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Bitcoin Legalization In El Salvador: Heading Towards A Crypto-Friendly Regime

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Cryptocurrencies are surely one of the hotly debated topics across the globe. There’s always an ambiguity surrounding the usage and permissibility of crypto assets. Various government entities fear that crypto holds the tremendous power to disrupt the financial and banking sector & it will surely replace the existing financial systems present across the globe. This is 21st century & with the growing technological advancements, the world is rapidly getting acclimatized into the domain of crypto currencies. With this move, some government entities are also changing their perception of cryptocurrencies. The recent legalization of bitcoin in El Salvador can be construed as a prime example of this which apparently came as good news for crypto enthusiasts. The news made El Salvador appearing at the forefront of leading international news channels and websites. By this move it became the first ever country across the globe to legalize any cryptocurrency. The step came after the El Salvador’s President Nayib Bukele announced via twitter that bitcoin will now be accepted as a legal tender across the nation. Earlier in the bitcoin conference 2021 held in Miami, the President gave subtle hints of passing a bitcoin legalization bill. From using bitcoin/paypal hashtags to modifying his twitter profile image depicting red lazer eyes (a trendy way to used in internet by crypto enthusiasts to exhibit their support for crypto), the President’s fascination with bitcoin can be construed prominently. The congress passed the bill on 9th June 2021 by the margin of 62 votes out of 84 favoring for legalization apparently termed by the President as what is called a supermajority. The successful execution and implementation of this bill will make way for the proper legalization of bitcoin. The prominent excerpt from the bill said – “The purpose of this law is to regulate bitcoin as unrestricted legal tender with liberating power, unlimited in any transaction, and to any title that public or private natural or legal persons require carrying out.” To further promote the acceptance of bitcoin the president also made it clear that persons holding bitcoin or persons investing in bitcoin in El Salvador will be offered citizenship of the country.

This pro-active stance by the El Salvador government was very much applauded by the industry experts and crypto enthusiasts around the globe. One of the reasons why the congress took such a drastic step is that El Salvador doesn’t have any currency of its own. Up till now, it has been using the United States Dollar as official currency across the nation. With this move the dependence of nation on US Dollar is likely to be diminished. Nevertheless, the President made it clear that US Dollar would be used for accounting and official purposes. As a matter of fact, the El Salvador government also promised to provide training and necessary guidance to the fellow citizens on the usage and holding of bitcoin. For the purpose of creating a robust bitcoin economy, the government will take assistance from newly launched home country based payment service provider platform Strike. Jack Mullers, the founder and CEO of Strike said – “Adopting a natively digital currency as legal tender provides El Salvador the most secure, efficient and globally integrated open payments network in the world.” The announcement of this legalization increased the value of bitcoin which faced a sharp decrease after the infamous crypto market crash few weeks back.

Apart from authorizing a potential future currency, the legalization will have a plethora of benefits for the country as a whole. For instance, it will boost the overall economy, create new job opportunities for citizens, facilitate faster remittances, help in increasing the low banking penetration rate among others, enable citizens of El Salvador living abroad to send tokens into their home country among others and permit the government to officially own bitcoins among others. It will also make El Salvador future proof from the crypto perspective as there is a strong possibility that crypto market will takeover the traditional banking and financial systems of the world in near future. When formally enacted, the citizens will be able to pay taxes in bitcoins, the price of commodities will be displayed in bitcoin, and almost everything related to price can be calculated from bitcoin terms apart from creating a alternative currency working simultaneously along with US Dollar.  

The legalization of bitcoin in El Salvador also holds the potential to make a remarkable shift in crypto perspective by other Latin American countries given the fact that the region may become a hub for crypto powered finance. Observing this move many Latin American nations have raised a voice to show support for this move. Countries like Argentina, Brazil, Panama, Paraguay and Mexico have given signs of making a similar move. The top-notch politicians fo the above mentioned countries have already commenced the discussion for providing legal backing to crypto assets. 

