If you’ve browsed our issues over the past two weeks, you’ll see two stories popping up a few times: the rise of inflation and the acceptance of Bitcoin (BTC, Tech/Adoption Grade “A-”) as legal tender.
In this week’s Weiss Crypto Sunday Special, host Chris Coney picks the mind of analyst and contributing editor of Undiscovered Cryptos Marija Matic about the ramifications of both events on the King of Crypto.
You can watch the interview here, or read on for the full transcript:
Chris Coney:
Hi there, guys, and welcome to this latest edition of the Weiss Crypto Sunday Special with me, your host, Chris Coney. My guest analyst this week is the lovely Marija Matic. Marija, nice to have you back.
Marija Matic:
Thank you, Chris. Nice to see you again.
Chris:
Nice to see you as well. So today, hot topic, I've called it Bitcoin and Geopolitics. Really, it's coming off the back of this news about El Salvador. Do you want to start us off by giving us an overview of what exactly has happened there?
Marija:
Well, the most important thing that happened is that Bitcoin got accepted as legal tender in El Salvador now by their legislative body, which is a historic moment in the history of cryptocurrencies. This is the first time that one country has accepted Bitcoin as legal tender, which means that it's now on par with the dollar since the dollar has been El Salvador's national currency since 2001, I think, when they replaced the colon because it was debased and inflationary due to political turmoil, wars and the problems that El Salvador was going through. So yeah, it's a quite important moment in the history.
Chris:
Okay. So, they were using the dollar as their national currency, right?
Marija:
Yeah.
Chris:
So, as far as I understand, because it's legal tender, all the merchants in the country now have to accept Bitcoin as payment, right?
Marija:
Yeah. I'm not if sure they have to, but they can. Maybe they have to, but I know that now the prices can be denominated in Bitcoin and shown in Bitcoin as well. And there’s no capital gain tax to be paid on Bitcoin. So, these are the things that we, at the moment, know.
Chris:
I think it's mandatory. The-
Marija:
It's mandatory. Okay.
Chris:
... Yeah, it's mandatory.
So, what the president was saying was that the government's going to back the volatility. So, even if you're a merchant and you accept Bitcoin, the government isn't going to force you to hold it and then have the price fluctuate. You can sell it on the open market as you normally would. And if not, the government will buy off you and give you dollars.
Marija:
Oh, okay. I haven't seen that pitch.
Chris:
Yes, that's how the government's going to get their own reserves, is they're going to buy off their citizens who don’t want to keep it. It's interesting.
Marija:
Interesting, okay.
Chris:
So, yeah. So, was the colon — the national currency of El Salvador …
Marija:
Yeah.
Chris:
… up until about 2001, and then it went on the dollar. Well, what was the biggest problem with them using the dollar as currency? You got any thoughts on that?
Marija:
Well, if you're using a dollar as your currency, you cannot influence monetary policy. You cannot influence the interest rates or inflation, so you're basically depending on a foreign country to do as they please. It's difficult to be a dependent country in monetary terms.
Chris:
I don't suppose the Federal Reserve gives much thought to El Salvador when they make policy changes, do they?
Marija:
No, I'm sure they don't.
Chris:
I'm sure they don't. I don't suppose it was even the Federal Reserve's or America's decision to put El Salvador on the dollar; that was probably [El Salvador’s] decision as the best choice of currency after their own one collapsed, I suppose. And maybe that's what they feel about Bitcoin now: It's another way of hedging their national currency in something that they perceive as stable politically.
Marija:
Well, politically, yes. Bitcoin … maybe not everyone will be using it to pay for a cup of coffee, but it's a great hedge for one country to have and a great option for their citizens. It's a great way to send remittances and to have it as a store of value, especially since it's deflationary compared to the dollar, which is quite inflationary.
So in the long term, people have a reason to bet that Bitcoin’s value will grow. So, I think it's very important that countries do have this hedge, do have this option, for their citizens.
