CryptoLira: Tyranny Or Another Ponzi?

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From Late 2019 until 2020 was probably the worst period for the Lebanese banking sector since the 90s, after the end of the 15 years long civil war. What led us to this grand collapse, that almost every Lebanese person, local or diaspora, is suffering from? It was actually the result of multiple events and the accumulation of many bad policies from the 2000s up until today. The Lebanese pound is a dollar pegged currency; this peg survived based on the existing dollar reserves in the economy. However, the reserve was not a 1:1 ratio but rather a fractional based system, in other words, the Lebanese pound was never 100% backed by dollars. For almost 20 years, the peg system worked to preserve itself, due to many factors that kept the dollar reserve high and stable.

Where Did the Dollars Come From?

Throughout all those years, the central bank was, the not so invisible, invisible economy planner. The central bank created a model based on sucking the entire capital in the system and putting it in its vaults, and in turn lend this capital to the government to use it the way it sees fit.

The Model in Theory (Rough percentages):

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The model suggests that through high interest rates you can attract all the capital in the economy and let one industry governed by one state entity (the central bank) decide the fate of the capital. Considering the central bank would want to satisfy the needs of the central government, it made it much easier for the government to obtain loans from private banks. However, private banks would only loan out to a risky entity, like the government, on very high interest rates, which in this case were very much available. Once the government receive those funds, it would theoretically invest them in projects related to infrastructure, schools, healthcare. After the investment is successful, capital owners would be incentivized to create businesses on a solid basis and the government would be able to acquire taxes from those businesses. Add to that, there would be more workforce who in turn would pay taxes to the government. The Model suggests that once the government is doing well, it would be much more justifiable for it to increase taxes and people would be more willing to pay them. With this theoretical model everyone is happy, the depositor is getting his or her high interest rate return, the government is getting the funds needed to pay for public expenditure and the bank is gaining great returns on operating assets. This model is an indirect way for the government to exercise control over a huge bulk of capital existing in the economy, it is a scheme based on the idea that the government controller is able to know what is best for the economy through its macro lens.

In practice this model was a complete failure. The capital received by the government was used for other purposes, including failed development projects, supporting the fractional based peg and expanding the government payroll. Currently, it is estimated that Lebanon has 350,000 employees in the public sector, knowing that the entire labor force is around 2.4 million.

The government has never been efficient in using all the money it was able suck in into the system, but it kept this scheme running thanks to many factors. Including foreign aid, foreign debt and most recently through a Ponzi Scheme. Funds to pay back old depositors was made available through new trusting depositors who were attracted by the extremely generous interest rates.

In other words, the system was running out of money and very little did the economic individuals know. The peg was alive, and the interest rates were getting higher and higher. The entire economy’s gullibility towards this is due to one system that detaches the individual from their own finances and that is the centralized Balance of Payments (BoP).

Centralized Balance of Payments, Lebanon

To put it in simple terms, the balance of payments is a statement showing all transactions done between one country and the rest of the world during a defined period. Transactions include all the imports and exports, as a simple formula: BOP = Exports — Imports. The current narrative in mainstream economics says that if the BOP is positive, the country in question is generally doing well, while if the BOP is negative, there is a certain problem there.

Every individual has a personal “balance of payment”. “Imports” are whatever the individual spends, while “exports” are whatever they earn in income. Every individual is capable of controlling their very own BOP, and in case they could not, the burden falls on them and only them. The story is a bit different when it comes to the centralized BOP of the government, as it inherently abolishes the personal BOP. In Lebanon, the centralized Balance of Payment was made possible thanks to the 1507.5LBP/1USD pegged fractional reserve system. Before the collapse of the peg, when you wanted to make a purchase (Registered as import in your personal BOP), you’re at the same time depleting the reserves of the central bank, as you’re forcing it to buy the purchased good at the rate of 1507.5 while in reality it does not have enough dollars to back the said rate. From your very own perspective, your personal balance of payment is balanced, but the unit of account used to value the balance of payment does not reflect its real redeemability in USD. This small economic activity can be projected to every Lebanese Lira holder for the last 20 years, and whenever the reserves would get depleted and a huge Balance of Payment deficit takes place, it somehow gets bailed out (through foreign aid, bank Ponzi etc.).

The collapse of 2019 can be simply translated as following, depletion in reserves without any bail out. This has forced the banks to perform the famous capital controls. As these lines are being written, you cannot use Lebanese Lira to buy Imports through the bank at the rate of 1507.5 or any rate. However, there are some exceptions to specific subsidized imports. Subsidies include, diesel, oil, gas, medicine, wheat, and a bunch of other “essentials” which get subsidized from time to time. The subsidies are further depleting the reserve, and people’s inclination to dump the Lebanese lira and buy actual US dollars is devaluing the lira more and making it completely useless. This is shifting us towards a cash & dollarized economy which will lead to the natural abolishing of the centralized Balance of Payment and the beginning of the end of the 20 years long economic somewhat *stagnation*. However, the central bank will not let it go all that easy, as news came out that Riad Salameh (BDL Governor) is planning to release a Central Bank Digital Currency (Might be called CryptoLira) which will serve for a few purposes. One of which is to re-instate the centralized balance of payment through a cashless economy and essentially to take the economic individual’s real money, whether it is real dollars or even Bitcoin.