But taking such a big leap of faith won’t give fruitful results unless & until there’s a strong backing and support provided to it. To realize this bitcoin powered project, the government officials have made it absolutely clear that the geothermal energy will be used for mining bitcoins considering the fact that the country has large repositories of volcanoes. The state-owned geothermal electric company LaGeo will work in assistance with the government officials. Since the President is aware of the ill effects of bitcoin mining on the environment, only the renewable energy source would be used for this project.  As per the estimates the carbon dioxide emissions from worldwide bitcoin mining industry has reached a whopping 60 million tonnes, equal to that of exhaust fumes from 9 million cars. Hence keeping in mind the environmental concern, the President gave assurance via twitter that the nations geothermal energy exclusively will be used. He also took to twitter to show his followers about the zero emission bitcoin mining process being tested by the engineers.

A major obstacle in this project comes from the reluctancy of International Monetary Fund (IMF) with this move which highlights the tensed relations between El Salvador and IMF citing the intricacies in economic and financial conditions currently prevailing in the nation. The IMF is of the view that providing legal backing to bitcoin will make El Salvador a safe haven for tax frauds and money laundering. Since bitcoin doesn’t involve tax on capital gains, it will surely pave a way for wealthy individuals and organizations to save themselves from paying heavy taxes. Also, it may facilitate laundering of billions of dollars by criminal enterprises and drug trafficking organizations. Although IMF earlier gave green signal to this move but lately it has been skeptical about the aftereffects of bitcoin legalization.

All in all, what future holds for crypto market is hard to comprehend. However, the scale at which crypto usage is growing, one can easily anticipate that the 2021-30 decade will observe a boom in the crypto financial market. Considering the disruptive nature, potential and audacity of cryptocurrencies, it will definitely replace the traditional financial systems present across the globe. Even then nothing can be predicted with 100% surety. Being a crypto enthusiast, I hope the world adopts a crypto-friendly policy so as to make sure crypto market is being regulated by regulatory bodies to ensure the authentic, safe and secure environment for crypto investors.  Meanwhile, we can speculate, make bets and invest on various crypto assets based on our own perceptions and calculations. Till then let’s enjoy the existing regime of crypto around the world.

Author is a Legal Associate at one of the leading Indian Law Firms. He also acts as an Advisory Council at Harvard Business Review.

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Economy

Reforms Key to Romania’s Resilient Recovery

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Over the past decade, Romania has achieved a remarkable track record of high economic growth, sustained poverty reduction, and rising household incomes. An EU member since 2007, the country’s economic growth was one of the highest in the EU during the period 2010-2020.

Like the rest of the world, however, Romania has been profoundly impacted by the COVID-19 pandemic. In 2020, the economy contracted by 3.9 percent and the unemployment rate reached 5.5 percent in July before dropping slightly to 5.3 percent in December. Trade and services decreased by 4.7 percent, while sectors such as tourism and hospitality were severely affected. Hard won gains in poverty reduction were temporarily reversed and social and economic inequality increased.

The Romanian government acted swiftly in response to the crisis, providing a fiscal stimulus of 4.4 percent of GDP in 2020 to help keep the economy moving. Economic activity was also supported by a resilient private sector. Today, Romania’s economy is showing good signs of recovery and is projected to grow at around 7 percent in 2021, making it one of the few EU economies expected to reach pre-pandemic growth levels this year. This is very promising.

Yet the road ahead remains highly uncertain, and Romania faces several important challenges.

The pandemic has exposed the vulnerability of Romania’s institutions to adverse shocks, exacerbated existing fiscal pressures, and widened gaps in healthcare, education, employment, and social protection.

Poverty increased significantly among the population in 2020, especially among vulnerable communities such as the Roma, and remains elevated in 2021 due to the triple-hit of the ongoing pandemic, poor agricultural yields, and declining remittance incomes.

Frontline workers, low-skilled and temporary workers, the self-employed, women, youth, and small businesses have all been disproportionately impacted by the crisis, including through lost salaries, jobs, and opportunities.