Chris:
Well, you mentioned the “buying the coffee” thing there, right? And people on Twitter, Inc. (NYSE: TWTR) were saying, "Well, how is this possible for it to be legal tender? How on earth are people going to spend it?" So, are you familiar with Strike Pay?
Marija:
I've heard of it.
Chris:
It’s a payment provider that uses the Lightning Network for these micropayments. Jack Muller is the CEO. He's only a young guy, only in his twenties. And he was the one that announced at the Miami Bitcoin Conference 2021 that he spoke to the President of El Salvador and kicked this whole thing off. So, when people are like, "Well, Bitcoin fees, and you can't transact in it, blah, blah." Well, the whole thing is going to be enabled by Strike Pay, which you can-
Marija:
With Lightning.
Chris:
... with Lightning, yes, but from Strike Pay. It's, kind of, like PayPal Holdings Inc. (Nasdaq: PYPL), but using the Lightning Network. And what that means is, you can transact in your local fiat currency. So, I can send pounds and you can receive euros, but it goes over to the Lightning Network, with Bitcoin powering it in the middle.
But as far as the user is concerned, they don't have to care. And you, kind of, have it in Bitcoin as well, but it means people can transact in Satoshis without fees because of the Lightning Network.
So if people wondering how on Earth is El Salvador, with small transaction sizes, going to pull this off using Bitcoin, that's the answer, right? Strike Pay on a Lightning Network. Tiny, tiny, tiny fees.
Back to the geopolitical point, though. Monetary policy isn’t clear in the U.S., and it's also inconsistent. That's why it's difficult to plan when you don't have certainty about the future, right?
You can't plan because you don't know what's going to happen. And this is what created the “short-termism” in, say, the U.S. stock market: Everyone's waiting around. They're only really planning three months ahead, because you don't know when the next Fed policy meeting is going to be, what the currency creation is going to be, what the interest rates going to be, what bonds are going to be doing, all these kinds of things. It’s turned the world into short-term thinkers because you just don't know what's going to happen to long-term if the global reserve currency is only being planned on a per quarter basis.
Have you got any thoughts on that?
Marija:
Yeah. Bitcoin, unlike the fiat currencies, has a predictable monetary policy. It's basically coded into its algorithm and everyone knows it. It also solves other problems of money, like costliness, durability, compactness, validation issues and transportability.
There are many things that Bitcoin solves. And, as Nick Szabo said during the Miami conference, “being good money is the intrinsic value in [Bitcoin].”
Chris:
Yeah.
Marija:
You don't really need much more than that. If you’re a good money in all these, you have all these features that fiat doesn’t have, or precious metals doesn’t have, then it's worth giving it a try.
Chris:
Absolutely. Absolutely. Good point on the transportability thing.
El Salvador is quite a small country — I think its population is sort of like 10 million people, which isn't very large at all. But the neutral politics of Bitcoin — in that the monetary policy is super transparent — means it's just a monetary network.
With government politics, the policies are for everything — laws and all that sort of stuff. It's not just money. We're separating money out from that into the Bitcoin network, and just have a policy that's transparent for the money system, that's completely separate. Then, you can vote on other things to do with society at the government level.
So, extending that to all the world powers. There was a new story that came out from the Russian finance minister this week basically saying that the national well-being fund will be completely divesting their $40 billion exposure of assets that are based in U.S. dollars and move more into Chinese yuan, euros and gold.
So, I'm going to pick up the gold point. Russia is obviously not happy having the world's reserve currency as the dollar and having an exposure to it with their national sovereign funds. So they are acquiring other large currencies, like the yuan and euro, but also gold.
The total fund size is $120 billion, say, and the dollar denominated allocation is 35% of it is 40%. So, $40 billion out of the $120 billion. The question is, if they're going to require gold, how exactly are they going to pull that off? They can either buy a derivative — like paper-based gold contracts, futures, exchange-traded funds (ETFs) — or they can buy physical gold.
And that's what I'm getting at: You made the point about Bitcoin solving the transportability problem.
