62. El Salvador on The Bitcoin Standard

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In this episode Saifedean talks to regular seminar attendees about El Salvador’s recent adoption of bitcoin as legal tender. They discuss how this is a test of the importance of legal tender laws for monetary choice, and the drawbacks of legal tender laws. Will this hasten bitcoin’s adoption in daily transactions? Or will it encourage hodling? What impact would wider use of bitcoin have on El Salvador’s exports? Why are governments without their own currencies more likely to adopt bitcoin? Can bitcoin inspire a populist anti-inflationist political movement in Latin America? They also touched on recent media reports about recovery of bitcoin from colonial pipeline hackers.

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Podcast Transcript

[00:03:39] Saifedean Ammous: Hello, and welcome to another episode of the Bitcoin standard podcast. In today’s seminar, we’re going to be discussing El Salvador and the recent law that was just passed today in which the government adopted Bitcoin as legal tender. Now El Salvador is a country that had taken the wise decision of eliminating its own national currency decades ago, and replacing it with the U S dollar, which is generally a much better prospect for a developing country because it robs the government of seigniorage and therefore forces the government to remain lean and therefore allows the private sector to thrive and allows the economy to grow.

So this was a very good setting for El Salvador to take this decision because the government originally didn’t even have seigniorage. And I think this is actually a very interesting. In hindsight it sounds so obvious so much that you kind of want to kick yourself for not thinking about this. It would make sense that governments that don’t have a [00:04:39] printing press, governments that use other countries printing presses, they would be the ones who would be most likely to see the benefits of Bitcoin, because they don’t have all the benefits of seigniorage which basically accrued to the country that issues their currency. Effectively country like El Salvador is witnessing its own money being devalued every year at the rate at which the U S dollar is devaluing. However, still that’s much better than what most countries usually do because most countries end up mismanaging their currencies because most countries don’t have international demand for their currency, where they can shift the demand externally and then get foreigners to buy their currency, which is what the US does.

And that’s how it is able to maintain the value of its currency even as it engages in a lot of inflation, because a lot more of the world keeps buying up US dollars. So from this regard it makes sense that a country like El Salvador would want to use Bitcoin. The first thing that I have to say about this [00:05:39] incredible move is that this is another vindication of Menger and Mises on their ideas of how money emerges.

And so we’ve discussed before in several podcasts here and in the courses in Economics 12 where we discuss money or Economics 11. I think it’s an Economics 11. If you remember in the website, we have a discussion on money and we discussed the Mengerian and Misesian conception of money, as opposed to the state theory of money. In the state theory of money views money as a creation of the state. Money is whatever government says it is.

Money has to have the imprint of the government and it has to have the name of the king or the name of the nation on it. And then when the government mints the money, it decides what money is. And that’s the theory that continues to get abused over time. And what the Austrians point out is that the state cannot determine what money is. The state follows the market.

And so this example shows that Bitcoin [00:06:39] became money on the market. It reached the market capitalization of around a trillion dollars all over the world. So there was a trillion dollars of cash balances in Bitcoin, held by people all over the world. And it had become to a large extent, a form of money. Money is obviously as we’ve discussed before a subjective question. Money is the general medium of exchange.

So Bitcoin isn’t the general medium exchange for the planet, but it is a general  medium of exchange for a very large and growing part of the global economy. It is a medium of exchange that is already larger than the vast majority of national currencies. So it’s general to an extent, but it is gaining monetary properties.

It is gaining moneyness over time and government declaring it legal tender comes after the growth in the monetary nature of the good. It was not declared money by government and then it grew on the market. So I think this [00:07:39] is a great example. And I think I’d like to take this opportunity to send my condolences to believers in the state theory of money who now have to by their definition, admit that Bitcoin is money because there are a lot of people who used to always say Bitcoin isn’t money because money has to be legal tender. Money is what the state says is money.

And so those people have to change their mind today. Specifically, overnight, they really need to change their conception of Bitcoin because yesterday Bitcoin was not money by their definition. Today bitcoin is money by their definition. So sorry for your losses of all the years you invested in being so angry at Bitcoin and refusing to accept it.

You know, you are going to be hung by your own petard, as they say, you live by chartalism, you  die by chartalism. If you think the state makes money well, there you go. The state decides what money is and in Honduras, I’m sorry, in El Salvador [00:08:39] money is Bitcoin. It’s legal tender. Now in my case, obviously I don’t believe that money is what the government says it is. I think Bitcoin was gaining in moneyness since its beginning. And this is another day, another step forward, another day in which it is recognized more and more as money. And I think government legal tender laws are a function of monetary status. They are not the deciding factor in what becomes money.

Having said that, what this experiment in El Salvador offers us is a very interesting test really, an empirical test of the importance of legal tender laws. So we’re going to see right now, there’s one country in the world that has legal tender laws that declares Bitcoin as legal tender that only one country has that.

So it’ll be interesting to see how Bitcoin growth happens over time. If El Salvador grows more than the rest of the world you might conclude that legal tender laws probably matter [00:09:39] to monetary status. That at least they help monetary status. Having said that, I think there are very good reasons to think this is a bit of an imperfect test because first of all, there was already fast adoption of Bitcoin in El Salvador.

So few weeks ago, I think it was the Strike app was the number one app being downloaded in El Salvador, I think at a certain point. And a lot of people use it for remittances and a lot of El Salvadorians work in the U S and abroad. And so therefore they send a lot of remittances, so there was already market adoption for it.

And there was also the Bitcoin beach in El Salvador, which is a project that has been using Bitcoin extensively in widely. You know, people use lightning transactions for their daily expenses in that area and a lot of Bitcoiners go there. So they’ve had that going for a while and that preceeded legal tender laws.

