Bitcoin remittances during Lebanon’s economic crisis
As bitcoin has been designed to be a peer-to-peer cash system, an alternative to government-backed fiat currencies, warnings regarding its possible negative influence, volatility, and technical difficulty have been issued by governments, such as the Lebanese, as early as January 2014, when Coindesk already reported about it.
The idea is that bitcoins are bought abroad and send on the bitcoin blockchain to the wallet or account of Lebanese bitcoin traders. Subsequently, the traders’ local distribution network helps as much as they can to provide dollars to the families of the diaspora who send the bitcoins.
In the midst of Lebanon’s economic crisis, the Association of Banks in Lebanon (ABL) has implemented directives for commercial banks, including a cap on weekly withdrawals in the amount of US$1000 from US dollar denominated accounts. This comes despite a statement from officials that there would be no formal capital controls.
Salim Sfeir, chairman of aforementioned association, said that "[t]he central bank governor was assigned to take the necessary, temporary measures, in coordination with the banking association, to issue circulars”. News agency Reuters reports that these were measures by the association with the intention “[…] to standardize and regulate the work of banks amid the country’s ‘exceptional circumstances’”.
Central bank Governor Riad Salamé has been a key institutional stakeholder since 1st of August, 1993, and therefore longer than ten Lebanese finance ministers, nine prime ministers, and five presidents. His role during previous times of economic uncertainty or crises is seen as passive, behaviour that so far he appears to repeat.
Professor Nassim Taleb, a former options trader and independent mathematical researcher at NYU, has pointed out via twitter that this perception of his authority is not accurate. Given that Salamé had designed an investment structure for US-dollar denominated deposits and loans at Lebanese banks promising high interest returns, Taleb accuses him acutely of having created and maintained a so-called “Ponzi scheme”. This fraudulent system, named after Charles Ponzi, is an investment scheme which uses funds of more recent investors to pay earlier investors an apparent return.
That is, instead of actually investing the money in the markets and paying real profits to – in this case – depositors of US dollars at Lebanese banks, Governor Salamé and his entourage appear to have created and maintained a Ponzi scheme. Interest rates on dollar deposits were as high as 14%, making it seem like an attractive investment for the Lebanese as they have a large diaspora whose dollar remittances contribute to GDP, averaging yearly at USD 570.71 million from 2003 until 2018, with 5 out of the last 10 years above USD 800 million.
With $170 billion in deposits and rates in range of 7-14% meant depositors were expecting to collect income in range of $12-24 Billion every year, returns that the US American Standard and Poor stock index SPX, representing the 500 most successful companies listed in the US, has hardly managed to achieve, with “averaged annual return between inception and 2018 [of] approximately 10%”.
It is becoming apparent that identifying solutions for the Lebanese people is difficult. Given presuppositions such as the currently failing economy, Governor Salamé still being in power and additionally being tasked to resolve the as well as said withdrawal cap, the emergence of negative feedback loops is hardly avoidable.
In these times, however, bitcoin improves liquidity in Lebanon. Distributed ledger technology, whose blockchain concept is its most prominent version, enables the use of the cryptocurrency bitcoin. Via this payment system, which has a fixed monetary policy and is no liability to a state, remittances to Lebanon from its diaspora are currently being facilitated. As there is no use in sending dollars to failing banks to help one’s family or friends to stay liquid, Lebanese bitcoin traders make use of their local dollar distribution network.
Coindesk reports that this goes both ways as well. A bitcoin trader says, “It’s working. It’s sufficient. It’s serving many businesses. They are sending money abroad to receive merchandise. One of my clients sent $100,000 (worth of bitcoin) to get his container from Saudi, he exports energy drinks.”
Clearly bitcoin cannot immediately resolve the complex issues prevalent in Lebanon, however, its use cases and novel philosophy give people some hope in times where it may make the difference.
Edited by: Patrick Lehner