And if Russia decides to buy — or anyone, really; the Chinese, for example, have been buying loads and loads of physical gold over the last few years, and they're taking physical delivery of it to hold it inside the borders of the Chinese country. Obviously that's incredibly expensive, which would create an incentive to buy a gold-derived asset, like an ETF, which is cheaper. Transaction fees are lower. You don't have to transport it. You don't have to store it, and all the rest of it.
And this is why I'm wondering if, because of the size of the country, El Salvador is nimbler, let's call it, and it’s able to do these kinds of things and make Bitcoin legal tender, because there's less at stake.
I also wonder whether there's been any conversation inside the monetary policy committees of Russia or China as to whether they want to hold some Bitcoin in their national reserves?
Marija:
Well, I would like to know that as well. There probably were some talks behind the closed doors around this issue. Bitcoin would be a great reserve because it has auditability, more so than gold, for example. And especially if you want to build trust among your citizens or the world regarding the printing of money and how much you have in the reserves. Simply by having the address of where the country holds its reserves in Bitcoin made public, it would be auditable by anyone, unlike gold, which is not auditable by me or you. No one is going to let us enter their walls and weigh in.
Chris:
That's a very good point. How would you really know? You have to rely on the word of the British, Chinese, American or Russian governments to say how much gold they're holding, but you can't really verify it without going in where they store it.. There's a lot of gold in the Bank of England that doesn't belong to us, for example. You're not just allowed to waltz in there and demand that they tell you exactly who's is what and where it is. You don't actually know because you don't have physical access to it.
But that actually is leading to a question, which you kind of half-started to answer, which is to flip the question the other way around:
Why wouldn't Russia, China, the U.K. or Serbia switch some of their reserves to Bitcoin? Why would they hesitate to do that?
Perhaps the point you made about the auditability is a downside from that point of view, because they kind of play geopolitical games by bluffing as to how much gold their holding. You know what I'm saying? Does that make any sense to you? Why would they hesitate to hold Bitcoin in a national reserve?
Marija:
Well, it's a difficult question because we know that the central banks are afraid of Bitcoin and they're against Bitcoin, as we’ve seen now from Basel Committee on Banking Supervision’s latest proposal. They consider Bitcoin as the highest risk asset in the world.
Chris:
Oh, do they?
Marija:
Yeah.
Chris:
Okay. That's interesting.
Marija:
And on Thursday, they said they’ll require banks to hold $1 as collateral, as a reserve, for each dollar of Bitcoin that they hold in their custody. So it's a huge capital requirement. It's very, very capital-intensive. And I don't think banks would want to kind of have custody for Bitcoin and hold Bitcoin on their balance due to these requirements. They also said that the stablecoins are on par with the bonds.
The Basel Committee is the central bank of central banks. And it's an international group governed by the central banks of 10 countries, including the U.K., U.S., Russia, China and Switzerland. So the central banks of the largest and most important countries have spoken about that. So we know they're against Bitcoin, and there's nothing we or anyone can do about it.
Chris:
When you say they consider it the highest risk asset in the world, what do they think the risk is? Do they think Bitcoin is going to collapse, disappear, go to zero? What do they think is the risk?
Marija:
Because it just came out, I haven't read the whole proposal, so I'm not sure what their rationale against it is. But usually, their rationale is that [Bitcoin is] so volatile that it can’t be controlled [by them]. Everything which we value as a feature, they see as a disadvantage.
Chris:
Okay. It's interesting. So it is the loss of value that they're worried about as far as risk goes?
Marija:
Yeah. In part. Yeah. Well, mostly as a reaction to some other events that they think can happen — they think maybe it can get hacked and it's risky for investors. Everything which we consider valuable — like being your own bank by holding your own private keys as an access to your Bitcoin — they consider that as a disadvantage. And they say it's a disadvantage because that makes it risky. It's risky for people to hold their own value instead of giving it to banks. They want to kind of protect the banks.
Chris:
Gotcha. Yeah, and they say consumers as well.