And in a sense, the president kind of saw a trend there and he thought he would get ahead of [00:10:39] it and help boost it by giving it this law. So I think it’s going to be interesting to see how this develops and how it changes El Salvadorian economy over time. They hadn’t had a lot of problems in terms of inflation because they didn’t have a dysfunctional hyperinflationary currency, or at least they haven’t for a while.

They’ve had the dollar. So their monetary policy hasn’t been terrible. So it’ll be interesting to see. It’s not like Venezuela where if Venezuela were to adopt Bitcoin as legal tender tomorrow, we would be witnessing a move from a hyperinflationary destroyed economy into a Bitcoin.

Which is very different from what is happening in El Salvador. El Salvador is much more similar to what would happen if the U S or Europe would adopt it because the currency of El Salvador is the US dollar, which is the currency of the U S and the currency of basically the world. So it’s an upgrade, not as drastic as Venezuela, but it’ll be very interesting.

I [00:11:39] think it’s an interesting test to examine over the next couple of years. I’m wondering what you guys think the outcome of this test would be. And just in general, what do you think of this whole El Salvador legal tender business? 

Allen Farrington: I think it’s really interesting that the contrast somewhere like Venezuela, I think is fascinating because the fact that, the cathalyst here is not inflation or hyperinflation as I guess I certainly would’ve predicted that in terms of where does this happen first. Venezuela seems like a good candidate or even Lebanon potentially. It’s not that, it’s remittance really, which I think is it from my point of view is fascinating.

Hopefully from everybody’s point of view, but it’s going to make a lot of people realize, you know, people who dig into, why did this happen in the first place it’s going to make them realize that they really have no idea how payments work. And so I think it’s going to be interesting that, you know, obviously we hope that it takes off as a store of value.

So that’s what we really want everywhere. But in grappling with like, why did it happen in the first place? [00:12:39] People are going to have to come to realize what a shit show, just medium of exchange and kind of almost in a more abstract sense, like transfer of value for any reason. It’s just a mess. I like that’s why this happened.

So that’s gonna be really interesting. 

Coach Kiki: I think there is a huge opportunity for remittances in terms of creating business. You mentioned coffee earlier. El Salvador was a great coffee grower. There are no longer exporting coffee, but certainly the terrain and the old coffee farms are still there.

It costs so much money to be able to export and to all the taxes and waiting for the money and wondering, and guaranteeing the money and the product, and that can disappear instantaneously with Bitcoin. And it gives a lot of opportunity for [00:13:39] entrepreneurs and for farming and for El Salvador to become an exporter again.

Saifedean Ammous: Yeah, it’ll be fascinating to see how that works. Because remember we had an episode a few weeks ago where we discussed whether easy money is good for exports and the conventional wisdom amongst Keynesians is that you want a weaker currency in order to export more. And if your currency is strong, then you won’t be able to export.

And we went in detail into why this isn’t really the case. So I think it’ll be interesting if El Salvadorians adopt Bitcoin in large numbers. Will be very fascinated to see what happens to their imports and exports. And I would expect that their exports would increase. I think when there are savings that begin to appreciate, I think they’ll have more capital, which will lead to more investment, which will lead to the production of more goods at a lower market price.

And therefore the more capital is accumulated, the lower the marginal cost of production. So [00:14:39] therefore you get more advanced industries and more capital-intensive industries and therefore lower cost of production. And I would imagine this would lead to an increase in exports. I think hard money will help in this regard to go back to Allen’s point.

I think Strike app and Jack Mallers from Strike app has worked with the president of El Salvador on this. They’ve been building and the plan is to get an app out for all citizens. Just today, earlier today, or, well, last night, depending on where you are in the world, the president of El Salvador Nayib Bukele, he joined Twitter spaces chat, which was being done by Nic Carter.

He just showed up while the parliament was voting on the bill and the bill passed. And it was interesting to get his perspective on this. And he was saying they’re going to offer an app where anybody can use the app that they’re going to offer, but there’s no [00:15:39] restriction on anybody using any other app they want.

But I think the objectionable thing for me obviously is legal tender laws. I think legal tender laws are just a bad thing that should not exist. The market doesn’t need government to tell it what money is. We don’t need government to tell us what is food and we don’t need the government to tell us what is money.

And if they’re doing it, they’re probably doing a very bad job of it. And so Fiat food, or fiat money, if they have to tell you about it, then it’s probably not very good. This is my objection to legal tender laws. And so, if I was in that position, although I don’t really see myself ever being in a position of a government and I’d probably do more drastic things, but I think from the perspective of president, if I could change, I think what would be best is to get rid of legal tender laws entirely and allow the market to compete. So again, this is going to be a fascinating test of the [00:16:39] importance of legal tender laws. But I think the outcome is going to be shaped more by the market. I think the market process is what matters more.

And that’s why I think in the case of Bitcoin, the speed limit on Bitcoin monetization at this point, I don’t think is the fact that governments haven’t declared it as legal tender yet. So Bitcoin has been growing in price at around 200% per year, as Michael Saylor says it; any faster than that and the wings start to fall off the airplane.

If you think that you can do a decade of 200% and you still look at that in 200% per year, on average, over a decade, and you think, you know, well this is really being hampered by the absence of legal tender laws, perhaps you might want to consider the opposite case, you know, that this isn’t being hampered by anything.

This is going faster than anybody could have remotely imagined. And it’s advanced. And the way that I see the process of monetization of Bitcoin, I don’t see that it can happen overnight because it’s a process of upgrading people’s cash [00:17:39] balances. Everybody’s cash balances contain a lot of junk these days.

And Bitcoin is kind of like Mary Komodo, it’s a minimalist upgrade for your cash balances. The way that Mary Komodo… Condo. Yeah. I don’t watch TV or Netflix, but I know, I know “Kondoizing”  or whatever they call it. Right? Yes. And that’s the thing that on purpose, just to prove your lack of work.

