FROM MY VANTAGE POINT
Why El Salvador’s President is Right to Defend Bitcoin
The decision on the part of El Salvador president Nayib Bukele to make Bitcoin legal tender back in September 2021 may have been controversial to some people, both in that nation and the world at large. But in my opinion Bukele was correct to defend Bitcoin, especially during that time. He has recently gone on record as disputing the concept that El Salvador’s economy was left in ruins by the Bitcoin crash, and in November 2022 announced that his country would begin buying one Bitcoin a day.
Let’s look at some reasons why Bukele was right to defend Bitcoin in his country.
All about Timing
El Salvador was the first nation to take this step, though the Central African Republic has since followed suit. Bukele opted for the approval at a time when Bitcoin had come down a bit in price, but it was still a wise investment opportunity. While trends may be changing again right now, there is often a great deal of reward that accompanies risk.
This also helps increase El Salvador’s travel industry, which according to the Inter-American Development Bank (IDB) accounts for 17.9 percent of the nation’s exports and provides over 31,000 jobs. Also, the Lightning Network, a Layer 2 solution that enhances the functionality of the primary network, has proven to be beneficial to the nation’s retailers – notably those on Bitcoin Beach, a coastal area where the crypto has flourished, and which as a result has been targeted for infrastructure upgrades.
Global Reserve Currency Options
While El Salvador may not be in the running as the next global reserve currency provider, there is the possibility that Bitcoin could play a role in the world’s major currency options. The countries that are investing in this new opportunity may have a much more pronounced role than one might expect. Bukele invested $1.5 million more in Bitcoin this past summer – i.e., 80 bitcoins at the price of $19,000 apiece. That’s less than half the average price that the El Salvador government paid previously for its $105.6 million stake.
Paying Attention to the Needs of His People
Bukele’s decision to adopt Bitcoin as legal tender wasn’t something that was done to benefit just the wealthy of El Salvador. Rather, this was a calculated decision that took into account everyone in the country.
While some might be slow to reap the benefits, he believes it’s only a matter of time.
“Patience is the key,” he tweeted on June 18, 2022.
Certainly that is the strategy he is following. Certainly he will continue to wed himself to Bitcoin, even as others waver. Certainly he has hopes that other nations besides the CAR will follow El Salvador’s lead.
To that end El Salvador hosted a conference in June 2022 that included representatives from 44 other countries – places like Nigeria, Pakistan, Kenya and Paraguay. While others have yet to make the jump, the possibility exists that that will come to pass.
There are those who believe that such events will serve as a catalyst, that it’s only a matter of time before other nations take the leap.
In fact, Nayib Bukele is banking on it.
The Exciting Possibilities of the Bitcoin Lightning Network
Decentralized finance has long been viewed as an avenue for the world’s two billion unbanked people to access a financial system and consummate transactions securely. To illustrate the point the website Cointelegraph in May 2022 related the tale of a man identified only as Jorge, who lives in the Southern African nation of Mozambique.
According to the piece Jorge, who works as a surf instructor in the coastal town of Bomba (while also peddling arts and crafts and SIM cards), became the first Bitcoiner in town in 2021, a shrewd move in one of the poorest nations in the world. Only three of every 10 residents have bank accounts, and Mozambique’s per-capita GDP is just $448.
Jorge admitted to Cointelegraph that while few others in his homeland understand Bitcoin, he can buy and sell phone credit on the Bitrefill Bitcoin application, which enables payments to be made in Bitcoin via blockchain or the relatively new Lightning Network, a Layer 2 scaling solution introduced in 2018.
Among other things, Jorge added, the Lightning Network (or LN, as it is often known) enables him to toggle between the currencies favored in Mozambique and one of its neighboring countries, South Africa.
Despite Mozambique’s financial state, half of the country’s 31 million inhabitants have phone subscriptions, and 20 percent have internet access, meaning that such P2P transactions are increasingly possible. Jorge told Cointelegraph he has been able to support his family, which includes four children, as a result of his reliance on decentralized finance in general and the Lightning Network in particular.
As he put it, “Things are pretty.”
Certainly there are other instances that have illustrated the possibilities of the Lightning Network, which as noted makes it possible to consummate transactions off the main blockchain. Those transactions are executed rapidly and with negligible fees, a stark contrast to legacy banking institutions.
