money. Come in, buy stuff, selling after couple of months/years and then exchange it for USD through SLV public facility.

They can take then take the USD out. Asked about the provenance of money by a foreign bank, they can show the receipt of its origin: SLV public facility. Presto. Clean money. (This will likely work until SLV is flagged internationally as AML risk)

Whats in it for SLV? This dynamic can start a real state boom with lots of new economic activity and construction jobs. The constant inflow of non-resident BTC will allow the government to leverage their own BTC play (under the assumption that it will always go up vs USD).

The problem is that this is an implicit BoP ponzi scheme. Only way to keep the show going is if the increase in value of BTC vs USD is large enough to offset clean USD outflows. If this criteria is not met, SLV will run out of USD. Bad money always drives good money out.

So, while this might work for a couple of years (domestic asset bubble) this is an enormous risk for the people of El Salvador. You dont want to find out the hard way if you can pay food, medicine and oil imports in BTC once your USD have dried out. END.

Aqui esta el hilo traducido al español:

https://twitter.com/danielmunevar/status/1403313571656830978?s=20