So, you know, the idea is that, you simplify your life, you get rid of all the junk that you don’t use. And then you find yourself much happier because you only own the things that you, really need. I think, Bitcoin’s going to do something like that. It’s gonna clean up people’s monetary junk. Instead of holding cash and gold and real estate that you don’t need.

And investments in stocks that you don’t understand and bonds and commodities and all kinds of archaic bullshit that you really have no business investing in. Instead of holding all of that nonsense, [00:18:39] you only hold Bitcoin as cash. And you make investments that you understand, you invest in your own business, you invest in a business of somebody you know and trust or in a business that you really understand.

And so I think this is what we’re headed toward. And it’s just completely irrational and impossible to imagine that this is going to just happen overnight. And it’s going to be a while until people figure out what Bitcoin is, until they understand the compelling use case, until they experienced the awesome power of number go up technology.

It’s going to be a while until they get it, a while until they understand it, a while until they’re willing to make the first move into purchasing it. And then another while still until they are able to move the majority of their balances and everybody’s limitation, of course, is that most other people that they’re dealing with have their cash balances in Fiat.

And so you’re getting paid in Fiat and you are making payments in Fiat. So you have to [00:19:39] maintain some amount of Fiat because you’re operating with fiat. So it’s going to be a while for people to upgrade their cash balances into Bitcoin, to grow their position into Bitcoin and to be able to get more cash balances and more Bitcoin.

And as that happens, I think until we reach a point in which Bitcoin is the dominant cash balance, Bitcoin is expected to appreciate enormously. And in this case, the compelling case as we’ve seen is that most people prefer to end up holding on to their Bitcoin and spending their Fiat as long as they can.

So I think the legal tender law, I’m not so sure how much it changes that dynamic. I don’t think it changes that dynamic. I think it’s still going to make more sense for people, whether your government tells you that it’s legal tender or not, it’s still going to make more sense for you to accept Bitcoin. I’m sorry to save Bitcoin and to try and spend your Fiat as much as you can. And so it might just be the case [00:20:39] that what this law ends up doing is the more important thing that it ends up accomplishing is that it encourages El Salvadorians to hodl Bitcoin even more. To hold onto Bitcoin rather than spend it.

You can see how the headlines in a couple of years from now, you can already see the blue checks on Twitter going on about how El Salvador enacted legal tender laws on Bitcoin two years ago, and here in the streets of this neighborhood  we find that all the coffee sellers are still taking US dollars and nobody’s selling their coffee for Bitcoin. Checkmate, Bitcoin. Bitcoin is dead.

So, you know, I think we need to brace ourselves for the possibility that this might be the case, but of course the plot twist in this case is that the coffee seller might not be accepting Bitcoin from his customers because the customers are all holding their Bitcoin. But the coffee seller would be stacking Bitcoin with their leftover dollars, with the dollars they can spare.

And, most likely the coffee seller at that point is going to be worth [00:21:39] three times as much as the Twitter blue checks,  laughing about him. Because this might end up doing is just encouraging El Salvadorian to hodl more and more. The government is going to give them a Bitcoin wallet.

It’s going to have Bitcoin in their face at all places at all times. And it’s even compelling people to accept Bitcoin if they can. Which  obviously, it’s one of those laws that is going to have to ask for trouble. Who defines whether you can or cannot accept Bitcoin?

And that’s just got to cause controversy, which of course is good for Bitcoin because it’s just more advertisement for Bitcoin and people hearing about Bitcoin and just more Bitcoin getting into people’s mental space and telling them what to do and think. It’s part of that process. I’m leaning more towards thinking that dynamic for hodling is likely to remain dominant. So most likely we’re going to see more coffees being sold in El Salvador than in neighboring countries in Bitcoin in a few years, unless of course the other countries are doing the same thing, perhaps, so there’ll be more, but I don’t think it’ll be significantly very different.

I [00:22:39] don’t think it’s going to make a huge difference in that regard, but it’ll be very interesting to see if we end up seeing more hodling. If we see that we end up with businesses setting up in El Salvador allowing people to stack Bitcoin and save it.

It will be very fascinating to see how this unfolds because we have an almost perfect experiment where, well, it’s not perfect that there are many confounding factors, but it’s an interesting experiment where we see one country tries this one different law from everybody else. And now we can compare and see how these things pan out over time.

Coach Kiki: I think it would be great for the hodling message to go out to the El Salvadorian people. Because as I understand that the president is staking like $150 million for this project and will be when people are trading or using Bitcoin, they can turn it into dollars through the presidents banking fund.

So essentially the president has 150 [00:23:39] fiat dollars to trade for 150 million of fiat  to get 150 million of Bitcoin from the citizenry. So the presidency or the governments can be building up their Bitcoin through the sats of the population. 

Allen Farrington: I’m completely with you in the legal tender aspect, kind of making me uncomfortable, but.

There is a, I guess, I don’t know if you call it like a silver lining, maybe, you know, if you put the ethics of it aside, I think there’s a practical consequence of this that could actually be profound, which is that in a kind of a sad sense. It doesn’t really affect El Salvador that much. I think what you talked about as far more likely to affect El Salvador and that’s what we should be rooting for, but an interesting consequence is that every multinational with even a single store anywhere in El Salvador now has to make the decision either to leave the country or to put in the infrastructure in place to accept Bitcoin [00:24:39] payments, which will work with minimal alteration everywhere in the world.

So basically, I mean, I’ve kind of making this up, but I would have imagined it would be something like, you know, if you’re Apple, right. Or like Nike or someone like that. Probably you or McDonald’s it owns this perfect McDonald’s I would guess it would cost McDonald’s millions or tens of millions of dollars to leave El Salvador. Probably cost them tens of thousands of dollars to install BTCPay server, pick up a connection to NYDIG or Coinbase so they can flip it back to dollars. I think that’s it. They can do that everywhere. 

