Bitcoin, Regime, and Centralization

As of right now there is no research done on comparing regime types in relation to Bitcoin monetary policy. In the current literature there is still a debate as to whether bitcoin can be considered a currency or not

Currency three attributes: 1. The storing of value, 2. a way to trade, 3. and a way to count (Fiuza 2019).

Some argue that bitcoin is too volatile to hold value and this severely limits its use as a currency because it lacks credibility. For example if an El Salvadorian had received their salaries in bitcoin their salaries value would have fluctuated from a gain of 180% to a loss of 65% since 2014. This casts doubt on the ability for bitcoin to function as a currency because it doesn't retain value extremely well from this perspective of fluctuations (“El Salvador’s great crypto experiment” 2021). But on the other hand the argument can be made that though it may not be completely functioning in the three ways that define currency, it is shown that the demand for bitcoin in comparable to fiat monies. Hazlett asserts that bitcoin is money and functions as currency but, possibly in a limited domain for the time being. For now there is still reluctance to accept bitcoin as a currency but, there is evidence that its does fulfill the attributes of a currency (Hazlett 2020, 144-149)

Here we argue that Bitcoin has far surpassed the standards for becoming a currency and that the academic literature is behind in this regard. Much of the literature out there is about either criticizing or applauding the El Salvadorian “experiment”. Here, we do not wish to predict the success or comment on the potential failures of the systems but, instead to understand why El Salvador created a centralized Bitcoin bank while Brazil did not. In general we ask if regime type (democracy vs authoritarianism) has an effect on how a country decides to regulate/use Bitcoin.

Why did El Salvador create a centralized national Bitcoin bank (Chivo) while Brazil created a decentralized peer to peer marketplace (PIX)?

The question above is the beginning of a long and hopefully fruitful research area that will analyze the affects that current government organizations have on the development of monetary policy that have/will be implemented in regards to Bitcoin. Further, the importance of the question lies in beginning to research if regime type has an effect on creating the rules of the game for arguably the next financial revolution (digitization of currencies). It is a novel topic and it would add to the greater literature of financial organization in association to government structures. The more general question again being whether government structure/ regime type has an effect on the centralization of the Bitcoin market within a country.

Literature

Conceptualizations about the internet and its inherent freedom have been written on since the 90s under the banner of Cyberliberalism. Bitcoin and the block-chain could be seen in the same realm. Cyberliberalism touts the decentralized nature of the internet and by extension Bitcoin (Golumbia 2016). In general the concept sees itself at odds with government intervention as the core purpose of the internet and by extension bitcoin is this idealistic idea that it takes power away from governments and puts it in the hands of the everyday user. Yet, In this sense El Salvador is doing the very opposite while outwardly projecting the imagine of this decentralized ideal. It is taking a completely decentralized asset which needs to no bank or institution and centralizing it in the same way that independent central banks like the federal reserve operate. Where levers can be pulled to manipulate/regulate the exchange rates and inflation.

Additionally in terms of the stability of Bitcoin Quintino, Derick, Jessica Campoli, Heloisa Burnquist, and Paulo Ferreira show that the (Brazilian) Bitcoin market follows the overall market. There are slight abnormalities but, nothing that would produce significantly increased returns. In this way we see that though bitcoin is seen as fluctuating, it is uniform around the world even in different markets using different fiat currencies. The efficiency of crypto markets are pretty good and lend to the argument that in the future it could be used as a State value marker like gold reserves.

In terms of attempts outside of our cases (Brazil & El Salvador) to regulate bitcoin Primavera De Filippi in “Bitcoin: A Regulatory Nightmare to a Libertarian Dream.”, explores how regulations are being worded and developed. Interestingly the literature argues that there is not the lack of opportunity to make create regulations. Instead the case is that regulators fail to agree on any method on how to start creating crypto regulations. The how and why are missing from the literature. The de-centralizied nature of crypto and its novelty is stumping policy makers. Here we try and associate regime type and institutional bitcoin centralization in order to see how regime type might push policy makers toward one solution or another in light of the lack of clear answers through observable events.

