Complex Made Simple

Could Bitcoin play savior to Lebanon’s fiat crisis?

Lebanese are now feeling the financial impact of continued unrest over the last few weeks. No money that they can retrieve from ATMs. Liquidity shortages in banks. Fiat is in trouble.

Other countries in crisis like Venezuela and Iran have had to find alternatives to fiat as well, due to a combination of currency devaluation and heavy sanctions imposed upon them.

Could digital currencies like Bitcoin be an alternative financial solution? 

Read Lebanon: Ghosts, memories and monetary abyss

Centralized banking gone astray 

Despite not being technically illegal, the government has made sure not to let Bitcoin and other digital assets an easy pass into the country, says BeinCrypto.

Banks have remained dysfunctional since Oct 17, when the street uprising against massive corruption practices started in Lebanon and ATMs dried out, leaving most people cashless and unable to buy basic necessities or pay for services.

Central bank reserves plunged 30% in the past year and the local currency is slipping against the dollar in recent months.

A black currency market recently emerged that exchanged $1 dollar upwards of 2000LP from a Central Bank official peg rate against the Lebanese Pound at 1,507.50.

Banks are resorting to unusual, often questionable tactics such as reducing the working hours or closing to decrease the pressure on cash withdrawals, according to Asharq Awsat daily.

Sources told the daily that “Those measures were taken upon the request of the Central Bank.” Stories of banks’ refusal to give customers dollar withdrawals are spreading on social media outlets like wildfire. TV stations report the same. 

Originally, banks put a $2500 limit to withdraw and a week in between those withdrawals and later media spoke of banks’ limiting this to $1500

A natural repercussion to this is the fact that many suppliers will not take checks anymore, in fear banks will not cash them.
At least one bank reduced credit card limits from $10,000 to $1,000 this week, customers said.

“Banks also placed a ceiling on cash withdrawals outside Lebanon and they enforced new measures to prevent transfers from local banks to outside the country in the coming period,” said Asharq Awsat.

Julien Hawari, CEO – InfakCorp – The first Islamic Fintech Ecosystem and Advisor – Capital Crypto Bank – Crypto Advisory Firm, told AMEinfo “Abuses in the financial system, that led to the great recession of 2008, were not checked and here we are. The recent banking crisis in Lebanon has been in the making for decades, as it has been the case in other countries, and overnight people lost access to their money. That is of course a strong case for possession of gold and for cryptocurrency that cannot be confiscated.”

Dan Azzi, a fellow at Harvard University who previously served as chairman and chief executive officer at Standard Chartered PLC’s Lebanon-based subsidiary said in an op-ed for Bloomberg:

“The real dollars in BDL reserves, plus bank deposits with custodial accounts, amount to around $40 billion: In other words, there’s only $1 of liquidity for every $3 of claims. This would normally not be a problem in fractional banking, except that all these liabilities are in a foreign currency that BDL cannot print nor generate locally.”

The World Bank, on Friday November 8, urged Lebanon to form a new Cabinet “within a week” to prevent further degradation and loss of confidence in its economy.

The banking sector suffered a blow on Thursday Nov 7 when Moody’s Investors Service downgraded the country’s three largest banks into junk territory. The international agency downgraded to Caa2 from Caa1, the local-currency deposit ratings respectively of Bank Audi, BLOM Bank and Byblos Bank.

Two days earlier Moody’s said it lowered Lebanon’s issuer rating to caa2 siting the possibility of rescheduling the country’s massive debt.

Do these types of crisis blow over quickly?

Fiat pains here to stay

With nearly $90 billion in public debt, Lebanon’s debt-to-GDP ratio of 150% trails only Greece and Japan, according to the International Monetary Fund (IMF). 

High levels of unemployment, rampant corruption, and the nearby Syrian civil war have all contributed to this stagnant economic environment. The budgeted deficit for 2018 is $4.8 billion, Finance Minister Ali Hassan Khalil said earlier in the year, Reuters reports. Lebanon is spending 38% of its budget on debt servicing.