Attendee: The government can  do it for them. That’s the thing, that’s what this trust is for. You are really forced to accept Bitcoin, which is quite the model.

Allen Farrington: They have to make this choice. They can, government can change it for you. You can’t that though. So that’s the thing. I think that there’ll be far more interested in. [00:25:39] So even if this is the mindset, it’s almost like the opposite or no, the opposite. It’s a different circumstance. So if pay me in Bitcoin, right?

 If McDonald’s wants to keep 1% of their Bitcoin. Then they have to do in the room and they can’t use the government money. They have to figure out how to like actually manage it. But again, really trivial. That’s not that doesn’t involve leaving El Salvador.

Attendee: I think this may generate actually a backlash because I mean, obviously on one side the fact that you wouldn’t have to pay taxes on the capital gains is a really huge benefit, but forcing every single business to accept Bitcoin, it’s going to be a nightmare. And I think they put a timeline of three months that every single business will have to be able to accept Bitcoin. Just think about the operational nightmare to upgrade every single point of sale, install new terminals which are able to accept Bitcoin, train all the staff to be able to operate these new terminals. Then all of the business owners and operators, they will have to learn how to [00:26:39] custody the Bitcoins, assuming that they won’t go with the third party custody. And then as Saifedean said, who is going to be spending Bitcoin?

Most of the people will be spending US dollars. So the business  will have to invest tons of money on upgrading the infrastructure. And in the end, there’s going to be hardly any transactions taking place on Bitcoin. So I don’t know, this thing actually can create a backlash and may look like the Bitcoin is failing.

Allen Farrington: I think I have an answer to that, a potential answer, they might get away with this if there’s too much of a gap in time before when anybody else does it. And the answer is that they will develop an industry that exports tourism and imports Bitcoin, which would be amazing. 

Saifedean Ammous: I think Boris raises an interesting and very important point, which is obviously, I don’t think it’s a good idea to force businesses, to accept businesses should be free to accept whatever they want.

And yeah, that’s going to be a nightmare because businesses don’t really, [00:27:39] they have other things to do in the next three months. They have COVID bullshit to deal with  and all kinds of stuff. And now they need to figure out how magic internet money works and then to go on Twitter and start shit posting with the rest of us and figuring out how to eat the steak and grill steak.

It’s, it’s a lot to do with three months. Ultimately what it’s going to end up doing is there’s an element of ritualism in it. That is kind of counterproductive because you’re going to be going from customers who might, you know, there might not be that many customers who want to spend their Bitcoins and then the shop doesn’t want to keep Bitcoins.

Most people, they’re not going to be converted into hodlers just because government said so.  They’re still used to paying their suppliers in dollars. And so they’re going to want to convert it. And so what’s happening is that you’re setting up the terminal so that people will pay you in Bitcoin and sending the Bitcoin to the government.

And it’s selling you the Bitcoin and sending you US dollars instead. It’s a transaction [00:28:39] costs and a security risk and a security  headache for everybody involved. That might not be what the market actually wants. So I think, the aspect of, as Boris said, the aspect of repealing taxes on it.

I think this is important. I think this is what really, really makes a difference. If you start treating it as a form of money for tax purposes, I think that makes a huge difference and incentivizes people to hodl more. But the point of sale terminal and forcing businesses to accept, I think might end up being counterproductive.

And I suspect there might be some risk here for the Salvadorian government in that they’re buying $150 million of worth of Bitcoin. And they’re essentially agreeing to make a market for everybody in the country that they’ll always buy your Bitcoins and always be ready to sell you Bitcoin if you want, which is a big commitment.

And it’s the business model of an exchange essentially. [00:29:39] And it’s not something that you would expect to be built up smoothly in three months. So there’s risk there. There’s execution risk there. And I think there’s foreign exchange risk in that you have to carry a position in Bitcoin.

And then if there’s excess volatility in Bitcoin, that might affect their foreign exchange position. And so that’s, I think one risk of it, but I think perhaps the bigger risk is the response of the international community and the international financial institutions. How they’re going to treat that? What’s going to happen to El Salvador’s ability to borrow on international markets?

What’s going to happen to their interest rates? What’s the what’s going to happen to their ratings, credit ratings? What’s going to happen to their relationship with the IMF? And so during the discussion today on Twitter El Salvador’s president Nayib Bukele, he mentioned that he’s meeting with the IMF next week or this week something. And from what I understood, it was a prescheduled [00:30:39] meeting. It was something that predated this. So it’ll be very interesting to see what they have to say about this and what they think. And how they deal with this. I think this is the big unknown because we’ve not had these kinds of breakaway monetary systems come out before we’ve not had a small country go and adopt a new monetary standard.

 Because historically whatever money monetary standard you wanted to adopt over the last couple of centuries, you needed to have banks and international banks that would help you clear it. And that was not a business that was very open for international competition.

It’s generally tended toward the monopoly because there’s economies of scale in clearing. So it’ll be very fascinating to see what do you guys think the IMF is going to do? 

Allen Farrington: I suspect you’re the only one who knows anything about the IMF, Saif. 

Saifedean Ammous: I don’t really know much about the IMF, but it’ll be interesting if now is the time to start pointing to election irregularities.

[00:31:39] Attendee: I think the wrench, which Salvador through for everyone is basically the tax treatment in every single other country. For example, in the U S you can choose to treat the exchange rate gains under section 988, but you can also choose not to recognize gains or losses. So basically technically the US hodlers could not have to pay the capital gains on Bitcoin hodlings. I believe the European treatment of foreign currencies is the same. So for example, the European holds US dollars and recognizes gains on the transactions. I don’t think as an individual you have to pay taxes on those. So now you will have to start discriminating, which foreign currencies are official fiat and which ones are basically store of value on which you have to pay taxes on capital gains.