While the literature has not responded to the relationship between regime type and bitcoin policy directly I believe that the logic of oppression in terms of authoritarian regimes should hold true in regards to Bitcoin. It is just another asset that elites can use to enrich themselves with the revenue and exploitation of its citizens (Friedrich 1968, Kyriakopoulou 2011). Being a new and seemingly complicated asset Bitcoin is perfectly ripe for manipulation. Within each country a narrative can be developed. Authoritarian governments can relatively easily co-opt the educational process of exposing their population to Bitcoin. Additionally there is so much information on the internet on the topic leading to almost no formal foundation. More than any other topic one can completely create their own narrative of what is happening and how. In a democracy it is harder to achieve this level of unified messaging since there are many competing actors with different motives for pushing or resisting Bitcoin narratives. Further, in an authoritarian government it is much easier to launch a national campaign that pushes forward a narrative that may be completely false.

Related to the above the idea that (authoritarian) command economies have a greater ability implement large scale programs is the fact that they have control and can also control the flow of information. Choosing to keep some details veiled. This ability to control and manipulate the system in the background is one of the major factors in the difference in the implementation of bitcoin systems in an authoritarian regime vs democracies which leads to different motivators as to how to create systems for implementing and trading bitcoin.

As developed above the logic that Bitcoin always has a decentralizing effect (cyberliberalism) is not consistent with the developments in El Salvador. This is because though in its original form this might be true, through the manipulation, the authoritarian government can create the same staus quo central banking system while giving off the impression that they are revolutionary.

Theory and Hypothesis

The expectation is that authoritarian regimes will opt to centralize bitcoin into a sort of national bitcoin bank (Chivo Wallet) where they control the flow of bitcoin within an isolated domestic market. The backbone of the bank would still be the global market but, within the country the centralized Bitcoin bank will be able to set its own rates and values at any given time. To contrast democratic systems are instead expected to allow for the free exchange of bitcoin as a decentralized asset (PIX) because they do not have the (state capacity) power to control the domestic bitcoin market in the same way a dictator/authoritarian would. In a democracy we expect that elites that benefit from the free market would vehemently oppose any such legislation that takes away their financial freedom and centralized it in the hands of the government. Our independent variable would be regime type while our dependent variable would be bitcoin market centralization.

Methodology

To test our arguments we deploy three methods: Case Studies, elite interviews, and archives

First we use El salvador and Brazil as case studies for an authoritarian regime that created a centralized bitcoin bank and a democracy which has in contrast created a decentralized state sponsored exchange. Our N is relatively small which is problematic because it creates problems with generalizing and according to KKV with validity as-well. Without a large N it is hard to be sure that it is actually the regime type and not some other non observed variable that differentiates the two cases. We can remedy this by observing the development of the two systems over time. We would create a data point for every month over a 5 year period from the start of the two systems to see if changes in the degree of democracy/authoritarianism also correlate with the further centralization or decentralization of bitcoin policy.

Alexander and Bennet go on to contend that though case studies may be limited they have "the main advantages of... heuristic purpose of inductively identifying additional variables and generating hypotheses. Statistical methods lack accepted procedures for inductively generating new hypotheses." pg. 73 Thus, though a large N might be effective in providing evidence for/agiasnt hypotheses, they are not as useful in generating new ones. Case studies have merit. They just dont have the same merits of large N-Studies. The limitations of the specific focus of cases studies can be overcome as mentioned above through time and additionally have the ability to produce inductively new hypotheses. As a method of conducting research it has more than proved its effectiveness.

We can supplement the cases with elite interviews in order to see if the government structures enabled or obstructed decisions which led to the centralization or decentralization of the bitcoin market. Through elite interviews we can get first hand accounts about the motivations behind creating a centralized vs decentralized system and if they had to do with the authoritarian or democratic nature of the regimes. Granted it would be hard to get access to some of the most important actors of interest (Goldstein, 669-672). Most glaringly is the dictator of El Salvador which would be at the center of the decision making process in the authoritarian setting. Though an interview with him may not be extremely fruitful due to the fact that he would be extremely motivated to exaggerate and misrepresent the facts to create the best possible narrative that would help bolster his own credibility (Berry 679-682). Still access to people who were part of creating the Chivo wallet/centralized Bitcoin bank would be invaluable. Similarly interviewing officials at the central bank in Brazil would give a great insight into the process that gave life to the PIX system.