Around a third of the country lives under the poverty line, according to the World Bank.

The crisis has been exacerbated by an influx since 2011 of 1.5 million Syrian refugees, representing about a quarter of the country’s population.

Landfills and beaches are overflowing with trash

Read: S & P: Does Lebanon have sufficient foreign currency reserves?

Nearly all Lebanese (93%) said in 2018 that corruption is widespread in their government. 

Almost 90% of public procurement and tenders are being arranged through consensus and barter without going through official channels of the tenders’ office.

In the case of Iran, the country’s sustained economic isolation is further reflected in the depreciating value of its currency. The official exchange rate of the Iranian rial rests around 42,000 to the dollar, but its value quickly depreciated and currency traders offered around 190,000 rials to the dollar in September 2018.  World Bank reports suggest that by the end of the 2019-20 financial year, the Iranian economy will be 90% of its size just two years ago. This a result of US sanctions targeting crude oil exports, which went from around 2.3 million barrels per day in early 2018 to a mere 200,000 bpd, according to estimates.  

For Venezuela, a former oil power, the situation has so deteriorated that more than 4 million citizens have fled. Twenty years of mismanagement have lent Venezuela’s economic data an outsize, almost absurd dimension. The central bank says inflation hit 130,000% last year. The economy has shrivelled to less than half its former size and the effect of tightening US sanctions this year has only added to the pain.

Bitcoin: The financial answer to Corrupt Governance?

Going by recent trends, it is pretty self-evident that Bitcoin tends to fare much better during periods of political unrest as compared to most other assets. 

With Venezuela largely isolated from the global financial system, the country has seized on cryptocurrencies as a possible savior for its economy. 

Venezuela’s government is planning to use cryptocurrencies as a “method for free national and international payments,” according to President Nicolas Maduro.

In a televised press conference, Maduro said: “The finance minister and Venezuela’s central bank have new instruments which we will activate very soon so that everyone can do banking transactions.”

Lat year he launched a sovereign crypto, called the Petro. More recently, Bloomberg reports that Venezuela’s central bank is running internal tests to determine whether it can hold crypto in its reserves, aiming to send Bitcoin and Ethereum to the central bank so it can pay its bills with them.

Even during the ongoing Hong Kong protests, the idea of Crypto came to light.

But the Iran crisis is also a good example of this. Given Iran’s financial woes amid severe sanctions, crypto-assets present a theoretical hedge against local economic stagnation. 

In July, Iranian officials announced that a domestically encrypted digital currency would be unveiled in the near future and would be overseen by the Central Bank of Iran and backed by gold reserves, in an attempt to free up the frozen assets of local banks.  

Examples of direct crypto-activity include cryptocurrency mining, speculation in crypto-assets, and trade through brokerages and exchanges for payments. Iranian cryptocurrency developers have also created a blockchain platform, IranRescueBit, to facilitate humanitarian support through aid donations in bitcoins, ethereum, and litecoins.

Because it doesn’t depend on the centralized banking system, there’s no question of Bitcoin ever coming to a standstill because of bank shutdowns or political unrest. 

Decentralized digital assets such as Bitcoin are also a potential solution against regular citizens losing their wealth to depreciating national fiats, as in the case of Venezuela and Lebanon.

“Blockchain is here and is being implemented in several projects in the region. The key question is more around cryptocurrencies. It will happen as regulators get more comfortable with the idea and as individuals start using more of it. In the region, as of few weeks ago, less than 30 locations accepted payment in cryptocurrency,” Hawari said. 

But first, the asset needs to address a lot of the inadequacies that it currently suffers from such as increased volatility and scalability issues, for example. 

Also, the role of digital exchanges needs to reinforced. “Exchange are an important part as it brings the liquidity and the market for people to exchange. With the rise of the tokenization, STO, IEOs and others, exchanges are the place for users to find the liquidity,” Hawari said.