And I think either the countries will have to [00:32:39] modify their tax laws or potentially there’s a door open for not having to pay capital tax gains. 

Saifedean Ammous: Yes. I’m not entirely sure about this though, because if you make money and we’ve discussed this, I’m pretty sure we were discussing this with you Boris, in the case of Mexico, you were telling us that in Mexico, if you want to hedge against Mexican peso inflation and you buy dollars, and then the Mexican peso actually does go to the toilet. And so the value of your dollar in Mexican pesos goes up. You have to pay capital gains tax on it. And I’m pretty sure that’s the case as well in the U S although I’ve seen Caitlin Long tweet about the saying that make changes treatment under commercial law, but I’m not entirely sure.

What do you guys think? Does anybody have more insight on this? 

Allen Farrington: Can you elaborate on the last part? What do you mean? It changes the treatment under commercial law? 

Saifedean Ammous: She mentioned something about how commercial law triggers some section of law whereby you no longer have to pay taxes on it because it is legal tender [00:33:39] elsewhere, but you would have to pay taxes if you bought euros and then sold euros and the euros appreciated in dollar terms, you still have to pay taxes on it.

So I don’t see how you get away from paying taxes on your Bitcoins, unless you move to El Salvador itself. 

Attendee: It’s different taxation system in each country. So by El Salvador changing its legal course, it can affect what other countries think about Bitcoin in that effect. We shall have to see because eventually it depends on every country. Another country can say, I don’t care what El Salvador says. Bitcoin is still not money. So I just continue with these taxes, but they don’t pay anything or they say, okay,  for El Salvador it’s legal money, I believe it’s a legal tender in El Salvador. I recognize that, I give Bitcoin now the same treatment as every other fiat coin, but made by every other government.

Saifedean Ammous: Yeah, it’ll be interesting. I’m no expert on taxes. I’m not going to [00:34:39] make any definitive statements on this. So it’ll be quite interesting to see. And I think, exceptions can be passed. Even if by the letter of the law you no longer have to pay capital gains tax on Bitcoin.

The law can be changed so that it accepts Bitcoin and you still have to pay capital gains taxes. In fact, it wouldn’t be impossible. And I don’t think it’s unlikely. I think it is likely that we might end up with special tax treatment for Bitcoin, particularly if regulators continue to miss out on the gains themselves, they’re going to potentially be quite vindictive in putting higher taxes.

So I don’t think you’re going to get away from paying taxes because of something happening in El Salvador one way or the other. I think they’re going to find a way around it. It’s going to be very fascinating to watch how this all unfolds. 

Coach Kiki: It seems to me there could be an opportunity for say outsiders who are holding these like dirty marked coins that they could take their coins [00:35:39] down to El Salvador and sell them to the government.

Saifedean Ammous: Interesting. Yeah, potentially. Yes. Because you know what, government legitimates everything. And so if the government buys it, then it’s, uh, it’s clean, anti-money laundering laws. 

Attendee: You still got to respect what the taskforce and you still have to do AML. Basically there are the big print of black Bitcoins or whatever.

Saifedean Ammous: Yeah. That’s something that I haven’t heard discussed KYC and AML, but I think it might be the case that, you know, there ends up being a government wallet that is like a surveillance coin where they know everything that you spend. But perhaps people can get around it, but perhaps you can also implement ways in order to de-anonymize people and maybe that’s part of the business plan. There’s a lot of data mining that can be done, could be very lucrative market [00:36:39] from this kind of thing.

And of course, I think it’s going to scale on lightning, so that might involve a large degree of anonymity, but to be fair, I think, particularly since they’re rushing it in three months. In three months time people aren’t going to be running lightning nodes.    There’s not going to be a millions of lightning nodes spun up in El Salvador in three months.

Most likely the vast majority of people, they’re going to utilize custodial solutions. These custodial solutions will most likely have lightning, but I still imagine that at this stage, we’re going to be getting more custodial solutions being utilized for this. It’s going to be a while until most people are able to run their own lightning nodes.

At least I think that would be the case. One other interesting thing to observe here is that this move from the president of El Salvador flies in the face of much of the monarchist propaganda that this podcast has been spreading for the past few [00:37:39] months. I think it was the first episode of this podcast, where we had a seminar on monarchy and democracy.

And it’s a theme that keeps recurring in this show. And it’s something that goes back to time preference. Ultimately Kings and monarchs expect to be in power for many generations to come. And so they want to take care of  their kingdom, and they want to take care of their land and their citizens.

So your king, once their descendants 10 generations from now to be able to tax your descendants 10 generations from now. So they want you to have your descendants happy and healthy and productive so that they can work and be taxed 10 generations from now. And that means keeping you happy and safe and productive today so that you can have a family and have children and have more tax slaves for the state. With a democracy on the other hand, there’s a very short time horizon for most decision-making in government because presidents and prime [00:38:39] ministers expect to be in power for only a few years. So they only can pillage society for only a few years. They have no interest in the well-being of your children and your descendants 10 generations from now, because they’re not going to be in power 10 generations from now.

So they optimize for these four years or five years or seven years in which they’re in power. It’s always the choice to choose now at the expense of the future. That’s what democracy does. So curiously enough, I would have expected that monarchs would be more interested in Bitcoin and probably there are monarchs, there definitely are monarchs who are individually interested in Bitcoin, but this move coming from a democratic country is quite interesting.

And you can’t really doubt the democratic credentials of this president. So of course, I’m sure that no president is perfect and there are problems with what he’s done. And of course, all governments are problematic in many ways, but not being democratic is [00:39:39] not one of his problems. He won an election fair and square.