Marija:
Because cryptocurrencies are replacing the banks, decentralized applications (dApps) and decentralized finance (DeFi) will one day replace banks.
Chris:
Yeah. The existing banking system and the regulators see it as their purpose in life to protect consumers from, well, themselves, ultimately. Because the problem is — and I don't blame central bankers and Bitcoin skeptics for seeing those features as bugs — it does take an enormous amount of time to dig down into the rabbit hole and really get to the detail of how it works and then understand the whole system. And only when you've done that can you then speak with authority on it.
But you know, these are busy people, they've got a dozen different agendas going on at the same time, and I very much doubt any of them have gone to the lengths that you or I have to understand it. So when they are making judgments about it, it's not based on a fully informed understanding of it.
Marija:
I think a lot of them do understand how it works.
Chris:
You think they've got a deep understanding?
Marija:
Not all of them, of course. But I think it's the understanding that it's going to replace the banks — that's what drives the fear.
Chris:
Oh. So you think they know, okay. You think they know that that is a risk?
Marija:
I think they're just simply trying to protect the status quo.
Chris:
Right. So the truth is it's self-preservation, but they can't say that. So they have to tell a different story, like protecting consumers, or that Bitcoin is a systemic risk to the financial system, and things like that.
But again, we see that as a positive, as replacing the legacy system with a superior one. But they flip that over and say, well, that's bad because they’re trying to protect the existing system. That that makes sense from their point of view because they're inside it and that's their livelihood and their whole careers are based in that.
I suppose that is political as well. I mean, you tend to think of politics as just governments, but you know, they call it “office politics,” don't they? Even within a company, you have a social dynamic of people playing power games and, so everyone's got their own agenda and is using their own incentives to get whatever it is they want.
And I think that is what really got me interested in Bitcoin: It doesn't take the position of trying to force anyone to do anything. It doesn't push back against anybody. It simply creates a set of incentives that says, "If you do this or behave in this way, you benefit. And if you don't want to behave that way, just don't join the network in the first place." That's it. There's no, "Don't do that." It's like, "Join and behave this way and benefit or just don't join." And I thought that’s brilliant because then there's no stress, really. You're either in it because you want to be in it or not. And if you're in it, you follow the rules and you benefit, and everyone benefits.
It's the first system I ever came across where everyone is kind of behaving themselves because they want to. It's more profitable to do that than, I dare say, in the old system, where there's incentive to cheat for personal gain. In Bitcoin, it doesn't pay to cheat. It’s actually more profitable not to cheat, which was completely mind-blowing to me.
So that actually brings me back to the geopolitical level.
You have all the representatives at G20, one per country, sit around the table and they still play the same old power games, don't they? And why Bitcoin is relevant to that conversation is for the same reason: it sort of gives everyone the option, invites them to this other system where everyone can appeal to their own self-interests. Then you don't have to debate or play power games anymore because everyone can win.
That's my point of view about it. And ultimately why I personally think eventually, El Salvador is the first domino in a long line that will lead to more countries adopting the Bitcoin standard.
Marija:
Yeah, I think you're absolutely right. And the game theory aspect of Bitcoin is very, very interesting, along with the behavioral economics of Bitcoin, also. And it’s in everyone's interest to protect Bitcoin. That's very, very important. Even just the investors who hold Bitcoin, it's in their interest to protect Bitcoin, even if they're not mining or don't have a node running. But the social influence is also extremely important; anyone who is a shareholder in some way in Bitcoin, everyone around the world who's interested in Bitcoin, can influence the governance in some way.
We could fork it or something if you don't agree on things as they are. So it's very important that these game theories have been set right from the beginning. And it's amazing from an anthropological, a political and a governance point of view. So I think many types of jobs and scholars one day will be interested in how Bitcoin works. And they will be paid more for their papers on the subject. And it's quite interesting.
Chris:
Yeah, that was a brilliant point. I'm going to pick that up there. If people keep investing in Bitcoin and causing the price to rise, that is like a continuous approval and validation of its monetary policy. Let me dig into that a bit more.