In February 2022, the mobile service Cash App integrated with the Lightning Network, enabling users to send Bitcoin to any LN or BTC address. A month later, Portland played host to the “Lightning Festival,” where the full scope of the network was on display. Fifty buyers used the LN to spend the equivalent of $1,800 in Bitcoin over three hours at various stands and shops, and vendors extolled the ease and efficiency of such transactions.
Clay Graham, founder of Rapaygo, a company devoted to enabling LN point-of-sales solutions, noted to Cointelegraph in the wake of that festival that the speed of the network was such that transactions “can clear as fast or faster than cards, so both the buyer and seller don’t feel that ‘where has my money gone.’ ”
In May, the introduction of the Bolt Card increased the LN’s network to an even greater degree, and perhaps not coincidentally network capacity achieved an all-time high of $113 million that month. That was exceeded one month later, when it jumped to $120 million.
It was at the latter point that Danny Brewster, CEO of the UK-based Bitcoin exchange Fast Bitcoins, told Cointelegraph that such “constant growth” represented “a great start” for the Lightning Network.
He added, “I foresee it continuing into the future, as long as all stakeholders, from developers to entrepreneurs building businesses continue to push forward.”
The Challenge of Improving Cryptocurrency User Experience
The tailwinds continue to gather behind cryptocurrencies, propelling the sector forward and scattering it in a thousand different directions. Non-fungible tokens, anyone? What of Web 3.0? And besides its ongoing disruption of the financial space, is it not possible that at some point in the not-too-distant future other nations will follow El Salvador’s lead and begin using crypto as legal tender?
The answer, my friends, is blowing in the wind.
Granted, bitcoin’s value plunged from $69,000, a record high, in November 2021 to $33,000 in January 2022, but as of mid-April it had climbed back to between $37,500 and $38,000, with the expectation that it would continue to rebound. One expert, Galaxy Digital founder/CEO Michael Novogratz, envisions its value skyrocketing to $500,000 by 2027.
Then there were the results of two surveys in March 2022, by NBC News and Checkout.com. The first of those concluded that 21 percent of Americans have dabbled in crypto, a remarkable figure for an industry which originated only in 2009, when bitcoin first appeared. The second poll also echoed the first in showing that there is particular enthusiasm for crypto among younger Americans. Forty percent of those between the ages of 18 and 35 would like to use it in the next year to obtain goods and services.
As Jess Houlgrave, Checkout.com’s head of strategy for crypto, told Yahoo Finance: “The cryptocurrency world is maturing and is increasingly being driven by utility, pragmatism and empowerment.” She added that the potential is there “for cryptocurrency to not only transform the way people transact, but also to potentially reinvent the dynamics of the entire digital economy.”
To do so, however, will require some tweaking on the part of those operating the various crypto platforms. As in other industries, the customer experience matters – improving it, personalizing it and maximizing it. Navigation and functionality must be improved, as reflected in the fact that only nine percent of those dealing in crypto are completely satisfied with the exchanges in which they are working, according to Statista.
Of those who are not, the most common issues mentioned were faulty security, high trading fees and lack of liquidity. Inconvenient user interface and subpar customer support also made the list.
A deeper examination of the issues mentioned fees and security, as well as onboarding problems (specifically, that it can take more than a day to register) and completing a transaction (i.e., not every one of them can be completed with fiat currency).
The solutions?
- Improve usability by providing users the information and tools they need for frictionless navigation.
- Design the platform so it is predictable and consistent, but not dull.
- Make sure it’s up to date and pleasing to the eye.
The bottom line is that crypto is speeding forward, and headed to parts unknown. Those in the industry can hasten the process that much more by maximizing the customer experience. Otherwise, they risk being left behind.
How Likely Is a “Crypto Winter”?
When Bitcoin slid from a record-high valuation of $69,000 in November 2021 to under $33,000 in January 2022, there was genuine concern in the cryptocurrency community that it was an indication that dire things were ahead. In the parlance, there were those who wondered aloud whether a “crypto winter” was at hand.