Nobody really doubts that he won it. It’s quite amazing, his rise to power. He came from a country in which they have a two party system, which was considered to be as ironclad as the American two party system. There’s only going to be two parties in El Salvadorian politics. There’s left and right.

And he was part of one of these parties. And then he left and established his own political party and everybody thought that this is hopeless, that he won’t be able to do anything with it, but he’s achieved phenomenal success. He won the presidency and not only won the presidency, but then he also won his political party.

His new upstart political party won the parliamentary majority as well. So not only did he beat the incumbent two big parties in the presidency, he also won the majority of the parliament. So, I mean imagine in the U S we get [00:40:39] a third party candidate that wins the election. And wins congressional majority. It’s astounding.

And so he already has control of the presidency and the parliament and effectively, he’s kind of also taking control of the judicial system and he’s taken out the old political establishment of the country. So he’s taken out two big political parties and turned them into two tiny minority parties in the current parliament and taken out the political establishment from all kinds of important roles.

Took out the old judiciary and now you can understand this move as him taking out the local central bank, basically, and taking out the local banking oligarchy. So say what you want about whether you think this is a good or a bad thing, it is democratic. And I think that’s actually quite interesting and noteworthy that we’ve had this kind of decisive [00:41:39] action coming from a democratic leader where they win the democratic majority so conclusively that they are able to pass laws like this basically eliminating the existing judiciary and taking control of the courts and eliminating the central bank, which is astonishing I think. And the guy is young, the current president; he’s young and he’s a bit of a social media phenomenon.

The way he’s managed to succeed is through playing the the social media game and appealing to young voters and essentially circumventing and routing around the old establishment and all of their traditional outlets and media. So it will be fascinating to see if the Bitcoin move gets replicated, but also if the kind of general wider political move, which when you think about it, it is to some extent kind of a Bitcoiner thing to do.  It’s a laser eyes thing to do, you know, let’s just win an election and take out the current political regime and take [00:42:39] out the central bank and take out the judiciary and,  start over again, basically let’s upgrade. Let’s stop trying to fix this cludgy fiat nonsense and let’s upgrade it.

So it’s a very bold strategy. And if it pays off in El Salvador, we could see many people copy the strategy entirely. I’m going to run for election against the traditional political parties. And I’m going to go on a Bitcoin standard and I’m going to tell the establishment to do one, to put up politely.

This could be part of the rise of Bitcoin populism, maybe in many of these countries that have suffered from hyperinflation, that are sick of their political regimes. Maybe this is the winning formula. The winning formula is to have new leaders that come out and say, I’m going to run with the promise of getting rid of the money printer. Elect me, and I will [00:43:39] break the money printer forever.

And I will make sure that no more presidents can ever give you a hyperinflation. It’s been a lot of time and a lot of decades where a lot of countries have experienced a lot of inflation and particular in Latin America, that this kind of message might get through. I think it’s really getting through to people that inflation really is the problem.

And I think that they can compare and contrast between different countries and different times that have had inflation. When there is inflation, life is bad when there’s no inflation, life is good. Maybe Bitcoin allows us to turn this into a very effective political slogan, to a very effective political call for action, which is we’re going to get rid of the inflation.

We’re going to fix the money, vote for me and, no more inflation and vote for me and you’re never going to get an inflationary president anymore. Think maybe this ends up happening in a place like Argentina, which has had its many, many, many decades [00:44:39] of amazing adventures in the Keynesian economics.

What do you think Camillo,  you’re from Argentina. Uh huh. Amazing events 

Attendee:  I don’t know, since I can recall, we change our money dies every 10 or 30, 40 years maybe. And then they create a new one and suffer a big bite of shady money, going down a spiral and inflation people tend to run to the U S dollar. And now of course, lots of people are gone Bitcoiners. It’s great.

Bitcoin per capita in Argentina is heavily used. It’s great. And we don’t need the government permission to do it. So we’re fine on that aspect. And I wanted to ask you Saif if I may, the thing about El Salvador is that I read that they didn’t use their money for a long time that they were strictly on a USD standard.

So basically El Salvador, it’s a country that’s now uses [00:45:39] Bitcoin and US dollar, but we can say that it’s a country that hasn’t been printing its own money for some time. So I think that’s the big difference between El Salvador  and most of other countries, including the United States, which print their own money.

Do you think that it’s an obstacle for the government Bitcoin adoption or are we going to see adoption first in these kinds of countries and then late in the countries that print their money? 

Saifedean Ammous: Yeah, we discussed this at the beginning. I was mentioning that in retrospect, this sounds like an obvious thing, and it’s kind of almost embarrassing why we had not thought about it.

You know, the governments that don’t have seigniorage that don’t have a money printer are more likely to hate Bitcoin. Whereas the governments that have a big money printer, you know, they’re going to not see the funny side of the memes when they start coming across it. So it is interesting. And I think it’s also interesting because the economic impact of it is not going  to be obfuscated in a [00:46:39] sense that where Venezuela goes to Bitcoin, we can’t really tell if it’s a Bitcoin or it’s just the end of the hyperinflation. We can’t really know how much of a lesson there is for the U S or Europe or places that have relatively stable currencies. But El Salvador is an experiment directly applicable to European and advanced countries with more countries would like to think of themselves as having responsible monetary policy.

 Their monetary policy is the dollars. So it’ll be very fascinating to see how that unfolds. I like to always have low expectations in life because, expectations is the father of disappointment. And if you don’t have expectations, you never get disappointed. So I like to keep my expectations low.

And so I’m always constantly thinking of what could go wrong. And so, we mentioned some of the ways that that could go wrong. The IMF might make life complicated. International correspondents banks might make life complicated. Volatility might make life complicated and hurt the government foreign exchange risk.

