Crypto Corner - Summary of the Week 07/06/2021


Written by: Yves, Head of Trading at Wirex

The Bitcoin price is still wildly swinging this week, dropping as low as $31,025 on Tuesday, and bouncing back by nearly 12% the next day. It is now quoting around the $37,500 level. This level has been crossed at least once a day, in eight of the past eleven days this month. The market still has no clear direction, and its volatility is shaped by the legal adoption and restriction measures announced or planned.

This Wednesday, the congress of El Salvador, country with a population of 6.5 million people, approved the Bitcoin Law that ‘regulates Bitcoin as unrestricted legal tender’. More specifically, ‘Prices may be expressed in bitcoin’, ‘tax contributions can be paid in bitcoin’, and ‘every economic agent must accept bitcoin as payment’. The decree is expected to take place less than 90 days from now. The country reportedly partnered with a Chicago-based project called Strike. For the past year, the concept of a Bitcoin economy has been tested by Strike at El Zonte, an El Salvadorian village where a few thousand locals can use an application called Bitcoin Beach for their daily expenses.

It would be difficult to imagine that a highly volatile cryptocurrency can be used in our everyday life. But the benefits of a fully decentralised currency far outweigh this drawback. The Bitcoin Beach project is a showcase for adoption, for banking the unbanked, favouring capital inflow from the estimated 1.3% of the world’s population that owns Bitcoin, guaranteeing that the Bitcoins sent for aid actually land into the wallets of those in need, to the last penny. 600 bitcoin users would purchase anything from ‘bags of tortillas to haircuts’. But why not use stablecoins instead?

Stablecoins are directly or indirectly centralised, whether they are backed by traditional assets or simply pegged to a traditional currency. Consensus is always more easily achieved through decentralisation. Confidence in a monetary system is more easily gained if there is no single point of failure, and in the case of El Salvador, the potential single point of failure could be the Fed, or the IMF.

In response to El Salvador’s Bitcoin adoption, the IMF’s spokesman Gerry Rice mentioned that the ‘adoption of bitcoin as legal tender raises a number of macroeconomic, financial and legal issues that require very careful analysis. [The IMF is] following developments closely and will continue [its] consultations with the authorities’.

Let us review these potential issues:

From a political perspective, there have always been wild speculations around the IMF loans that have been extended to the country over the years, the choice of dollarisation, and the interference of the region’s governments in the country’s affairs. On the other hand, there is also the matter of corruption in the country, as well as the alleged sentiment of a strengthening authoritarian drift. The recent politics, like the flow of US dollars with and within El Salvador, are obviously anything but transparent. By contrast to the Greenback paper, every Bitcoin transaction is traced in a timely manner. By contrast, it would take months or years for enforcement authorities to get a bank’s records according to former federal prosecutor Kathryn Haun.

From a microeconomic perspective, with the right operational structure in place, every donation ends up in the intended wallet, and the intended wallet can be associated to a local business, such that the donor knows exactly where his donation is spent. The accuracy of economic data that can be gathered makes the system probably better than helicopter money. Furthermore, there is no point in having middlemen: NGOs, Banks, Governments. Why would anyone risk having her donation eroded or wasted by an unreasonable or potentially corrupt number of intermediaries. The IMF’s rightful concern is that intermediaries like banks could be useful if they are reasonable and honest creditors, lending more to the economy through the multiplier effect. But El Salvador abandoned its monetary sovereignty in 2001 and adopted dollarisation instead. In other words, El Salvador transferred its monetary policy to the US Federal Reserve (Fed) such that the Fed would tighten or expand the country’s monetary supply, in line with the US economy’s interests, and regardless of El Salvador’s economic interests. With the right policy in place (and I know this is a bold comment!), the introduction of Bitcoin could help mitigate this effect.

From a legal perspective, Bitcoin is more traceable, and as we established before, it is certainly more quickly traceable that the Greenback. The Department of Justice announced this week ‘that it has seized 63.7 bitcoins valued at approximately $2.3 million’, which represents the majority of the 75 Bitcoins that were paid as ransom by Colonial Pipeline. Advised by the FBI, Colonial Pipeline paid the hacking group known as Darkside. Elliptic was able to trace the Bitcoin flow to a wallet owned by Darkside, and the Department of Justice eventually got hold of the account’s private key that let them retrieve the stolen funds. This is one of the many examples where Law enforcement agencies worked with private-sector analysts to efficiently trace the stolen funds. With their repeated successes, law enforcement agencies are proving that a blockchain is indeed a ‘digital bread crumbs’ in the field of forensic analysis. From this perspective, El Salvador’s Bitcoin legal tender would not be coherent with the hope of corrupt officials to launder the proceeds of crime more easily.

Joe Biden is expected now to tackle the cryptocurrency issue at the G7 summit. Although the FBI did stress the fact that the hacks were conducted by Darkside, independently of any political agenda, the US president could take advantage of the situation to reinforce his political stance for more international cooperation against cyber criminality. If political consensus is unlikely to succeed, at least, the public blockchain consensus is already in place, ready to serve a justice without borders.

data taken at 9:08 am 11/06/2021

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The above is an opinion piece and therefore should not be taken as financial advice. Please do your own research thoroughly when looking at Cryptocurrency.
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