Lastly archival work would be an invaluable asset here. Both of the systems are recent and are government projects which allows one to access various archives that are associated with the projects. Archives would provide solid documentation for the times and dates when decisions were made or conversations had. This evidence could corroborate the interviews and help fill in some of the validity problems we encounter when using such a small N. The archival work would further help develop the cases by specifically addressing questions like who,what,when,where,why,by whom, and how (Darnton 2018, 84-126). Naturally official documents shouldn't be trusted blindly, especially when provided by an authoritarian government. Further the lack of archival data or certain holes would beckon further questions. Why is the information missing? Does the lack or nature of the information point toward propaganda or manipulation? Exploring the documentation would give us insights and specific details as to if the regime types played a role in the centralization or decentralization of the systems.

Cases and Limitations

The two cases were selected because of first their difference in regime type which is what we are trying to test. Second both are countries are regionally related, both were historically extractive colonies with similar colonial legacies. Most importantly both countries have formally responded to Bitcoin by creating government manged systems that allow for bitcoin to be traded within the country. Presently there are very few countries especially within the same region that have done this at all. The fact that Brazil has created the Pix system and El Salvador has created the Chivo wallet allows us a preliminary look at two countries which share a colonial legacy, a relatively similar geographic location (South America), but differ in regime type.

It is justified to use these cases because they are the only cases available at the time of writing this research. There is literally no other country in the world besides El Salvador that has adopted bitcoin as a national currency. Brazil serves as a good contrast for the reasons already stated but is also one of the only countries to have created any government system which allows citizens to transact bitcoin. 


Case Brazil Pix:

It is said to promote lower financial costs, increased security, improve customer experience, and create higher market competition as-well as gap-filling retail payment instruments available to the population. In this way PIX is useful to advance the adoption of bitcoin as it helps bring in new sections of the population into the digital banking world and lowers the costs of transactions for them (by eliminating third party fees) (“Pix En” 2021)

PIX is a government created system which facilitates digital transactions. It allows for easy payment between Brazilians but, it does not use the block chain and it is not a currency itself. PIX is interesting because it allows Brazilians to create market places to trade crypto. It is a peer to peer system which means that transactions are between the two people with PIX as the facilitator. PIX is the system which is currently being used to trade bitcoin in Brazil without going through private third party marketplaces (high fees) (Kosinski 2021, 1-26).

Case El Salvador Chivo:

The Chivo Wallet which is the app that was created by the El Salvadorian government to transact bitcoin within the country. It works within a centralized state bitcoin bank with the Chivo app as the platform for distribution. The Chivo wallet works through the centralization of bitcoin while the Pix system is decentralized and created for peer to peer transactions that go beyond the trading of bitcoin.

The problem is the lack of additional examples. We can not tell if the explanations will travel once more information is available. The argument that democracies will tend to favor decentralized systems while authoritarian regimes will tend toward centralized systems can be completely destroyed if the El Salvadorian centralized system comes to pay dividends to its citizens as a result of the exponential growth potential of bitcoin. Pegging the national currency and exchange rate to bitcoin could be similar to the logic of the past which pegged currencies to gold. Performance will play a key role in how other countries choose to develop their own government systems to control the Bitcoin market. Democratic systems may be forced to create centralized bitcoin banks if it proves to be the most profitable avenue. Which would be interesting because then bitcoin would though fundamentally designed to be decentralized would be mimicking the current system which is highly centralized through the worlds federal reserves.

As of right now the two countries selected for the study explicitly support the argument. El Salvador is using its authoritarian government’s ability to implement an extremely speculative and nebulous bitcoin system. By in large it seems to be an effort to centralize and control bitcoin in the same way that normal fiat currencies are organized. The only difference being that instead of being reliant of international exchange rates and commodity prices bitcoin is supported by the greater bitcoin marketplace which is completely dependent on supply and demand of a non-exisitent asset. Bitcoins decentralized credibility is its value.

Brazil is a democracy and does not have the ability to restructure the entire economy around bitcoin. So it instead is allowing for its citizens to more easily transact in bitcoin in order to generate revenue from the profits (taxation) made via bitcoin. The Brazilian government has to be much more accountable and transparent as well which does not allow them to create such a central bitcoin bank that isn't accountable to the government itself.