All these [00:47:39] things can go wrong. And also we might not witness the mass adoption in terms of consumer payments, which is going to get a lot of people upset about it and calling Bitcoin a failure. But I still think having the government continuously talking about Bitcoin can’t hurt Bitcoin.

There’s only going to be 21 million Bitcoin. And the more noise that the world makes about Bitcoin, doesn’t matter what they’re doing. Doesn’t matter how, what they do all that they’re doing is generating awareness of Bitcoin and directing more and more eyeballs to Bitcoin and directing more attention to it.

So like everything in the world, this too I think is good for Bitcoin. I’m just a little bit wary of high expectations, of expecting that this is going to change things. And I think we’d be buying into the legal tender narrative that this is the legal tender is the most important thing in the world when I don’t think it is.

I think Bitcoin’s adoption, as we were saying earlier, it’s been [00:48:39] proceeding at a very fast pace. And I’m not so sure that the limiting factor or that factor that has been slowing down is the absence of legal tender laws. I think most likely it’s the economic logic of people wanting to hold Bitcoin rather than spend it for as long as it is a small part of global cash balances.

And so the only way to fix that is for global cash balances to continue to grow more and more in Bitcoin so that the potential upside in Bitcoin is reduced. And so that the market is large, extremely large, and becomes extremely predictable because supply is predictable and existant reservation demand of people holding cash is so large, that the only variations in demand happen with changes in time preference, which is what a perfect money would be like as Mises described it. And in that kind of world, Bitcoin will become far less volatile and the price will be far more stable.

So I think the economic impediments or not [00:49:39] impediments, the economic path to hyperbitcoinization  has to still go through the gradual expansion of cash balances over time. Not sure how much legal tender laws are going to matter to this process, but still definitely good for Bitcoin. Yeah.

Attendee: Yeah, yeah, for sure.  But let’s think about the Bitcoiners. It’s not the same being a Bitcoiner providing services, earning your wage in Bitcoin, in Argentina, where it’s not legal tender, but it’s certainly not forbidding to use and in Bolivia, in Bolivia, for example, you can’t legally use Bitcoin.

Which is not nice for the people. Everything is good for Bitcoin, but not everything is good for the Bitcoiners. Certainly in El Salvador, you can, for example,  it’s a user contract where I’m going to provide you a service for the, I don’t know, like 30,000 sats. And then you owe me 30,000 sats and we can denominate that in Bitcoin.

But if we do that in Argentina, [00:50:39] and if you default, you don’t pay me the 30,000 sats. And I can’t  go to the justice to collect my fee. And if you decide not to pay the judge is going to sentence you to pay, but you will have to pay in pesos to the convertible rate that the government and the judges and interests that they apply.

You never owe me any more sats. Because you basically just defaulted. Of course, nobody can collect sats but in El Salvador now if I sue you there, you still have to owe me 30,000 sats. That’s up to you if you’re going to comply or not because your keys, your coins , but you still owe 30,000 sats. And in fact, if my purchase power 100%, 100 X overtime, you still owe me that sats.

Sorry man, you should have payed before. That’s a huge difference. 

Allen Farrington: I was kind of disappointed. I mean, I get that, it’s sort of the most interesting to talk about the whole thing about it being, you know, they have to accept payment in it, but I thought that maybe like an even more important implication and it is honestly just a variation of what [00:51:39] Camillo just said,    is just that it’s now acceptable to do your business accounting in Bitcoin.

So if you actually have a Bitcoin business. Probably most of won’t, right. But if you have a Bitcoin business, whatever that happens to mean suddenly, it’s like, oh my God, this is like, I’ve been wanting to do this the entire time. I don’t need to give a shit what the exchange rate is anymore. Cause I don’t use dollars.

Saifedean Ammous: Yeah, but you know, again, you have to have a lot of cash in Bitcoin in order to be able to run your balances in Bitcoin, because you need your operational stuff, unless you want to be paying a lot of exchange fees and paying a lot in transaction fees. You need to have operational cash in the predominant currency, but yeah, it’s definitely cool that you can denominate contracts and run your numbers in Bitcoin.

Now, I think they’ll probably steal a march on this, but I think perhaps the sober kind of pessimistic take is that it has never happened that government mandated something and good results ensued. So I think there’s going to be a mess from the implementation and [00:52:39] from the fact that, they’ve tried to mandate this thing rather than let the market take it on.

So exercise is good. Health is good. Food is good. And yet when government tries to mandate those things, when government tries to intervene in those things, it manages to mess them up. So. Bitcoin is good, but governments trying to force others to do it, I think might have some negative consequences perhaps.

Attendee: Isn’t it also that here the government has actually mandated something that the market has already chosen. Doesn’t that  kind of change it a little bit as well? 

Saifedean Ammous: It’s true. And that was the original point that I made. This is a vindication of Menger. It is the choice of the market. The market chose and the government is just acknowledging the choice, which is the same thing that has happened with gold and silver.

There is no single king or government that made gold into money because look all the empires and emperors and governments and Kings. All of the nations of the world, the regimes would get removed and the Kings would die and new Kings [00:53:39] would come and people would conquer others. And all along as those governments went and came, gold remained as money.

So it was money before all of the governments came and it was money after all of those governments left, except for the ones that survived 1914. Well, even on those and still they’re stacking gold as well in the central bank. So governments can’t overrule the choice of the market. And even the example of Germany switching from the silver standard to gold standard that you could argue that this is an example of government decisions influencing the market, because that was a pivotal moment for silver in particular, that was like the demonetization of silver because once Germany shifted to gold, then Germany was the biggest country on the silver standard. And once they shifted to gold then the network effect around silver was beginning to collapse and all silver holders were beginning to suffer.