The pandemic has also highlighted deep-rooted inequalities. Jobs in the informal sector and critical income via remittances from abroad have been severely limited for communities that depend on them most, especially the Roma, the country’s most vulnerable group.

How can Romania address these challenges and ensure a green, resilient, and inclusive recovery for all?

Reforms in several key areas can pave the way forward.

First, tax policy and administration require further progress. If Romania is to spend more on pensions, education, or health, it must boost revenue collection. Currently, Romania collects less than 27 percent of GDP in budget revenue, which is the second lowest share in the EU. Measures to increase revenues and efficiency could include improving tax revenue collection, including through digitalization of tax administration and removal of tax exemptions, for example.

Second, public expenditure priorities require adjustment. With the third lowest public spending per GDP among EU countries, Romania already has limited space to cut expenditures, but could focus on making them more efficient, while addressing pressures stemming from its large public sector wage bill. Public employment and wages, for instance, would benefit from a review of wage structures and linking pay with performance.

Third, ensuring sustainability of the country’s pension fund is a high priority. The deficit of the pension fund is currently around 2 percent of GDP, which is subsidized from the state budget. The fund would therefore benefit from closer examination of the pension indexation formula, the number of years of contribution, and the role of special pensions.

Fourth is reform and restructuring of State-Owned Enterprises, which play a significant role in Romania’s economy. SOEs account for about 4.5 percent of employment and are dominant in vital sectors such as transport and energy. Immediate steps could include improving corporate governance of SOEs and careful analysis of the selection and reward of SOE executives and non-executive bodies, which must be done objectively to ensure that management acts in the best interest of companies.

Finally, enhancing social protection must be central to the government’s efforts to boost effectiveness of the public sector and deliver better services for citizens. Better targeted social assistance will be more effective in reaching and supporting vulnerable households and individuals. Strategic investments in infrastructure, people’s skills development, and public services can also help close the large gaps that exist across regions.

None of this will be possible without sustained commitment and dedicated resources. Fortunately, Romania will be able to access significant EU funds through its National Recovery and Resilience Plan, which will enable greater investment in large and important sectors such as transportation, infrastructure to support greater deployment of renewable energy, education, and healthcare.

Achieving a resilient post-pandemic recovery will also mean advancing in critical areas like green transition and digital transformation – major new opportunities to generate substantial returns on investment for Romania’s economy.

I recently returned from my first official trip to Romania where I met with country and government leaders, civil society representatives, academia, and members of the local community. We discussed a wide range of topics including reforms, fiscal consolidation, social inclusion, renewably energy, and disaster risk management. I was highly impressed by their determination to see Romania emerge even stronger from the pandemic. I believe it is possible. To this end, I reiterated the World Bank’s continued support to all Romanians for a safe, bright, and prosperous future.

First appeared in Romanian language in Digi24.ro, via World Bank

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US Economic Turmoil: The Paradox of Recovery and Inflation

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The US economy has been a rollercoaster since the pandemic cinched the world last year. As lockdowns turned into routine and the buzz of a bustling life came to a sudden halt, a problem manifested itself to the US regime. The problem of sustaining economic activity while simultaneously fighting the virus. It was the intent of ‘The American Rescue Plan’ to provide aid to the US citizens, expand healthcare, and help buoy the population as the recession was all but imminent. Now as the global economy starts to rebound in apparent post-pandemic reality, the US regime faces a dilemma. Either tighten the screws on the overheating economy and risk putting an early break on recovery or let the economy expand and face a prospect of unrelenting inflation for years to follow.

The Consumer Price Index, the core measure of inflation, has been off the radar over the past few months. The CPI remained largely over the 4% mark in the second quarter, clocking a colossal figure of 5.4% last month. While the inflation is deemed transitionary, heated by supply bottlenecks coinciding with swelling demand, the pandemic-related causes only explain a partial reality of the blooming clout of prices. Bloomberg data shows that transitory factors pushing the prices haywire account for hotel fares, airline costs, and rentals. Industries facing an offshoot surge in prices include the automobile industry and the Real estate market. However, the main factors driving the prices are shortages of core raw materials like computer chips and timber (essential to the efficient supply functions of the respective industries). Despite accounting for the temporal effect of certain factors, however, the inflation seems hardly controlled; perverse to the position opined by Fed Chair Jerome Powell.

