The authoritarian risk of cryptocurrencies

Bukele sets a worrying precedent

Eduardo San Miguel Velasco

Cryptocurrencies are all the rage and there are opinions of all kinds. Investors eager for fortune explain with relish the details of Bitcoin's volatility and how to circumvent it to make money. Of course, there is also no shortage of detractors with frontal opposition to what they say is a bubble without any economic basis. It is going to burst and they have no doubts. Time to time. That's the way it is, but I don't get involved. I don't know if Bitcoin will be with us in 24 months, if it will be trading at $10,000 or $60,000 and that's why I keep my exposure to a minimum.

Who does seem willing to bet on the currencies of the future is Nayib Bukele, millennial and authoritarian president of El Salvador. So much so that the Central American republic is the first country in the world to adopt Bitcoin as legal tender. Bukele says that the monetary experiment seeks to attract international investment, reduce the cost of remittances and bring banking services to the most depressed segment of society.

El Salvador is the first country in the world to adopt Bitcoin as legal tender.

Unlike the Bitcoin quote, I do have something to say about this. But first, what do others think? Beyond cryptocurrency enthusiasts there is no praise for Bukele. For its part, the IMF highlights the obvious risks involved in Bitcoin volatility. Imagine: at 8 a.m. in your Bitcoin wallet there is enough to pay another month's mortgage denominated in dollars (El Salvador is a dollarized economy). At 4 o'clock in the afternoon, before you go to pay the monthly bill, Elon Musk launches a Tweet about kittens and the Bitcoin drops 50%. When you get to the branch your debt is de facto twice as big as yesterday.

So far really nothing is out of the usual debate about cryptocurrencies, their advantages and disadvantages. What is novel is that a government would do something like this instead of opting to introduce a central bank digital currency (MDBC). Home-made cryptocurrencies. The Chinese government is already experimenting with an electronic yuan; the ECB and Federal Reserve both have programs that look into the risks and implications associated with giving central banks a greater role in money creation. Recall that the vast majority of money is deposits created by the banking system.

What is novel is that a government would do something like this instead of opting to introduce a digital central bank currency (MDBC).

Personally, I find it strange that the authoritarian leaders of the world, with the exception of Xi Jinping, are not working on their own CDBMs. In market economies, banks control the allocation of credit and are therefore the directors of the economy. A priori and hypothetically, with an MDBC a central bank can become the sole credit manager, thus circumventing banks as intermediaries. And central bank independence is fragile in many countries. In short, an MDBC is a baton of the economy at the disposal of the government. One with a lot of negative potential to fall into the wrong hands.

It is fair to say that over the past few decades we have experienced how technology intended to make the world a better place can have just the opposite result. Facebook connects two human beings no matter the distance that separates them, but it has also been employed to promote the genocide of the Rohingya; artificial intelligence is superior to any expert doctor when it comes to detecting cancer early, and it is also being instrumental in creating a technodictatorship (pardon the expletive) in China.

Here comes another bit of folk wisdom, albeit not so recent: centralized economies are frightening for the ordinary citizen. Therefore, MDBC technology represents a sensitive problem for the future by facilitating an unprecedented centralization of the economy. Bukele is a perfect example of the way in which authoritarian leaders begin to flirt with new financial technologies without really seeking economic improvement, but rather political interest.

Bukele is a perfect example of the way in which authoritarian leaders begin to flirt with new financial technologies without really seeking economic improvement, but rather political interest.

The absence of debate about the destructive potential arising from the conjunction between MDBCs and authoritarian leaders again demonstrates the glaring incapacity for anticipation from which liberal democracies and the international community as a whole suffer. Technology should equalize the possibilities of peoples, not separate them.