If people continue to acquire Bitcoin over time, and more and more people jump on the bandwagon — I think Anthony Pompliano said something like there are a hundred million people in the world that hold Bitcoin right now. So, if a hundred million people have bought into it, that must mean that each of those individuals, companies or governments have heard about it, looked into it and found out what the basic monetary policy is. They got the basic understanding of it and went, "Okay, I'm in. I'll have some of that."
Each one of those hundred million people read the same story. And that must mean that the design of Bitcoin is almost universally appealing. Well, not universally because that would mean all 8 billion people approve of that monetary policy. But still, so far, so good. A hundred million people have approved of that monetary policy. And if that continues, the technology will improve and it gets easier to use.
And if ever that monetary policy were to change in such a way that the community disapproved of it, that all would unravel and that hundred million people holding Bitcoin would become 90 million, then 80 million, and the price would start falling because people would start offloading because they don't like it anymore. So it’s really a way of voting with your money directly. So that is governance, I suppose..
Marija:
Yeah. It can be kind of direct and kind of indirect governance, as maybe an opinion maker, some small person on Twitter or a larger and influential opinion maker, can have an impact. And it's very important to understand that for these countries, it would be helpful to have it as a legal tender, especially since it's kind of protected from black swan events — and even protects it from the internet itself.
And you even have satellites like Blockstream satellites, nonces in space, things like that. So people, companies, individuals — they are making sure increasingly to keep it safe. Like we have now in El Salvador, we're going to have a mining farm on top of a volcano to use clean geothermal energy. So all these crazy things are happening.
All the companies have invested so much in their shareholders, and there are people who are mining in their basement and it's not really possible even for the Chinese to crack down on mining. I don't think it matters much on the grand scale because the centralized popularity is really large.
Chris:
That was another good point. I want to take that one as well. So you talked about the decentralization, and some people who have got fear around holding Bitcoin will say, "Well, you know, there are other large companies in control of the internet. So, what do we do about that?"
Well, you just reminded me of something, which is, El Salvador takes geothermal electricity supply from the volcanic energy and the heat. So, they can mine Bitcoin on-site, and then, with the satellites, they could broadcast that over radio frequency. If you had no other internet, et cetera, no mobile phone signal, you could broadcast that signal a hundred miles using a CB radio just with old pulse tones, like from most code days, you could transmit the nonces.
Because all the hard work is done by the hardware on a local level, all you need to broadcast is that what you found node, and then everyone can validate elsewhere. So dis-intermediating the internet and using all communication methods, telephones satellites, CB radio, that means that you can bypass any and all censorship of the communication channels.
Marija:
Black swan events.
Chris:
Black swan events, exactly.
Marija:
Black swan events, censorship and global turmoil. Some political collapse or whatever.
Chris:
Natural disasters, any of that. Bitcoin is so resilient. And when I talk about the Bitcoin standard, even El Salvador isn't just going to transform their entire economy into Bitcoin only. That's still going to be a dollar-denominated economy. And they're just going to introduce Bitcoin as an alternative. And that's just like a hedge. And that's just like, what we do on an individual level is I don't hold all my savings in great British pounds. I have half of it in Bitcoin and half of it in great British pounds. That's a hedge in case, who knows, the Bitcoin price goes down or whatever Bank of England collapses. I don't know. It doesn't matter. It's a principle that you hedge your risk in two different systems: old financial system, new financial system. So countries could take that straddling approach as well, just for their own sake.
Marija:
Bitcoin is like ... I would call it a “social contract.” It's like a global social contract, which wasn’t imposed by anyone. It was gladly accepted. And that's why I think it's a form of some huge global contract, which started as an experiment but it's kind of outgrowing that experiment phase and it's becoming something very beautiful.
Chris:
And everyone's signed that social contract voluntarily, and they can withdraw at any time.
Marija:
Exactly. Exactly. That's what's important.
Chris:
That's gobsmacking.
Marija:
It's not binding.