David Marcus, former head of the digital wallet Novi, went so far as to tweet on Jan. 24 that the crypto had already entered that bearish phase, while adding that it might not be the worst thing, as it is during such periods that savvy investors tend to make hay. Nadya Ivanova, chief operating officer of the tech research firm L’Atelier, was of the same mindset, telling CNBC’s “Squawk Box Europe” that the crypto market was in “a cooling-off period” and that that “might actually be an opportunity to start building the fundamentals of the market.”
As the weeks have passed and Bitcoin’s value has stabilized, optimism has only grown. By mid-March its value stood just over $40,000, and while the Federal Reserve raised interest rates to combat inflationary trends, Bitcoin held steady. Certain experts foresee its value exceeding $76,000 by the end of 2022, before climbing to $192,800 by the end of 2025 and $406,400 by the end of 2030.
Michael Novogratz, founder and CEO of Galaxy Digital, told Bloomberg that in his estimation Bitcoin will remain in the $30,000-to-$50,000 range this year, then mushroom to $500,000 by 2027. As he put it:
“We see an adoption cycle that accelerates. Bitcoin grew so much faster last year – crypto grew – than the Internet did at its best in the ‘90s. So I see this going viral everywhere. If it’s in the Mideast or in pension funds in the United State, all are getting ready to participate.”
Greg Beard, CEO of Stronghold Digital Mining and formerly the Global Head of Natural Resources, Senior Partner and Member of the Management Committee at Apollo Global Management is also optimistic. Beard told Fortune that while it’s hard to predict where Bitcoin might be at the end of 2022, he believes it “should be worth multiples of today’s price in five years, I’d say at least five times.”
That would take it to $200,000.
As noted by CoinDesk, Bitcoin’s recent slump does not quite compare to the one that befell the leading crypto in 2017-18. Then, it lost 70 percent of its value in one 51-day period, after being valued at $19,850 – an all-time high to that point – in December 2017. This time, it lost 52 percent over 75 days.
The crypto market as a whole plunged 66 percent in ‘17-18, while it has fallen 48 percent during its current slump.
The inescapable conclusion is that while Bitcoin has undergone something of a chill as of late, it is a considerable stretch to say that a “crypto winter” is approaching. Rather, it is as Vijay Ayyar, vice president of corporate development at crypto exchange Luno, told CNBC: The current trend represents a “correction,” as opposed to an extended slump. Judge accordingly.
Five Bitcoin Predictions for 2022
When Bitcoin plunged from its all-time high of $68,950 in November 2021 to under $33,000 in January 2022, analysts raised concerns that a “Crypto Winter” was at hand, that cryptocurrencies in general and the world’s most popular crypto in particular were headed toward a deep freeze.
Analysts quickly revised that prediction, however, and by late January foresaw Bitcoin’s value exceeding $76,000 by the end of 2022, before climbing to $192,800 by the end of 2025 and $406,400 by the end of 2030. Just a few weeks later, as Bitcoin’s value climbed above $40,000, the predictions grew rosier still. There was an expectation in some corners that it would reach $200,000 in the second half of 2022.
Sean Farrell, head of digital asset strategy for the research firm FSInsights, made that observation in a note to investors, basing his prediction on “legacy market capital entering the fold.”
Wells Fargo expressed similar optimism in a report issued in early February, comparing crypto adoption to that of technology in the mid- to late ‘90s: “At that time, the internet hit a hyper-adoption phase and never looked back. Cryptocurrencies appear to be at a similar stage today.”
And indeed, the report added, some 221 million people were using cryptos around the globe in June 2021, over double the number of four months earlier:
If this trend continues, cryptocurrencies could soon exit the early adoption phase and enter an inflection point of hyper-adoption, similar to other technologies. There is a point where adoption rates begin to rise and do not look back […] Precise numbers aside, there is no doubt that global cryptocurrency adoption is rising, and could soon hit a hyper-inflection point.
In short, things don’t sound so wintry anymore. The comparison to the last Crypto Winter, which began late in 2017, continued into early 2018 and saw Bitcoin lose 84 percent of its value, would not appear to be valid.
So Prediction No. 1 for 2022 would be this: Things are going to be fine in the Bitcoin space.
The website Analytics Inside likewise believes that more people will be adopting Bitcoin as a digital asset, and at least paid lip service to the idea that other countries will follow El Salvador’s lead and make Bitcoin legal tender.
