Bitcoin becoming full blown money suffers from some perverse options available to its potential users. It's being hoarded as an asset, and there are no motivations to spend Bitcoin especially when the main motivation to hold Bitcoin is to benefit from its price rises. This article will not go into the question of whether Bitcoin can serve as a good medium of exchange or not. Instead it goes into the question of whether El Salvadorans' liberty and choice is diminished in any manner by the Bitcoin Law?
Recently, El Salvador came out with a proposed Bitcoin Law that sought to adopt Bitcoin as El Salvador's second currency with the prevalent one being the US Dollar. However, libertarian critics who believe Bitcoin's true potential lies in voluntary adoption as opposed to state enforced acceptance, have called out the Bitcoin Law for having committed the very sin of centralized decision making against which Bitcoin emerged. By choosing to be the arbiter of Salvadoran's choices when it comes to deciding the medium of exchange they would/should use, the State of El Salvador is being accused of behaving like other dictatorial regimes, in whose hands Bitcoin is likely to suffer more than achieve its potential.
Taking a cue from F.A. Hayek's view that 'choice is currency', George Selgin, an economist has argued that Bitcoin adoption should be a free economic choice and therefore it must not be subject to the same compulsory mandate as applied to national fiat currencies.
Economists have argued that free market forces ultimately lead to greater consumer welfare owing to the fact that they permit self-interested actors to determine their welfare levels and by pointing to the fact of how markets have self-corrected/regulated themselves through the invisible hand mechanism. While the fact remains that the road to voluntary adoption is long, but more firm as that would entail adopters who are firmly convinced about the truth, power and force of the technology, such critics fail to appreciate the fact that developing nations that suffer from structural inadequacies (such as lack of enough banks which makes financial inclusion a challenge despite political will and focus), can benefit from the leapfrogging technology based opportunities that Bitcoin could offer.
Unlike developed countries, underdeveloped countries rely on paternalistic approaches that drive faster adoption. The west has fairly well established systems and institutions which provide same level of comfort and convenience as a leapfrogging technology is expected to provide in under-developed countries. So arguments based on voluntary choice and endeavour regarding Bitcoin's adoption should also take into account the costs of waiting for the slow grind of adoption to occur over a state backed push for public adoption.
Suffice it to say that a legal mandate brings greater certainty to Bitcoin's acceptance as a currency, and sparks behavioural changes required for new technology to prosper and unlock its value. This article is an attempt to address some of those criticisms.
1. Bitcoin Law forces people to accept Bitcoin:
It would be incorrect to say that the Bitcoin Law forces Salvadorans to accept Bitcoin by making it compulsory as Selgin has argued. Critics point out Article 7 which states that "Every economic agent must accept Bitcoin as payment when offered to him by whoever acquires a good or service".
It is a common canon of interpretation that a law is not to be interpreted or observed in its parts, but rather in its entirety. That's why if we have to analyze any particular provision, such as Article 7, we have to take a look at the entire law to derive its meaning as intended by the legislature. When we do that exercise, we will find that despite the law recognizing Bitcoin as compulsory legal tender, it still leaves a choice to Salvadorans.
Let's look at Article 8 which states that "the State shall provide alternatives that allow the user to carry out transactions in bitcoin and have automatic and instant convertibility from Bitcoin to USD if they wish."
Further Article 14 also states that 'Before the entry into force of this law, the State will guarantee, through the creation of a trust at the Banco de Desarrollo de El Salvador (BANDESAL), the automatic and instantaneous convertibility of Bitcoin to USD necessary for the alternatives provided by the State mentioned in Article 8.
From a combined reading of Article 8 and Article 14, it is a foregone conclusion that El Salvador has to implement suitable payments infrastructure that makes it possible for Salvadorans to immediately receive USD if they so want. El Salvador has to implement such a payments infrastructure before the law can be activated.
Therefore, as per a combined reading of Article, 7, 8 and 14, the envisioned reality can be concluded as thus: A buyer purchasing goods from a merchant can opt to pay in Bitcoin. A merchant cannot turn away the buyer for deciding to pay in Bitcoin. However, the merchant can turn the buyer away if the merchant does not have the State's guarantee of instant and automatic convertibility for Bitcoin to USD.
Suppose El Salvador has implemented suitable on-ground infrastructure to make the Article 14 guarantee of instant USD convertibility effective, then the question of a merchant refusing a buyer desirous of paying in Bitcoin is moot. This is because the merchant will always receive payments in USD if the merchant has switched on instant USD convertibility option.
Therefore, the combined effect will be this - a merchant cannot refuse to provide services to a buyer who wishes to pay in Bitcoin, but the merchant can always choose to receive USD. Thus the merchant's ability to decide what the merchant receives will not be affected. The merchant's ability to decide whether to entertain a buyer or not, depending on what he chooses to pay is affected to the extent that the merchant cannot exercise discretion to refuse goods and services to a buyer wishing to pay in Bitcoin. In that sense, let's not be quick to jump to a conclusion that the same affects merchant's freedom to contract, but rather helps prevent discrimination against Bitcoin believers.
2. Bitcoin Law does not provide a level playing field:
There is nothing in the Bitcoin Law that suggests it provides any additional advantage to Bitcoin over Dollar. Sure, the Salvadoran government is taking steps to enthuse its adoption and acceptance - but the provisions of the Bitcoin Law are drafted only to put it on the same pedestal as how the other currencies (US Dollar and Salvadoran Colon) in the state are treated as a legal tender.
Article 2 states that the exchange rate between Bitcoin and the US Dollar shall be set freely by the market. A preferential treatment would have entailed a more active and interventionist government policy and regulatory mechanisms to manage the exchange rate for Bitcoin to make it more attractive for the sake of incentivizing adoption.