Conclusion

Though much is still not known about how bitcoin will be handled by States we can start to look at the earliest attempts to interact with it. The proposal here argues that authoritarian governments are expected to favor more centralized bitcoin systems because they have the ability to pass speculative monetary policy without having to consult congress or their constituents. The centralization and creation of domestic bitcoin banks also allow for a greater control of the market by the government. On the other hand democracies lack the authority or motivations to create centralized bitcoin banking institutions. They would face massive push back from investors which much prefer the decentralized nature of the market.

Additionally this type of research could be done on varying scales to see if within different types of democracies there are different outcomes in terms of bitcoin monetary policy. The difference between majoritarian and representative democracies could be researched in the same way. The variable of centralization could also be changed to for example tax rates. Naturally on the flip side how different types of authoritarian regimes could differ from another is another interesting avenue.

The field of study which involves emerging digital currencies and governmental types is a vastly unexplored research area being that bitcoin and other crypto currencies are still being debated as to whether they have value as a monetary tool. This is why there is not much done in terms of comparing bitcoin to fiat currencies and other international assets. Yet, bitcoin today stands tall at $58,000 per coin just off from an all time high just a week ago. When will it reach the threshold where academia will take it seriously? At $100,000? or will same same arguments of volatility be thrown haphazardly to avoid to the topic all together? Though there is no certainty (much like other topics) it does not mean that research cannot start to be done. The goal is to start questions. In this way the methodology selected reflects this type of introductory research. Hard empirical tests are hard at the moment due to the lack of data but through developing cases, conducting interviews, and scouring the available archives there is the possibility to start developing more questions to guide our certainty on how bitcoin and other crypto currencies are affected and affect governments around the globe.

Bibliography

admin. “El Salvador’s great crypto experiment,” September 14, 2021. http://119.78.100.173/C666//handle/2XK7JSWQ/337900.

Darnton, Christopher. “Archives and Inference: Documentary Evidence in Case Study Research and the Debate over U.S. Entry into World War II.” International Security 42, no. 3 (January 2018): 84–126. https://doi.org/10.1162/ISEC_a_00306.

Fiuza, Lucas. “O padrão Bitcoin aplicado ao Brasil: uma sugestão de política monetária e revisão da função do Banco Central.” MISES: Interdisciplinary Journal of Philosophy, Law and Economics 7, no. 1 (May 2, 2019). https://doi.org/10.30800/mises.2019.v7.1101.

Friedrich, Carl. “THE CHANGING THEORY AND PRACTICE OF TOTALITARIANISM.” Jstor 33, no. 1 (1968): 25.

Golumbia, David. The Politics of Bitcoin: Software as Right-Wing Extremism. U of Minnesota Press, 2016.

Hazlett, Peter K., and William J. Luther. “Is Bitcoin Money? And What That Means.” The Quarterly Review of Economics and Finance 77 (August 1, 2020): 144–49. https://doi.org/10.1016/j.qref.2019.10.003.

Kosinski, Daniel Santos. “A digitalização dos meios de pagamento: o pix e as central bank digital currencies em perspectiva comparada.” Textos de Economia 24, no. 1 (June 18, 2021): 1–26. https://doi.org/10.5007/2175-8085.2021.e79020.

Kyriakopoulou, Kalliopi. “Authoritarian States and Internet Social Media: Instruments of Democratisation or Instruments of Control?” Human Affairs 21, no. 1 (March 1, 2011): 18–26. https://doi.org/10.2478/s13374-011-0003-y.

Leech, Beth L. “Interview Methods in Political Science.” Political Science & Politics 35, no. 04 (December 2002): 663–64. https://doi.org/10.1017/S1049096502001117.

“Pix En.” Accessed October 22, 2021. https://www.bcb.gov.br/en/financialstability/pix_en.

De Filippi, Primavera. “Bitcoin: A Regulatory Nightmare to a Libertarian Dream.” SSRN Scholarly Paper. Rochester, NY: Social Science Research Network, May 14, 2014. https://papers.ssrn.com/abstract=2468695.

Quintino, Derick, Jessica Campoli, Heloisa Burnquist, and Paulo Ferreira. “Efficiency of the Brazilian Bitcoin: A DFA Approach.” International Journal of Financial Studies 8, no. 2 (June 2020): 25. https://doi.org/10.3390/ijfs8020025.

“Snapshot.” Accessed October 22, 2021. https://chivowallet.com/.