But yet that example, even though it was Germany, kind of, to an extent spurred the destruction of Silver’s monetary role. Germany [00:54:39] was simply catching on to the market. This silver was losing value next to gold over time. And that was beginning to accelerate and Germany jumped off the silver ship and that made the ship sink very quickly, but it was a sinking ship already.

You know, they jumped off a sinking ship. They didn’t cause the ship to sink. It wasn’t like silver would have continued its monetary role forever if a German had stayed on the silver standard. All that would have happened if Germany had stayed on the silver standard is that Germany would have been poor.

Yes. It looks like Tonga might be next. One of the members of parliament I think or one of the leaders of Tonga was on Twitter saying he wants to start stacking sats. And it’s interesting, incidentally, when I was mentioning the Bitcoin populism, a lot of leaders in Latin America are putting laser eyes on their profiles.

And I think it was a very powerful viral element to this idea. People have heard a lot about Bitcoin and Bitcoin going up, going up, going up and then hearing all these normal politicians, joining the bandwagon, and then [00:55:39] seeing all these superstars and athletes all over the world, getting on the bandwagon.

This could take off very, very quickly. This could take off in Latin America very quickly, in five years time we could see it has become a very powerful force to contend with in south American politics. I think that would be absolutely amazing to watch, Bitcoin populism would really be interesting.

Peter Young: Saif do you want to say anything about this news? We’ve heard about the FBI pipeline being quite prominent. 

Saifedean Ammous: Yeah, I’m not so sure. I haven’t really followed it very closely, but apparently people on the internet and blue checks on Twitter think that the FBI can hack your private keys and that they can drain the Bitcoins out of every Bitcoin address.

Because that’s what they did with these hackers. Now, I don’t know exactly what the details are. And I think the FBI’s credibility in these matters might be a little not exactly where you would want it to be because [00:56:39] they have some kind of track record with them being too eager to have sting operations where they try and get people to do things that they can use to buses.

So they’ve done this with terrorism a lot. Essentially there was a period in time where we would hear all the time about FBI foils terror plot. And then you read the details of the terror plot and usually it was an FBI informant who would go into a mosque and then keep telling people: Hey, you want to do some terrorism?

And generally, the only people who would end up going along would be like the cognitively challenged and the mentally handicapped. The kind of people who would listen to a stranger, come up to them at a mosque and tell them: “Hey, you want to go do blow up shit” and think, yes, I do in fact, want to do it.

And so they spend months trying to get this obviously extremely unfortunate person trying to get him to agree, to take part in an operation and try and get them to figure out how to [00:57:39] do the operation, which of course is going to be very complicated. But then, they finally agree. All right, we’re going to come, you’re going to pick these things up and you’re going to take them.

And they would be all of his connections. The only reason he’s into doing bad things, is that they’re out there recruiting him and trying, promising him to provide them. And then, you know, when he, when he agrees to meet them so that he would do the thing, then they go and arrest him and tap themselves on the shoulder and get a lot of recognition in the media.

This is what bureaucracies do. They live off the problems that they are meant to address. And so they perhaps are a little over eager in trying to illustrate how much of a problem these things are. So it’s not entirely clear to me whether this is actually the case, what happened, how they got the money, but it is entirely clear that, yeah, they didn’t hack private keys.

You can’t hack  Bitcoin private keys. If as the FBI could do it, the earth has a lot of [00:58:39] bigger problems because the FBI could destroy the internet. Destroy web commerce,  destroy nuclear launch codes. We have a lot of bigger problems than Bitcoin if this was going to happen. 

Peter Young: Yeah, I think there’s a lot of strange things about the story specifically, the fact that there was apparently this Russia based sophisticated hacking group, and they managed to transfer their Bitcoin holdings that they gained from this hat to a California based custodian.

And that was apparently how the FBI were able to get hold of the Bitcoins because they issued an order to this custodian, ordering them to release the private keys of the hackers, which seems like a fairly rookie error for a group of Russian hackers who have managed to steal 2.5 million US dollars to make.

So it’s quite a bizarre story. If you look into it, it doesn’t seem like the FBI kind of claiming they’ve hacked a Bitcoin [00:59:39] address or done anything like that. Although that has been reported by various media channels. But the story is a bit weird. And it’s not really very clear from what I’ve seen, what exactly was supposed to happen.

Saifedean Ammous: Yeah. Jordan Schachtel  who has been on this podcast before, he’s got a good article about this, which we’ll post in the notes, which looks into some inconsistencies of the story as it is reported in the media. But it’s possible to seize somebody’s coins from a custodial and it is, you might think, okay, it is a rookie error for a bunch of sophisticated hackers, but I think you may be overestimating just how incompetent all kinds of people in all kinds of fields are.

And so it’s not entirely impossible that somebody figured out how to make ransomware work, but when it came to Bitcoin, all they figured out was, get a wallet on Coinbase. And then they just assume that if it’s Coinbase it’s anonymous or something like that. So who knows, maybe it is possible that things like this could happen, but, I’m not too worried.

[01:00:39] Ultimately, this really changes nothing about Bitcoin. It’s not a story that’s really interesting to Bitcoin. It’s a story that’s interesting to think about what is happening in terms of Bitcoin in the public eye, perhaps. And whether this kind of angle of the story is being played up by the media, whether there is some kind of PR push to portray Bitcoin in this angle that the FBI can take people’s Bitcoin, which is an interesting FUD angle to come after the environmental stuff.

So Bitcoin is boiling the ocean and the FBI can take it from you anyway. So, why don’t you come to our shitcoin instead. It’ll be interesting to see how this unfolds and I can’t wait to see what the next month has for us in terms of a FUD. There’s going to be a lot of reasons for people to get upset with Bitcoin in the future.

I think. So we’ll see. Thank you very much everybody for joining us today. And we will meet again in the next week seminar on Monday. Take care.