Jun 25, 2021
An Analayis of the El Salvador Bitcoin News
El Salvador declaring BTC as legal tender has been making waves through mainstream media of late so let’s break it down.
Why would El Salvador adopt Bitcoin? The narrative that has been most prolific in the headlines as well as in the Bitcoin community is that the adoption of Bitcoin as legal tender will help El Salvadoran people with lower remittance costs. While I do think that Strike can compete in this market and has the potential to do this, I don’t think this is El Salvador’s primary motivation for enacting this legislation.
The real reason El Salvador sees an opportunity here is to attract global capital and talent. Bitcoin has captured some of the most intelligent minds and has created more millionaires over the last decade than any other asset class. As a country previously known for high violent crime and high levels of poverty, El Salvador has been looking for ways to incentivize the growth of their economy and their peoples’ living standards. Eliminating capital gains tax on Bitcoin, providing residency for individuals willing to invest 3 BTC into their country, and implementing some of the lowest capital gains taxes in Latin America are ways in which the government is attempting to compete. This is great to see.
Is this good for Bitcoin? Bitcoin holders have been rejoicing because this can be beneficial to their speculative position as the network grows in participants, and at the same time this can potentially benefit the people of El Salvador by lowering costs of remittances, but few are discussing the mechanism for implementation.
The way in which people are going to be operating with the Bitcoin network is through a private company, Strike, which is built on top of a second layer 1:1 credit system called Lightning Network. While Strike does allow users to withdraw their Bitcoin to their own wallets, there has been little talk of the security trade-offs in using Strike, or LN independently over just using BTC.
Selling the Lightning Network as Bitcoin without acknowledging the security trade-offs is dishonest. Bitcoin maximalists are rightfully upset when someone is promoting a proof-of-stake altcoin and claiming it to be as secure as Bitcoin. Hearing something like, “It’s just as secure but environmentally friendly and doesn’t consume dirty energy!”is very frustrating because it’s a lie. Similarly, because of the incentives to promote one chain over others, some bitcoin maximalists want to make people believe using layering solutions is the same as using BTC, even though it’s also a lie.
How could El Salvadorans be hurt by this? The mainstream media is attacking the price volatility of bitcoin as potentially hurting El Salvadorans, but this can be mitigated by only holding a small portion of BTC and converting the rest to USD at point of sale.
The real way El Salvadorans can be hurt by this is not having an option to settle or withdraw their coins because the cost in on-chain fees is too expensive relative to their LN BTC balance, and so they have no security. This means that their funds can be at risk of theft since the cost of securing the coins is as much as they have in their LN channel. Maybe Strike will pay users’ fees for a short time, but that is not a sustainable LT business model.
If Bitcoin reaches adoption and monetization levels most expect, then most of the economic activity for locals in El Salvador will be priced out of the BTC chain. If they voluntarily choose to still use Strike and LN knowing full well they can’t ever pay for the security of the BTC chain, then I would have no problems with this. If we want people to be sovereign we mustn’t subject them to private companies or governments that have the ability to take that sovereignty away.