Chris:
It's not binding at all. You just click a button, sell your Bitcoin, then you're done. So on the point of the U.K., I was thinking about my country and why don't we adopt the Bitcoin standard? The problem with the U.K. is the same as the United States: Pound sterling is one of the world's reserved currencies. So it's kind of really, really hard to give up the benefits of having that kind of power.
The Bank of England is able to create one of the top five reserve currencies in the world, and it doesn't make sense from their point of view to adopt the Bitcoin standard when you're already in that kind of position of power. For a country like El Salvador, which doesn't really have a lot of power or its own currency, it’s like, "Hey, YOLO."
Marija:
Yes. Well, yeah, they fought for centuries, these large powers, to create these currencies and impose them on the rest of the world. And you’re just coming and saying, "Hey, but we want something new."
I wouldn't expect a large power to accept Bitcoin as legal tender, or maybe not even smaller countries that have their own currency and they're not in bore or something. But for the countries like El Salvador … they do not have their own currency. It's quite likely that they may accept Bitcoin as legal tender. Like now, we have all these Latin American countries. Their politicians are signaling that they are interested and would like to see Bitcoin accepted that as legal tender. Like Argentina or Paraguay or Brazil.
But as I said, I think all this has to go through legislative body, and it probably won't be that easy, like it was in El Salvador, especially if they have their own currency.
Chris:
True. That is probably a good place to end. And the next thing for us to keep an eye on is, now that El Salvador has come on board, looking at the other South American countries and looking to El Salvador as an example, especially if it succeeds. If they grow their GDP — if it starts to work for them — then that it's then scientific. It's not a risk so much anymore for Panama or Mexico to start considering it because El Salvador would have already gone through the door and didn't get shot. So if it starts to work for them, it's much lower risk for other Southern American countries to follow. And then maybe the bigger countries come behind that. Maybe, maybe not. But in the next phase, I agree with you that similar countries can then use that as a template, potentially.
Marija:
I think what you said is very important to note, and this is kind of probably the largest monetary experiment, economic experiment, in the world. Having the whole country accept Bitcoin as a national currency, that's quite amazing, and I can't wait to see what will happen with that. I do expect that their government will kind of go through tough times from the U.S. government since President Bukele hinted that they're already getting real big pressures from large powers regarding their decision. But he's very determined to take it until the end.
Chris:
I can imagine.
Marija:
So let's see what kind of political turmoil may happen because of this. I hope it won't, but it's not just the Bitcoin being an experiment; it's also a political experiment for the government. What can happen to the government if they decide to accept Bitcoin?
Chris:
I totally agree. It will be difficult enough if it were just the case of adopting Bitcoin without all of the geopolitical pressure from the United States, for example, not wanting to challenge the dollar. And that's one of the first things that I thought. I thought, well, I do not envy [Bukele’s] position while all the Bitcoin community is running around partying and celebrating. He's the one that's going to have to have a spine of steel to keep his course because, behind closed doors, I can't even imagine the types of phone calls he's going to get and the kind of decisions he's going to have to make to stay the course. He must have a strong back, is all I could say. Strong spine. So hopefully, he'll stand his ground. So we'll see.
Marija:
Yeah. That will be interesting.
Chris:
All right, Marija, thanks very much for joining us today. This was a great conversation. You got any closing words?
Marija:
I think it's a great day for Bitcoin, a great week for Bitcoin. And I'm quite excited about it. Even these crackdowns of mining, change of legislations here and there, accepting it and not accepting, banning or unbanning cryptocurrencies … it's all going to pass. This is one of the things that is more important. Let's see how it functions when it happens.
Chris:
Right. Good one. Good one.
Marija:
If it actually happens, somewhere.
Chris:
Absolutely. Well, we'll be here to cover it. So that's all for this week's edition of the Weiss Crypto Sunday Special with me, your host, Chris Coney and Marija Matic. Check your inbox for the next edition of the Sunday Special. Until then, it's me, Chris Coney, saying bye for now.