The Fed already insinuated earlier that the economy recovered sooner than originally expected, making it worthwhile to ponder over pulling the plug on the doveish leverage that allowed the economy to persevere through the pandemic. The main cause was the rampant inflation – way off the 2% targetted inflation level. However, the alluded remarks were deftly handled to avoid a panic in an already fragile road to recovery. The economic figures shed some light on the true nature of the US economy which baffled the Fed. The consumer expectations, as per Bloomberg’s data, show that prices are to inflate further by 4.8% over the course of the following 12 months. Moreover, the data shows that the investor sentiment gauged from the bond market rally is also up to 2.5% expected inflation over the corresponding period. Furthermore, a survey from the National Federation of Independent Business (NFIB) suggested that net 47 companies have raised their average prices since May by seven percentage points; the largest surge in four decades. It is all too much to overwhelm any reader that the data shows the economy is reeling with inflation – and the Fed is not clear whether it is transitionary or would outlast the pandemic itself.

Economists, however, have shown faith in the tools and nerves of the Federal Reserve. Even the IMF commended the Fed’s response and tactical strategies implemented to trestle the battered economy. However, much averse to the celebration of a win over the pandemic, the fight is still not through the trough. As the Delta variant continues to amass cases in the United States, the championed vaccinations are being questioned. While it is explicable that the surge is almost distinctly in the unvaccinated or low-vaccinated states, the threat is all that is enough to drive fear and speculation throughout the country. The effects are showing as, despite a lucrative economic rebound, over 9 million positions lay vacant for employment. The prices are billowing yet the growth is stagnating as supply is still lukewarm and people are still wary of returning to work. The job market casts a recession-like scenario while the demand is strong which in turn is driving the wages into the competitive territory. This wage-price spiral would fuel inflation, presumably for years as embedded expectations of employees would be hard to nudge lower. Remember prices and wages are always sticky downwards!

Now the paradox stands. As Congress is allegedly embarking on signing a $4 trillion economic plan, presented by president Joe Bidden, the matters are to turn all the more complex and difficult to follow. While the infrastructure bill would not be a hard press on short-term inflation, the iteration of tax credits and social spending programs would most likely fuel the inflation further. It is true that if the virus resurges, there won’t be any other option to keep the economy afloat. However, a bustling inflationary environment would eventually push the Fed to put the brakes on by either raising the interest rates or by gradually ceasing its Asset Purchase Program. Both the tools, however, would risk a premature contraction which could pull the United States into an economic spiral quite similar to that of the deflating Japanese economy. It is, therefore, a tough stance to take whether a whiff of stagflation today is merely provisional or are these some insidious early signs to be heeded in a deliberate fashion and rectified immediately.

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Carbon Market Could Drive Climate Action

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Authors: Martin Raiser, Sebastian Eckardt, Giovanni Ruta*

Trading commenced on China’s national emissions trading system (ETS) on Friday. With a trading volume of about 4 billion tons of carbon dioxide or roughly 12 percent of the total global CO2 emissions, the ETS is now the world’s largest carbon market.

While the traded emission volume is large, the first trading day opened, as expected, with a relatively modest price of 48 yuan ($7.4) per ton of CO2. Though this is higher than the global average, which is about $2 per ton, it is much lower than carbon prices in the European Union market where the cost per ton of CO2 recently exceeded $50.

Large volume but low price

The ETS has the potential to play an important role in achieving, and accelerating China’s long-term climate goals — of peaking emissions before 2030 and achieving carbon neutrality before 2060. Under the plan, about 2,200 of China’s largest coal and gas-fired power plants have been allocated free emission rights based on their historical emissions, power output and carbon intensity.

