How Bitcoin Fits Into Lebanon’s Banking Crisis
Coindesk | 5 June 2020
Lebanon’s financial crisis has banks looking for alternative monetary policy and citizens scrambling for alternative banking services.
The economic crisis has been raging for years, but political turmoil and the pandemic-induced global market downturn has raised fears of government defaults and the devaluation of the Lebanese pound. As a result, more Lebanese people are seeking information about bitcoin (BTC), which is relatively cheap and accessible compared to the fractured banking system.
The exchange rate for Lebanese pounds to dollars has skyrocketed from 1,500 pounds for every dollar to 4,000 pounds for every dollar, said Patrick Mardini, CEO of the Lebanese Institute for Market Studies and associate professor of finance at the University of Balamand in Lebanon. That exchange rate also varies depending on the type of dollar.
Dollars already inside the restricted Lebanese banking system trade for less than physical dollars from the local black market, which are easier to move around. This is why some people are using bitcoin to buy black-market dollars to pay off their bank loans cheaply, said bitcoin researcher Matt Ahlborg.
Most Local Bitcoin traders get their bitcoin by using bank accounts outside of their country of residence and use the local listing as a type of advertisement. Some software developers and poker players, who earn bitcoin from foreign clients or online games, also bring their bitcoin to these over-the-counter (OTC) traders to liquidate for local currency. Likewise, attorney Charbel Choueh, partner at Choueh Law, said his firm is the first in Lebanon to accept both tether (USDT) and bitcoin from clients abroad.
“The bitcoin coming into the country is coming from the freelance market … plus a little bit from poker people and remittances,” Ahlborg said, referring to how most newbies use social networks to find bitcoin veterans rather than rely on exchanges. “There’s more demand due to the COVID-19 shutdown of traditional finance and supply chain businesses.”
One anonymous OTC trader, who has been operating in Lebanon since 2013, estimated the Lebanese people trade between $1 million and $5 million a month using informal networks, which dwarfs the $54,916 worth of Lebanese bitcoin transactions tallied over the past year on Paxful and Local Bitcoins combined. He added the COVID-19 pandemic increased demand, and therefore the fees, of local hawala remittance networks. Now that hawala options are more expensive, by comparison, bitcoin is a cheaper and more attractive option, he said.
Such traders primarily use sites like Paxful for advertising but conduct the trades using other mobile apps.Many bitcoin traders in emerging markets like Lebanon, even professional OTC traders that move assets at-scale, rely on WhatsApp as one of the top chat platforms for discussing deals. Telegram, WhatsApp, Facebook and Twitter are among the most important platforms in this scene.
Social networks have essentially become grassroots financial networks without banking restrictions, relying on global currencies like dollars and bitcoin. In response to this, the government has banned exchange-rate apps showing the actual exchange rate for pounds to dollars.
Bankers strike back
Meanwhile, proposals from the government and bankers suggest the country is in reform, Mardini added.
If the country can prove that it is rebuilding its fiscal infrastructure, it might be able to secure billions of dollars in financing from the International Monetary Fund (IMF). IMF backing would encourage further investment from the international community, Mardini added.
At the moment, the government’s plan is to cut its debt by about 62% and wipe out $44 billion in foreign exchange losses at the Lebanese central bank. This plan would include wiping out the reserve capital at the central bank, the reserve capital at private banks, and a certain amount of deposits from the country’s wealthiest people.
The result of both the government and central bank defaulting on debts would likely shrink the number of banks in the economy from 50 to 10, Mardini added. In a country that’s already dealing with a central bank that struggles to prove its independence from political factions, Mardini said he worries that the restructuring of the banking system in Lebanon would create more distrust in banks.
“If you let the government do the restructuring, they would put their hand on the banking sector – the crown jewel of the Lebanese economy,” Mardini said. “It would be an oligopoly of 10 banks controlling the market.”
Currently the Lebanese banks are asking the government to consider a counter-proposal that would include no government defaults. The first part of the plan would allow the government to purchase bonds with lower interest rates from private banks. The second part of the proposal looks similar to tokenization in the crypto space: Government assets like the telecommunications networks, waterfronts and real estate assets in Lebanon would be made into bonds and essentially be tradable shares.
The banks argue that this would hypothetically decrease the government’s debt by $40 billion, but the bonds would be wholly owned by the government. “You’re just transferring it from one central government to another government entity in a fund,” Mardini said.
Mardini said he’d prefer the government dissolve the central bank and replace it with a currency board that would ensure that the Lebanese pounds would be backed 100% by the U.S. dollar.
“Either they keep them in cash or put them in secure-asset American government bonds, which would allow a certain income and cover the costs of operations for currency board,” Mardini said about his proposal. “The quantity of money issued by the currency board into circulation would be determined by market conditions.”
Crypto vs. the pound
Jon Gayfield, a U.S. Navy veteran who began mining crypto in 2013 and was an early trader on Mt. Gox, has been working with Professor Mardini on ways to introduce crypto to the Lebanese people after meeting Mardini through Gayfield’s sister who does humanitarian work in Lebanon.
The ethos of economic freedom that undergirds the cryptocurrency community made Gayfield realize that bitcoin could be a humanitarian endeavor in addition to a business model, he said.
“I believe cryptocurrency is potentially the best anti-war idea ever devised,” Gayfield said. “If the citizens of a nation actually owned their currency/wealth and not the government, then the government must actually serve the people and cannot wage war without the consent of the governed for funding.”
Initially, Gayfield considered having Lebanese expats use bitcoin for remittances to get crypto flowing into the country.
“In an ideal case that is a necessary part of what we’re trying to do,” Gayfield said. “However, the way to get this working is not to use a really broad solution like that you’re going to have to get a large portion of the population to learn how to use the technology.”
Currently, Gayfield is looking at having importers send crypto to a company that Gayfield and Mardini would headquarter in Malta, converting that crypto to fiat, and using that fiat to pay international suppliers and curtailing the banking system.
“We could get a couple of importers on board for our proof-of-concept and demonstrate that it works,” Gayfield said. “Then we’re driving the adoption where regular citizens could potentially pay the importer directly in crypto. … Expats are more likely to send crypto to the country if there’s a demonstrable use case for crypto there.”
At first, Gayfield was thinking about using a stablecoin like tether for the project, so that Lebanese businesses would have something less volatile to move money, but “there’s the inevitable concern about influence from politics or sanctions,” Gayfield said.
Bitcoin being the most recognizable cryptocurrency, it seems to be the easiest to use in Lebanon, he added. Gayfield was supposed to fly to Lebanon to meet Mardini and network with businesses that might be interested in using crypto, but his flight was canceled after the U.S. banned flights to Europe as part of its pandemic response.
Since most major exchanges don’t operate in Lebanon, citizens have to work with local traders which makes scaling difficult. Users are also not allowed to buy bitcoin in Lebanon with a credit card, and banks have set limits on withdrawals.
If all goes well, the project could have further implications than just Lebanon’s failing bank system.
“This isn’t just a Lebanon project,” Gayfield said. “There’s no reason this couldn’t work somewhere else … in any other country that’s going through a financial crisis.”