3. Bitcoin Law Enhances Choices:
Selgin argues that the Bitcoin Law reneges on the Hayekian question that animates the Bitcoin Philosophy. Hayek asked, "should we not let people use freely what money they want to use? ... I have no objection to governments issuing money, but I believe their claim to a monopoly, or their power to limit the kinds of money in which contracts may be concluded within their territory … to be wholly harmful."
Selgin argues that Article 7 proposes a limitation on the kinds of money in which contracts may be concluded. This is an incorrect and erroneous inference because the argument ignores the fact that El Salvador is not replacing US Dollar or the Colon with Bitcoin. Instead, the country is using Bitcoin as a complementary currency to supplement the existing financial system. Recently, El Salvador’s finance minister, Alejandro Zelaya, assured the IMF that the country was not abandoning the U.S. dollar as a currency. Adding Bitcoin as a complement in fact increases the choice for Salvadorans in that now a buyer can choose to pay in either USD or Bitcoin, and at the same time, if the State fulfils its guarantee of instant USD convertibility, then the merchant can choose to receive either USD or Bitcoin. It may also be possible for Salvadorans to pay and receive a mix of USD and Bitcoin.
Selgin's argument excessively focuses on the merchant's inability to turn the buyer away if the buyer has Bitcoin to offer in payment, while completely ignoring the fact that the buyer has the choice to decide whether to receive payments in bitcoin or not.
4. Digital Illiterates are excluded:
Selgin then goes on to argue that Article 12's exclusion of digitally illiterate Salvadorans from accepting Bitcoin does not help Salvadorans benefit from such an exemption by holding the view that having access to a 'smartphone' could be held against them as evidence of digital literacy.
While this is a valid argument and the fact that the bar for exempting a Salvadoran from accepting Bitcoin is quite high as Article 12 says that the digital illiteracy has to be of a 'notorious variety', may make one to come to an easy conclusion that El Salvador may be favouring Bitcoin over the other currency, the argument avoids the inevitable reality that even for such Salvadorans who are pushed into the Bitcoin payment mechanism, there will always remain a choice whether to receive payments in Bitcoin or not.
Agreed that a libertarian perspective may question bringing Salvadorans onto a financial system which they haven't studied, understood and adopted voluntarily, but then who understands property law or banking laws, or stock trading and listing laws in the same manner for one to conclude that their adoption can be called truly voluntary if the adopters continue to betray ignorance of such laws and systems?
Another related argument offered by critics is concerning the difficulty in coming up with a feasible and interactive User Interface/User Experience - UI/UX that does not leave any Salvadoran behind in enjoying the benefits that are expected to be unlocked by implementation of Bitcoin Law.
The challenge here is that of figuring out UX flows that enable widespread adoption and does not end up being discriminatory against individuals who lack digital literacy. The apprehension here is that there may not be an objective standard to determine if a Salvadoran suffering from digital illiteracy passes the requirement of Article 12 so as to claim exemption from the obligation of providing supplies of goods and services.
The fear is that in the absence of objective standards or the so called 'bright lines' to accurately determine who passes the threshold for exemption, many Salvadorans who otherwise could find it difficult to adopt Bitcoin based exchange mechanisms, may be forced under the Bitcoin standard, only to be exposed to risks and losses. The other fear is that Salvadorans who refuse to adopt Bitcoin citing 'notorious' digital illiteracy may be held to have provided wrong information, only to be then hauled up by the policing and judicial systems; a prospect that is reflective of dictatorial regimes enforcing the dictator's commands.
The above fears are currently imagined about the Salvadoran government and are imposed in the same way as globalist apprehensions are imposed on native societies without taking into consideration the on-ground economic and financial realities. It's important to understand that developing nations suffer from several structural defects because of which it would be unethical and dishonest to expect the same trajectory of evolution for them - as was seen in the case of developed nations. In their context, leapfrogging technology is the answer for them to play catch-up in a short period of time, and which answers to the urgency felt in equalizing opportunities for bridging the global north-south divide.
5. Paternalistic approach is required for El Salvador to Leapfrog:
Penetration of traditional banking and financial services is very less generally in South America. As per 2017 data, only about 30% of Salvadorans have a bank account. Even though the mobile device penetration for the entire country is 1.5 times the population with nearly half of the population using smartphones, less than 5% of Salvadorans use mobile money accounts. Only 46% of Salvadorans know about Bitcoin.
Pushing for mobile money accounts would require sufficient banking and financial institutions to be set up, adequate banking and commercial regulations and licenses to be implemented, distribution of banking services to every individual, and the gestation period for such services to come together and create a critical effect to be widely adopted for the financial ecosystem to become sustainable.
In light of the several structural inadequacies faced by El Salvador, the country need not wait for adequate development and capitalizing of their economy for banks and financial institutions to emerge for Salvadorans to benefit from digital payments. Bitcoin's widespread acceptance and adoption can help El Salvador leapfrog through all the intervening steps that have been observed in developed and advanced economies without having to incur huge capital costs and patiently bear long gestation periods.
It is my personal view that the exciting prospect of adopting leapfrogging technology cannot wait to be delayed in pursuit of esoteric concepts that make sense, and more necessarily so, in developed and advanced economies. This is comparable to India's Aadhar project, where esoteric demands of privacy related expectations were placed by the intelligentsia on the Indian government while ignoring the significant value that could be unlocked by adoption of the UIDAI project. As in the Indian case, critics of the Bitcoin Law need to appreciate the fact that challenges faced by third world countries can be addressed better by leapfrogging tech through a state driven implementation. The intellectual focus should be on smoothening the kinks in such a system so that all human rights and civilized norms are observed and respected without arguing against any new technological innovation itself.
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