The problem with El Salvador’s Bitcoin law

In a prerecorded video that aired at the Bitcoin 2021 conference in Miami on June 5^th, the Central American head of state announced, to ecstatic cheers, that he planned to establish bitcoin as legal currency in his country. Four days later, after minimal discussion and little pushback, his proposal cleared congress to become law.

The unexpected move proved to be a PR coup. Bukele is already a massively popular politician at home thanks, in part, to his unrestrained spending policies. Since becoming a crypto convert and extolling the virtues of “digital gold,” he has boosted his international profile tremendously. Other Latin American politicians have followed his lead, taking up the cause—”laser eyes” meme and all—with the same zeal that crypto exchanges and fintech companies have lately been adding Dogecoin to their slates of offerings. (Give the people what they want.)

It’s going to take more than a bit of good press to solve El Salvador’s economic and diplomatic woes, however. The country faces a ballooning deficit, accusations of government corruption, and tanking sovereign debt ratings. The World Bank and the International Monetary Fund are eyeing El Salvador’s crypto gamble suspiciously. By talking, instead, about using volcanoes to mine bitcoin sustainably (Hear that, China? Listening up, Elon?), Bukele has shifted the conversation away from, and effectively glossed over, the country’s troubling gamut of problems.

As excited as bulls may be about what this means for bitcoin price speculation, crypto enthusiasts ought to take a second look at Bukele’s legislation. There is an odd article, No. 7, contained in the new law. This portion requires all “economic agents” to accept bitcoin as payment. As Bukele later clarified in a Q&A, this means, “If there is a lady selling fruit on the market, she is obliged to be paid in bitcoin.”

This is an unusual stipulation, even for a legal tender. Combine that with Bitcoin purists’ tendency not to like being told what to do—let alone by a politician. A paradox begins to reveal itself: Cryptocurrency’s appeal is, largely, its nation state-less status, presenting an alternative monetary system outside the interference and control of government. But what happens when a government forces you to use it?

If you believe in financial freedom, in the strictest sense, then El Salvador’s rules will probably jar against your sensibilities. George Selgin, a senior fellow at the libertarian Cato Institute, points out the irony “that a movement that began as a libertarian protest against fiat money should now embrace the very tactics past governments relied upon to saddle innocent citizens with it.” He calls the coercion “Bukele’s big stick.”

Jerry Brito, executive director of Coin Center, a crypto-focused think tank based in Washington, D.C., expressed similar qualms. He called the law “a disgrace,” saying in a post on Twitter that it “forces citizens to accept bitcoins whether they want to or not. This is intuitively wrong to any liberal.”

“I’m surprised that so many smart and principled people have nevertheless applauded and defended this law,” Brito continued. “They are confusing the ends of liberty with the means of Bitcoin and I hope they’re doing so merely in error.”

Not everyone is as troubled by the heavy-handed approach. Eduardo Madrid, a technical lead at Snap, the photo-sharing app, pushed back. If the government did not force people to accept bitcoin, he argued, that could lead to “reverse discrimination.” Imagine “unbanked” people, who possess only digital wallets rather than traditional bank accounts, being effectively excluded from the economy because merchants reject their bitcoin.

Alex Gladstein, chief strategy officer of the Human Rights Foundation, backed up the point. He noted that El Salvador got onboard with bitcoin only after “a grassroots movement of people” proved how valuable it can be for receiving much-needed remittances, an activity that accounts for more than a fifth of the country’s GDP. “It will absolutely help people who don’t have traditional banking,” Gladstein said. “Many may never have [a traditional bank account]. Leapfrog effect.”

Perhaps the debate is premature. Defenders of El Salvador’s bitcoin law point out that another article, No. 12, provides an out, temporarily, for merchants. Anyone who doesn’t “have access to the technologies that allow them to carry out transactions in bitcoin are excluded from the obligation,” the law states.

To be sure, El Salvador is a long way off from having all the basic infrastructure necessary to make bitcoin a widespread payments system throughout the country. Internet access is spotty and there are very few bitcoin ATMs around to let people exchange cash and crypto, among other issues. (The country is planning also to set up a $150 million “trust” fund it can tap to help smooth out bitcoin’s volatile price fluctuations when payments are settling.)

As David Gerard, author of the crypto blog Attack of the 50 Foot Blockchain, observes in an op-ed for Foreign Policy, this latter article of the law presents “a loophole large enough to drive a truck through.” But one day, after the proverbial roads are paved, the law’s ramifications will become more apparent. And by then it will become clear who is really sitting in the driver’s seat.

