By Edward DeLeon Hickman
At face value, news of El Salvador adopting Bitcoin (BTC) as a legal tender is another step in the right direction for our industry, but President Nayib Bukele needs to agree to creating a system that is a truly decentralized and permissionless way for all Bitcoin and digital currency transactions. Until he does, we should be concerned.
El Salvador, a Central American nation with a population of 6.4 million, made history this week when it became the first country to adopt Bitcoin as an official currency. If it does so effectively, the economic growth that the country’s population will enjoy, relative to its neighbors especially, will be tremendous. Success will also free Salvadorans from their reliance on the dollar and a worldwide financial system controlled by central bankers. And effective implementation there will lead to a cascading effect through South America and eventually all developing nations to switch to a hybrid cryptocurrency-based system.
But, using a private database or Algorand as a private blockchain would be as Yogi Berra once famously said, “Deja vu all over again.”
The details and their implications
Using Algorand’s infrastructure makes sense, given Bitcoin’s blockchain cannot handle an entire country’s transactions. Transactions need to happen quickly and cheaply, given El Salvador is one of the poorest countries in the Americas and a Bitcoin transaction may average $2 to $3 and go as high as hundreds of dollars.
But how will El Salvador use Algorand? For something this important and this significant as a major Bitcoin milestone, there must be functioning gateways so users can take their funds in and out of the system, APIs available to build these open and permissionless gateways, and a public blockchain explorer that will allow anyone to see into the system and verify certain data sets.
The downsides to a state-run blockchain
What I and other proponents of cryptocurrency are concerned will happen is that El Salvador will create a private blockchain — or database — that will allow the government to freely “print” money — leading to run away inflation — financial censorship, or simply emptying people’s accounts at will. It can essentially act as a more powerful, information age Federal Reserve.
The fear that a lot of people have about government-run digital money is that a totalitarian state will exercise total control over the economy. In that situation, moving to crypto won’t offer a viable alternative to what’s already in place in nations across the world. Having worked with nations in South America on crypto, I understand some of the cultural forces at play (look no further than Venezuela and Argentina, where people’s money had become trapped within their respective borders). The allure of unfair capital controls over a country’s population is possibly too great for any leader to resist.
One of the main suppositions of the crypto community is that no nation state will ever be able to effectively launch a true cryptocurrency, because the leadership is already a form of centralization. They may not have bad intentions at the offset but the incentives to abuse the system are simply too big for any form of centralized power to ignore for long. This is not a failure of certain individuals, it’s simply human psychology, going back to the days of Babylon, or more recently, Greece. The tenets of crypto were created to help us stave off our worst impulses.
Crypto is about surrendering centralized control and allowing the users on the other side to have a degree of self-determination. An ecosystem that borrows the strong market positioning of Bitcoin in a cynical bid to bolster its economy is destined for failure.
If it's not open, permissionless and decentralized, it's not crypto. If it's not crypto, the market will reject it and the end result will be that El Salvador’s digital currency will be worth nothing.
Ed DeLeon Hickman is the CEO and founder of Anatha, an ethos-driven decentralized ecosystem, cryptocurrency, and end-to-end blockchain solutions provider. Born into poverty, DeLeon worked his way up the educational ladder, eventually landing as a banker on Wall Street. After the 2008 stock market crash, he lost everything. With only $250 in his pocket, he invested in Bitcoin, and quickly realized digital assets could have a positive impact on society. Determined to create systems to provide every person on the planet with universal basic income through cryptocurrency, DeLeon founded Anatha in 2017. With the help of crypto veterans and former Apple, Adobe, Visa, and JP Morgan talent, Anatha officially launched in 2020 with a mission to create a new financial model with fractal economies and opportunity for everyone involved.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.