How Bitcoin Fits In The Lebanon Banking Crisis

How Bitcoin Fits In The Lebanon Banking Crisis

The financial crisis in Lebanon prompted banks to seek an alternative monetary policy and citizens to scramble for alternative banking services.

The economic crisis has been raging for years, but political unrest and the global market slowdown caused by the pandemic have raised fears of government failures and the devaluation of the Lebanese pound. As a result, more Lebanese are looking for information on bitcoin ( BTC ), which is relatively cheap and accessible compared to the fractured banking system. 

The exchange rate for Lebanese pounds into 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 Balamand University in Lebanon. This exchange rate also varies depending on the type of dollar. 

The dollars that are already in the tight Lebanese banking system are exchanged for less physical dollars from the local black market, which are easier to move. This is why some people use bitcoin to buy black market dollars to pay off their bank loans cheaply, said bitcoin researcher Matt Ahlborg.

Most LocalBitcoin traders get their bitcoin using bank accounts outside of their country of residence and use the local list as their type of advertising. Some software developers and poker players, who earn bitcoin from foreign customers or online games, also bring their bitcoin to these over-the-counter (OTC) traders to liquidate them in local currency. Likewise, lawyer Charbel Choueh, partner at Choueh Law, said his company was the first in Lebanon to accept both lanyard ( USDT ) and bitcoin from customers abroad.   

Bitcoin entering the country comes from the independent market ... plus a little bit of the poker people and remittances," said Ahlborg, referring to how most newbies use social media to find bitcoin veterans rather than relying on trade. "There is more demand due to the COVID-19 closure of traditional finance and supply chain activities."  

An anonymous OTC trader, who has been operating in Lebanon since 2013, has estimated that the Lebanese people trade between $ 1 million and $ 5 million per month using informal networks, which overshadows the $ 54,916 of Lebanese bitcoin transactions counted over the last year on Paxful and LocalBitcoins combined. He added that the COVID-19 pandemic has increased the demand, and therefore the costs, for local hawala transfer networks. Now that hawala options are more expensive, in comparison, bitcoin is a cheaper and more attractive option, he said. 

These traders mainly use sites like Paxful for advertising, but trade using other mobile apps. Many bitcoin traders in emerging markets like Lebanon, even professional over-the-counter traders who move active on a large scale, rely on WhatsApp as one of the main discussion platforms to discuss offers. Telegram, WhatsApp, Facebook and Twitter are among the most important platforms in this scene. 

Social networks have essentially become basic financial networks without banking restrictions, relying on global currencies like the dollar and bitcoin . In response to this, the government has banned exchange rate apps showing the real exchange rate of pounds to dollars.

Bankers retaliate

Meanwhile, government and banker proposals suggest the country is under reform, Mardini added.

If the country can demonstrate that it is rebuilding its fiscal infrastructure, it may be able to secure billions of dollars in funding from the International Monetary Fund (IMF). IMF support would encourage new investment from the international community, added Mardini. 

Currently, the government plans to reduce its debt by about 62% and write off $ 44 billion in foreign exchange losses at the Lebanese central bank. The plan would include the removal of reserve capital from the central bank, reserve capital from private banks and a certain amount of deposits from the wealthiest people in the country. 

The outcome of government and central bank default on debt would likely reduce the number of banks in the economy from 50 to 10, Mardini added. In a country already dealing with a central bank struggling to prove its independence from political factions, Mardini said he feared that the restructuring of the banking system in Lebanon would create more distrust of banks. 

"If you let the government restructure, it will take over the banking sector - the crown jewel of the Lebanese economy," said Mardini. "It would be an oligopoly of 10 banks controlling the market." 

Currently, Lebanese banks are asking the government to consider a counter proposal that would not include any government default. The first part of the plan would allow the government to buy bonds at lower interest rates from private banks. The second part of the proposal looks like tokenization in the crypto space: government assets like telecommunications networks, docks and real estate assets in Lebanon would be turned into bonds and would essentially be tradable stocks. 

The banks say it would hypothetically reduce the government's debt by $ 40 billion, but the bonds would be owned entirely by the government. "You just transferred it from a central government to another government entity in a fund," said Mardini.

Mardini said he would prefer the government to dissolve the central bank and replace it with a currency board that would guarantee that Lebanese pounds would be backed 100% by the US dollar. 

"Either they keep it in cash or they put it in US government bonds with secured assets, which would provide some income and cover the costs of operating the currency board," Mardini said of his proposal. . “The amount of money issued by the currency board in circulation would be determined by market conditions.”

Crypto against the pound

Jon Gayfield, a U.S. Navy veteran who started mining crypto in 2013 and was one of the first traders on Mt. Gox worked 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 underpins the cryptocurrency community has made Gayfield understand that bitcoin can be a humanitarian business in addition to a business model, he said. 

"I believe cryptocurrency is potentially the best anti-war idea ever devised," said Gayfield. “If the citizens of a nation really own their currency / wealth and not the government, then the government must really serve the people and cannot wage war without the consent of the governed for funding.”

Gayfield initially envisioned Lebanese expats using bitcoin for remittances so that crypto could flow into the country. 

"In an ideal case, it is a necessary part of what we are trying to do," said Gayfield. "However, the way to make this work is not to use a really broad solution like this, you will have to force a large part of the population to learn how to use the technology." 

Gayfield is currently seeking to have importers send cryptos to a company headquartered in Gayfield and Mardini in Malta, converting these cryptos to fiat, and using this fiat to pay international suppliers and restricting the banking system.

"We could involve some importers in our proof of concept and demonstrate that it works," said Gayfield. "Next, we drive adoption where ordinary citizens could potentially pay the importer directly in crypto. … Expats are more likely to send crypto to the country if there is a demonstrable use case for crypto there. "

Gayfield initially envisioned using a stable link as the link for the project, so that Lebanese businesses would have something less volatile to move money, but “there is the inevitable concern about the influence of politics or sanctions, ”said Gayfield.

The Bitcoin being the most recognizable cryptocurrency, it seems to be easier to operate in Lebanon, he added. Gayfield was supposed to travel to Lebanon to meet Mardini and meet companies that could be interested in the use of cryptography, but his flight was canceled after the United States have banned flights to Europe as part of its response to the pandemic. 

Since most of the major exchanges do not operate in Lebanon, citizens have to work with local traders, which makes scaling up difficult. Nor are users 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 other implications than just the weak banking system in Lebanon.

"It is not just a project in Lebanon," said Gayfield. "There is no reason why it cannot work elsewhere ... in any other country going through a financial crisis."


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