Facilities that cut emissions quickly will be able to sell excess allowances for a profit, while those that exceed their initial allowance will have to pay to purchase additional emission rights or pay a fine. Putting a price tag on CO2 emissions will promote investment in low-carbon technologies and equipment, while carbon trading will ensure emissions are first cut where it is least costly, minimizing abatement costs. This sounds plain and simple, but it will take time for the market to develop and meaningfully contribute to emission reductions.
The initial phase of market development is focused on building credible emissions disclosure and verification systems — the basic infrastructure of any functioning carbon market — encouraging facilities to accurately monitor and report their emissions rather than constraining them. Consequently, allocations given to power companies have been relatively generous, and are tied to power output rather than being set at absolute levels.

Also, the requirements of each individual facility to obtain additional emission rights are capped at 20 percent above the initial allowance and fines for non-compliance are relatively low. This means carbon prices initially are likely to remain relatively low, mitigating the immediate financial impact on power producers and giving them time to adjust.

For carbon trading to develop into a significant policy tool, total emissions and individual allowances will need to tighten over time. Estimates by Tsinghua University suggest that carbon prices will need to be raised to $300-$350 per ton by 2060 to achieve carbon neutrality. And our research at the World Bank suggest a broadly applied carbon price of $50 could help reduce China’s CO2 emissions by almost 25 percent compared with business as usual over the coming decade, while also significantly contributing to reduced air pollution.

Communicating a predictable path for annual emission cap reductions will allow power producers to factor future carbon price increases into their investment decisions today. In addition, experience from the longest-established EU market shows that there are benefits to smoothing out cyclical fluctuations in demand.

For example, carbon emissions naturally decline during periods of lower economic activity. In order to prevent this from affecting carbon prices, the EU introduced a stability reserve mechanism in 2019 to reduce the surplus of allowances and stabilize prices in the market.

Besides, to facilitate the energy transition away from coal, allowances would eventually need to be set at an absolute, mass-based level, which is applied uniformly to all types of power plants — as is done in the EU and other carbon markets.

The current carbon-intensity based allocation mechanism encourages improving efficiency in existing coal power plants and is intended to safeguard reliable energy supply, but it creates few incentives for power producers to divest away from coal.

The effectiveness of the ETS in creating appropriate price incentives would be further enhanced if combined with deeper structural reforms in power markets to allow competitive renewable energy to gain market share.

As the market develops, carbon pricing should become an economy-wide instrument. The power sector accounts for about 30 percent of carbon emissions, but to meet China’s climate goals, mitigation actions are needed in all sectors of the economy. Indeed, the authorities plan to expand the ETS to petro-chemicals, steel and other heavy industries over time.

In other carbon intensive sectors, such as transport, agriculture and construction, emissions trading will be technically challenging because monitoring and verification of emissions is difficult. Faced with similar challenges, several EU member states have introduced complementary carbon taxes applied to sectors not covered by an ETS. Such carbon excise taxes are a relatively simple and efficient instrument, charged in proportion to the carbon content of fuel and a set carbon price.

Finally, while free allowances are still given to some sectors in the EU and other more mature national carbon markets, the majority of initial annual emission rights are auctioned off. This not only ensures consistent market-based price signals, but generates public revenue that can be recycled back into the economy to subsidize abatement costs, offset negative social impacts or rebalance the tax mix by cutting taxes on labor, general consumption or profits.

So far, China’s carbon reduction efforts have relied largely on regulations and administrative targets. Friday’s launch of the national ETS has laid the foundation for a more market-based policy approach. If deployed effectively, China’s carbon market will create powerful incentives to stimulate investment and innovation, accelerate the retirement of less-efficient coal-fired plants, drive down the cost of emission reduction, while generating resources to finance the transition to a low-carbon economy.

(Martin Raiser is the World Bank country director for China, Sebastian Eckardt is the World Bank’s lead economist for China, and Giovanni Ruta is a lead environmental economist of the World Bank.)

(first published on China Daily via World Bank)

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