The failure of “dollarization” may be a “breakthrough” for bitcoin legalization

Can crypto-digital assets such as Bitcoin be the first to assume the status and function of legal tender in a country? In fact, the Zimbabwe case has given the answer ……

If Bitcoin becomes the legal tender of a country, its sovereign monetary system will be split in two, and the subsequent shocks and situations will be too numerous to bear. This is not a rational choice for sovereign countries. However, this still can not stop individual sovereign countries willing to risk this world, to feed the tiger, what is the reason?

In 2006, Zimbabwe experienced hyperinflation. Three years later, the Zimbabwean government phased out the use of the Zimbabwean dollar, the influx of U.S. dollars, the “dollarization” of the economy occurred, and the monetary authorities gradually lost control of the local currency. At this point, the Zimbabwean authorities completely opened up bitcoin trading and safe-haven funds began to hold bitcoin, causing the local bitcoin to soar, and with improper government controls, the unit price of bitcoin soared as high as $76,000.

In terms of the mechanics of currency speculation, effectively opening up or tightening bitcoin trading in the domain is a way to regulate the impact of risk averse funds under conditions of local currency failure, and to mitigate the impact of large amounts of foreign currency. The goal is to maintain the monetary authority’s ability to intervene in the currency by using bitcoin transactions to avoid a failed exit of the monetary authority due to currency failure, thus preserving the organizational basis and policy for the recovery of the local currency. means of intervention.

However, the case of Zimbabwe’s full expansion of bitcoin trading in response to the failure of the local currency is an inspiration to those economies that have “dollarized” their economies. It is because of the “dollarization” of the economy that the local currency is in a state of potential failure, and even if the economy performs without a major crisis and remains compliant with “dollarization” policy operations, the local currency can still fall into explicit failure due to changes in external monetary conditions.

In response to the weak economy and weak employment brought by the new crown epidemic, the Federal Reserve implemented an easy money policy and the U.S. Treasury also implemented an easy money policy, and a large number of dollars were released. According to the analysis, 60% of the loose dollars will flow overseas. The external conditions that lead to the apparent failure of the local currency of the “dollarized” economies are initially in place, and the local currency may directly fall into a situation of failure.

The failure of "dollarization" may be a "breakthrough" for bitcoin legalization

Given this, the growing danger of the collapse of the local currency due to the erosion of the foreign currency glut, the revelation of the Zimbabwe case becomes increasingly significant. Since a capital gains tax on asset transactions would impede the release of transactions or drive down efficiency, it should be eliminated, and given the lack of alternative flows after hedging bitcoin and still transferring profits to the U.S. dollar, a more radical policy option than Zimbabwe’s would be to simply grant digital assets like bitcoin the status of “legal tender”. In this way, Bitcoin becomes able to absorb and resist the monetary erosion of excess dollars and seek regulatory protection from the local currency monetary authority.

A failure of the local currency would either lead to foreign currency intrusion or a spike in crypto-digital asset trading. For weak monetary economies, the lesser of two evils, opening up bitcoin trading, or even granting it legal tender status outright, could help lead to more bitcoin inflows and counteract foreign currency erosion. Given that the vast majority of sovereign monetary authorities simply do not consider the strategy of the wolf before the tiger, it is important for potential monetary failure economies to be the first to grant legal tender status to crypto assets such as Bitcoin, and instead, to be able to draw in “enough” crypto digital assets such as Bitcoin from outside the country to bolster their own monetary authorities economy to effectively counteract foreign currency erosion.

The failure of "dollarization" may be a "breakthrough" for bitcoin legalization

The myth of “bad money eliminating good money” does not occur when there is a large influx of excess dollars into those economies with unsound sovereign currencies. The elimination of good money by bad money is predicated on a fixed exchange rate or conversion rate that is real and effective, not nominal. In contrast, the foreign currency, the dollar, as the “good currency”, will strongly and sharply squeeze those weak and ineffective local currency sovereignty, the result is the collapse of the existing exchange rate level, the overall weakening of the local currency, the overall increase in the price of the local currency, the overall squeeze of the dollar on the local currency, and even currency substitution, the withdrawal of the local currency from circulation, until the occurrence of the local currency and its organization The total collapse and failure of the system.

At present, the international monetary system is flooded with dollars, and the local currencies of dollarized economies and their monetary authorities are likely to be the first to fall into the doomsday, and the legalization of crypto-digital currencies is taking this opportunity to achieve a “breakthrough” in fiatization. In fact, this is the very same local currency that has already failed and is forced to borrow the form of a crypto-digital currency in order to substantially withdraw from circulation. Even so, the monetary authorities involved in the first fiatization of crypto-digital assets may have the “first opportunity” and the “ability” to make a difference in the practice of forced digitization of currencies.

However, can crypto-digital assets such as Bitcoin take the lead in assuming the status and function of legal tender in a country? In fact, the Zimbabwe case has given the answer …… Currently, El Salvador has only passed a law, and the subsequent arrangements are far from complete. That is to say, the failure of dollarization and the resulting “breakthrough” in the fiatization of crypto-digital assets such as bitcoin is still just a legal arrangement ……

Zhou Ziheng|First published by FTChinese.com 2021.6.21

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/the-failure-of-dollarization-may-be-a-breakthrough-for-bitcoin-legalization/
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