Central Bank Digital Currency (CBDC)

Is it the so-called “The Great Reset”, the “You Should Not Own Anything” narrative or a central bank’s desperate attempt to bail itself out and kick the can further? I say it is all three options. As central banks all around the world went down the route of never-ending money expansion ever since the pandemic started in early 2020, talks of a new system is looming large again. Of course, I agree that the system is crooked, a system that gives the incentive to the money producer to produce money beyond their means. However, the decision makers, the rulers or the elites never choose to see it this way, instead they rather pin the whole issue on the market participants and the greed of human nature. Somehow this issue can be solved by introducing a CBDC. Britain, the USA and even The EU are all on the verge of releasing their own national digital currency. Many failing economies already did, the most famous example is the Venezuelan Petro. The absolute inevitable emergence of CBDCs all around the world is definitely pushing the Lebanese Central Bank to finally release its long-awaited digital currency. In order to understand the real motives and the purpose behind this “cryptolira” one must first understand what made a similarly collapsing country like Venezuela introduce their own national digital currency, aka Petro.

Venezuelan Petro

Announced in December 2017, the Petro had a unique concept, which is a currency backed by national “natural resources” and more precisely oil. The whole monetary system of the Petro is based on its backing to five billion barrels of oil. Of course, in reality, it was not backed by anything and the government “pre mined” it out of thin air, therefore Petro was not a blockchain based digital currency. Also, the Petro could not be bought with bolivars (The Venezuelan national currency) instead it could only be bought in its pre-sale using foreign currency and other famous cryptocurrencies like Ethereum and Bitcoin. To put it in simple terms, 1 petro was supposed to be equal to one barrel of oil, the government mined 100 million petros for pre-sale, thus this would allow it to raise funds depending on the price of the Barrel on the sale date.

Lebanese CryptoLira

The cryptolira’s marketing concept will be based around it being the saviour from the complete collapse of the financial system, by bailing out the depleting dollar reserve and re-establishing the centralized balance of payment over the entire economy. This can be done by withdrawing all physical lira from the market and gradually make people use cryptolira instead. It will serve as surveillance money, by watching and monitoring how people transact with it and thus blocking them from using it to buy dollars from the black market or other supposedly subsidized goods. All transactions would have to go through the central bank first. It will put ties on your purchases,decide what the individual should or should not be able to consume, how much he or she can save and how much he or she can invest. The complete abolishing of economic and financial freedom and creating a perfect centralized balance of Payment. BOP= Imports — Exports will be entirely controlled by the central bank, with no risks of deficits in the 100% cashless cryptolira economy. One might think this is it, but really it is much more than just this. Riad Salameh said cryptolira will bring back trust in the financial system when he announced the continuation of the project in early November 2020. In that same announcement he happens to mention the Central Bank’s Gold. Quoting Salameh:

“Lebanon doesn’t have any natural resources and we have to keep the gold because it’s an asset that could be liquidated in foreign markets if we face an inevitable, fateful crisis”.

Banque du Liban holds 286 tons of Gold in its reserves, which is considered top 20 gold reserves in the world. Unlike Venezuela, Lebanon does not own any natural resources, but it does own a lot of Gold. Salameh said it himself. My guess is that, Cryptolira will be released in 2021 and it will be entirely based on the price of Gold in the market, as it will be a CBDC backed by one of the biggest gold reserves in the world. This will be the entire case for the Lebanese CBDC to compete with the new founded inevitable CBDC forex like market of 2021.

Of course, much like the Petro, cryptolira will not be based on the Blockchain technology, as it will be mined in its entirety by the central bank. Moreover, it will not be sold for lira or even lollar (dollar stuck as bank deposits), but instead it will be sold for foreign currencies and Bitcoin. The Lebanese central bank after the 2021 Bitcoin bull market will look for the most desperate ways to hoard Bitcoins. The Cryptolira might serve the purpose to raise funds for the government to help it bail itself out of its complete bankruptcy. As well Cryptolira might be used to acquire resources (imports), more precisely the currently subsidized goods ,like wheat, oil and medicine. Only the friends of the Lebanese state and those who trust it will accept such deal. It might also serve the purpose of reinstating the centralized balance of payment and bring back control to the central bank over the economy. My prediction is that the latter option is almost impossible without real suppression by the state to force people to use it instead of cash, however, the former is highly possible but only with the risk of channeling Lebanese gold to foreign countries.

Lebanon: From Gold to Cryptolira

Most of the currently held Gold on the Lebanese central bank balance sheet was bought during the 60s, 70s and 80s. It is said that a big amount (unspecified) was transported to Fort Knox to be kept in safety away from the militia during the 1975–90 civil war. Selling the Gold cannot happen easily, it needs a majority approval by the parliament and even if that’s available, only the governor of the central bank can ask for its return from Fort Knox, but who knows if Fort Knox is willing to return it in the first place. Cryptolira could be the equivalent of selling the Gold without actually going through bureaucratic procedures. If big players in the global economy decide to buy Gold backed Cryptolira, the said currency must be redeemable in Gold. The Lebanese Gold will be highly under pressure of getting shipped to another country. Cryptolira will be equivalent to a Gold IOU. Naturally, the central bank could just default on paying back with Gold, but the world’s superpowers will not be happy about such decision and this will put the Lebanese economy in even more isolation, and under the threat of gold confiscation by force.

Cryptolira and Bitcoin Adoption

With the introduction of cryptolira, the Lebanese average Youssef will be familiarized with the concept of digital currency and when he is, he will want to want to own the best one. Arguably, that is Bitcoin. After the introduction of the Petro in Venezuela, many people were also introduced to Bitcoin. Mining operations grew largely there, and the adoption of Bitcoin happened faster than expected. Currently Venezuela has 20,000 Bitcoin points of sale all over the country.

Cryptolira is dangerous because it is a scam to strip you away from real money and give you fake IOUs. However, unless people are coerced into it, generally rarely anyone ever dumps real hard money for fake fiat money on the long run. The answer for the famous question “Is this Good For Bitcoin” is, as always, YES.

Bitcoin Diary in Lebanon

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