Robert H. Hackett

@rhhackett

robert.hackett@fortune.com

DECENTRALIZED NEWS

Credits 🚀

Bitcoin briefly rose above $40,000 ... Helped by bullish comments from Paul Tudor-Jones ... And, you guessed it, an Elon Musk tweet ... Core developers approve Bitcoin's "taproot" upgrade ... Goldman Sachs will let people trade Ethereum futures and options ... Blockchain can help Africa and Hong Kong ... Crypto's favorite car is selling like hot cakes ... Keeping up with Reddit's favorite meme stocks ... A look at Vietnam's retail investor boom ... JPMorgan buys UK fintech Nutmeg ... BitMEX hires ex-JPMorganer ... Survey says 2.3 million people hold crypto ... Amex adds checking accounts ... Fintech startup Wise to go public ... Sports betting app gets Reddit cofounder funding 

Debits 🐻

After vaulting above $40,000, Bitcoin fell below $38,000 ... SEC delays Bitcoin ETF ruling ... WSJ: Bitcoin on the balance sheet is "an accounting headache" ... Goldman Sachs warns Bitcoin is too risky to be a "viable investment" ... Regulators are worried about stablecoins ... Basel Committee says crypto is banks' biggest risk ... Mark Cuban gets "rugged" on a crypto bet ... Biden's FTC chair has it out for Big Tech ... Stripe employees took pay-cuts to flee SF ... DraftKings sank after short-seller report ... Two ransomware suspects convicted ... Fed to hike rates by 2023 ... Lumber enters bear territory ... People are delaying retirement because of COVID-19 ... Porsche is selling NFTs ... As NFT sales are dropping ... Survey says 38% of developers think blockchain is "all hype"

FOMO NO MO

Every day we consume popular entertainment centered on characters. A collection of successful characters can become the foundation for a franchise — e.g. Star Wars, Marvel, Harry Potter — that can span decades, and be incorporated into successful products across platforms and media types. 

But today, most successful characters exist as intellectual property owned by a single corporation. This means that fans don’t have any governance, let alone direct ownership, of these characters, limiting them to being only passive consumers of the products and narratives that the corporation decides to create. Even if fans buy public equity in the companies to show support or alignment, it’s difficult to make a targeted bet on the success of a single individual character or franchise, since many corporations are large, diversified, vertically integrated businesses that own and operate many product lines. Shareholder voting wasn’t and won’t likely ever be designed for fans and investors to choose which actor should play their favorite character in the next movie in a series, or to help make other such impactful decisions. 

Cuy Sheffield, head of crypto at Visa, the payments giant, has a bright vision for the intermingled future of NFTs, or non-fungible tokens, and DAOs, or "decentralized autonomous organizations." He believes the technology behind digital collectibles (NFTs) and crypto token-holding groups (DAOs) will enable online communities to develop and own the fruits of their creative labor. In other words, fans will become more active participants in the production of new characters, story lines, and other digital content spanning the entertainment industry, rather than them merely playing second fiddle to corporate giants.

As Sheffield writes in a far-sighted op-ed for Future, a new publication spun up by the venture capital firm Andreessen Horowitz, crypto tech is poised to "unbundle creative media." In the not too distant future, he says, regular folks will be able "to participate in the fun, and financial upside" of their creative successes. His calls the idea "fantasy Hollywood," an allusion to fantasy sports.

BUBBLE-O-METER

$30+ billion

That's how much commercial paper, or short-dated investments similar to cash, were held in reserve, at least as of May, at Tether, the firm behind a popular so-called stablecoin of the same name. The staggering sum makes Tether the world's seventh largest holder of companies's short-term debt, reports the Financial Times.

Tether is in league with giant fund managers, like Vanguard and BlackRock, according to analysts at JPMorgan. Its holdings far exceed equivalent investments held by the likes of Google and Apple, as Bloomberg notes, per this chart from JPMorgan.

With a total market value of more than $62 billion, Tether, the crypto coin, is the world's third highest-valued cryptocurrency. In February, Tether paid $18.5 million to settle a lawsuit brought by New York Attorney General Letitia James. (In a statement, she said the firm lied that its virtual currency "was fully backed by U.S. dollars at all times.")

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MEMES AND MUMBLES

Kim Kardashian is using her Instagram account to shill a month-old crypto coin, as Coindesk reports. By writing "#AD" in the lower right hand corner of the post, she disclosed that it was a paid promotion, likely providing some regulatory cover. Some celebs, like boxing champ Floyd Mayweather and music guru DJ Khaled, found out the hard way that you can't self-interestedly pump a coin without disclosing your financial interest.

Helpfully, Kardashian noted: "THIS IS NOT FINANCIAL ADVICE." Thank goodness, because I really thought it might be.

Interested in joining Fortune's The Ledger as a writer? We could use another pair of (diamond) hands. Contact robert.hackett@fortune.com.