Nigel Green, CEO of deVere Group, one of the world’s largest independent financial advisory, was even more bullish about the latter, suggesting that three other countries will adopt Bitcoin this year, and mentioning Panama, Paraguay, Guatemala and Honduras as possibilities.
Per Analytics Inside, here are three other predictions for this year:
- Crypto will face increased regulation: And indeed, there were hints in 2021 that that will be the case, as mentioned in the Global Blockchain Business Council’s inaugural International Journal of Blockchain Law. In it, U.S. Securities and Exchange Commission commissioner Caroline Crenshaw suggested that several governmental bodies, including the SEC, should take the lead on this front.
- Banks will offer Bitcoin-related services: Again, this is already on the front burner. Even though banks and cryptos have a fraught relationship, the banks understand the demand for Bitcoin, as exhibited by U.S. Bank’s decision in October 2021 to offer custody services for cryptos.
- There will be more cyberattacks: This has become a sad fact, as shown by the increasing number of cyberattacks and scams inflicted upon the decentralized finance sector in 2021.
On balance, the year ahead is a promising one for Bitcoin. January’s downturn seemed to be nothing more than a momentary setback. Far from being another Crypto Winter, there appears to be nothing but green grass and high tides ahead.
Regulators Taking a Long Look at DeFi
In the wake of some troubling cyberattacks and scams inflicted upon the decentralized finance sector in 2021, questions were raised about the necessity of DeFi regulation, questions that were addressed in part when the Global Blockchain Business Council rolled out the first edition of the International Journal of Blockchain Law in November of that year.
In the foreword, Dr. Matthias Artzt, Deutsche Bank’s senior legal counsel, wrote that blockchain technology “will have a significant impact on the field of law,” while adding that it is too early to tell how great that impact will be:
Will current law bend to new use cases inspired and enabled by blockchain technology or will we see new laws enacted, especially in such areas as contract, intellectual property, regulatory, and antitrust law?
U.S. Securities and Exchange Commission commissioner Caroline Crenshaw amplified the point later in the report, noting that while DeFi “presents a panoply of opportunities,” it also “poses important risks and challenges for regulators, investors, and the financial markets.” She added that DeFi’s current “buyer beware” approach was simply not adequate, and that besides the SEC, the Department of Justice, Internal Revenue Service, Commodities Future Trading Commission and Financial Criminal Enforcement Network have jurisdiction over “aspects of DeFi.”
There are “a variety of tools” at the SEC’s disposal, according to Crenshaw, “ranging from rulemaking authority, to various exemptive or no action relief, to enforcement actions.”
It is not the first attempt on the part of a regulatory body to get a read on DeFi, much less a handle – an understandable trend, given that as of early 2022 there was nearly $237 billion of value locked in DeFi projects, up from $13 billion at the end of 2020.
On Oct. 28, 2021 the Financial Action Task Force (FATF), an international organization, issued some guidance for dealing with DeFi, centering not only on the licensing and registration of Virtual Asset Service Providers (VASPs) but also on such matters as money-laundering and terrorist financing through peer-to-peer transactions.
But the guidance raises a simple question: Who can be held accountable when the things go awry with a DeFi exchange? It is a monetary system (not to mention an investment vehicle) that operates without a centralized authority; that’s the whole point of DeFi to begin with.
Agustin Carstens, general manager of the Bank for International Settlements, told CNBC in December 2021 that “the decentralized aspect tends to be illusive” and added:
“There are some incentive issues related to the fact that, through this decentralization, at some point you end up with some agents that play an important role, and not necessarily for the best (interests) of users of financial services.”
Unraveling that mystery will be one of the great challenges for any regulatory body that is seeking to solve DeFi issues. So too is the fact that DeFi platforms are not bound by any geographical boundaries, though there are those who believe guidance can be found in the Foreign Account Tax Compliance Act of 2010, which enables U.S. authorities to regulate American citizens’ use of foreign currency around the globe, and the European Union’s General Data Protection regulation, which was passed in 2018 and governs data usage on the part of Europeans when in a foreign land.
The bottom line is that governmental officials are well aware of the risks and challenges of DeFi. While it is not entirely clear what might happen next, it seems certain that various bodies will continue to monitor the situation, and that movement on this front is entirely possible.