Bitcoin As a Global Currency: Why El Salvador’s Decision Is a Massive Step
“If AI is communist, Blockchain technology is libertarian” — Peter Thiel
On January 3rd 2009, the genesis block, or the first block, in the Bitcoin blockchain was mined, presumably by its founder, Satoshi Nakamoto. On it read, “chancellor on the brink of second bailout for banks,” quoting the cover of the London Times that morning. In 2021, twelve years later, El Salvador announced it will be the first country to adopt bitcoin as legal tender. This news story is about how systems dictate human interactions, and how ultimately, only technology drives history forward. It may be one of the most important new stories of 2021, representing a monumental progression in the history of human civilization. While most criticize bitcoin for its speculative nature, regarding it only as an investment opportunity, instances like this highlight the political and activist side to bitcoin and decentralized applications. For, like all technological advancements from the printing press to the railway, political implications are deeply ingrained in blockchain technology. Blockchain’s sidestepping of central authority advances a more fair society.
Bitcoin and the Risks of Centralisation
Bitcoin was conceived in 2009 by Satoshi Nakamoto (the exact identity of whom is unknown), aiming at creating a completely trustless online cash system. He achieved this by solving two computer science problems: the double-spending problem and the Byzantine general problem. Double-spending is a flaw with digital cash systems where fraudulent transactions can be achieved by sending the same token of digital cash twice; as digital currencies are computer files, they are more easily duplicated. The Byzantine general problem, on the other hand, asks how separate parties can reach a guaranteed consensus. In 2009, Bitcoin proposed an effective solution to these problems with its integration of a distributed ledger with a consensus mechanism.
The innovation of Bitcoin, and blockchain technology, is that it ensures security without incurring the risks associated with the centralisation of power through intermediaries and delegated authorities. Centralisation is problematic as it often always leads to abuses of power, such as privacy rights abuses, coercion, censorship and de-platforming, to name a few. Nowadays, abuses from centralisation remain prominent from multinational corporations, particularly big data, as well as big government. For instance, arguably the most relevant abuse from centralization post-Covid-19 comes from monetary policy. After massive cash injections starting in 2009 after the financial crash, then more aggressive stimulus during the covid-19 pandemic, inflation, has climbed up to 5%, according to May 2021 Consumer Price Index (CPI) metrics for the US dollar. The lower-income class, those who rent and hold no assets except for cash, are disproportionately affected by inflation and the decreased buying power of the dollar. Meanwhile, the upper class, who diversify in equities and real estate, enjoy higher asset valuations as the dollar depreciates in purchasing power. Therefore, as stocks and real estate appreciate against the dollar and billionaires see enormous gains in their net worth, the lower and middle-class deal with higher utility and food bills. In the past, a gold standard was maintained to prevent governments and central banks from overly relying on stimulus to manage the economy. Yet, since the severance of the gold standard by Nixon, massive abuses like these have occurred. As centralisation delegates power to a select few that often make decisions that disproportionately impact a group, decentralized applications like Bitcoin protect from any such risks.
El Salvador recognises Bitcoin
In 2001, El Salvador abandoned their own currency and became a dollarised state, meaning that its principal currency is the US dollar provided by the Federal Reserve. During the violent conflicts of the early 2000s, millions of Salvadorians fled to the US. Representing 20% of its GDP or $6 billion annually, dollars sent back home make up a significant portion of the Salvadoran economy. Around 3 million Salvadorians are still sending large sums of money to their home country, forcing the immigrants to go through remittance services. Furthermore, now with the insecurity of the post-Covid economy and mass stimulus in the United States, inflation has further diminished El Salvadorians’ purchasing power.
It is of no surprise that people who hold the majority of their net worth in cash are disproportionately affected by cash inflation. On the other hand, with access to the internet alone, individuals hold a digital currency recognised worldwide and can participate in the global economy, without the need for currency exchange or centralised banking authorities for remittances. Understanding these benefits, Nayib Bukele, the president of El Salvador, stated that it was the duty of the state to facilitate economic growth and financial inclusion, and in order to do so, it is “necessary to authorize the circulation of a digital currency whose value answers exclusively to free-market criteria.” The Congress has effectively approved the bill which accepts Bitcoin as payment for goods, services, debt obligations, and taxes. In addition to that, the government has offered $30 in bitcoin to all its citizens.
What’s next?
Announced at the Bitcoin conference in Miami by a Bitcoin activist named Jack Mallers, who dedicated his life to financial inclusion through blockchain technology, this decision signaled the first major step towards the weakening of the nation-state and the beginning of a new paradigm.
El Salvador’s decision was praised by Adam Back, renowned cryptographer featured on the bitcoin white paper, and the strongest candidate for “Satoshi Nakamoto”: “it was an inevitability, but here already: the first country on track to make bitcoin legal tender.” More recently, Argentina and Paraguay have proposed bills to also recognize bitcoin as legal tender. Furthermore, according to Forbes, as a result of El Salvador’s recent acceptance of Bitcoin as legal tender, the World Bank must now hold Bitcoin.
There is also another way in which blockchain technology introduces a paradigm shift. Since the dawn of time, the method to protect private property has been violence. It has been used by governments, militia and mafia alike to ensure the security of private property. Now blockchain has the potential to render this norm redundant. It doesn’t offer a new way to protect private property, but rather makes it so fraud and theft cannot occur. In creating a ‘trustless’ system, where central authorities are no longer necessary, it is better because it secures the civil liberty of private property without incurring risks of centralisation. This has a significant implication for the institution of the state: according to philosopher Thomas Hobbes, the role of government is as the Leviathan, a central authority that protects private property and ensures contract execution. Since Bitcoin offers a more secure way for this to happen, then ultimately blockchain technology renders the state obsolete. This is why, although Bitcoin grows in notoriety as its price increases, it ought to be considered as much an activist movement as an investment opportunity. Free from centralised abuses, free from geopolitical mood swings, bitcoin and blockchain technology establishes an entirely new status quo.
