Home BusinessAnalysis The Local Bitcoin Market and the Crisis

The Local Bitcoin Market and the Crisis

The young currency remains a topic of the day

by Sasha Matar

Lebanon’s banking crisis is yet to offer depositors any cushion to soften the blow of capital control restrictions, a crumbling currency, and an uncertain future. As depositors become well versed at queuing outside banks and fighting for their money, some have begun looking for alternative methods to storing their money – not under the mattress, but digitally, through cryptocurrency. “My clients who buy cryptocurrencies or exchange them for fiat, are the ones who do not feel that it is safe to deal with banks anymore, not now, not ever. The banking crisis alone has created ample conditions for the interest in cryptocurrencies, namely Bitcoin,” Nader Dirany, a cryptocurrency consultant and founder of one of the first cryptocurrency exchange counters in Lebanon, tells Executive.

Linkages between cryptocurrencies and financial crises seem to be anchored in recent history. To many, the appearance of Bitcoin during the Great Recession was not a coincidence. Although the rationale of Bitcoin in the original white paper published by a person or group of persons under the Satoshi Nakamoto pseudonym, did not refer to banking crises in general or the period’s subprime problems in particular, cryptocurrency users can easily perceive the digital currency to address the failure of banks, presuming that Bitcoin will not fail the world the way the banking system and the central banks did in 2008-09. For Lebanon, the banking breakdown arrived a decade later, when a liquidity shock rippled through banks at the end of 2019, forcing them to impose tight capital controls which prohibited depositors from spending money abroad and from access to accounts, in an attempt to stem capital flight amid a widespread shortage of US dollars. The conditions sowed the seeds for the beginnings of a cryptocurrency community in Lebanon.

Fertile soil for Bitcoin

The cryptocurrency story is tied to the global financial crisis of 2007-09. Early crypto enthusiasts were thrilled by the idea of a currency that is authenticated by a foolproof chain of digital evidence on the internet, named the ‘blockchain’, which is free from the chains of central bank controls. This anarchic hope, embedded into the mysterious narrative of Bitcoin, was soon paired with interest from speculators, money launderers, black market drug sellers, and people who looked for alternatives to “fiat” money issued by central banks. The invention of Bitcoin in 2008 in one sense got a boost from the global crisis, and the rise of Bitcoin from the fancy of a few tech enthusiasts and monetary anarchists took shape over several waves, riding both speculative gains and immense losses.

While there were local enthusiasts who were excitedly embracing the Bitcoin concept in finance and academia, the dominant local mood about cryptocurrency during the first ten years of the story was one of disinterest and indifference. Lebanon was not really affected by the 2008 financial crisis. It was not until banks blocked depositors’ access to their funds in 2019, that Bitcoin earned widespread attention locally. Banks that were once the protectors of foreign capital inflow, including the diaspora’s money in particular, turned into exchange counters after 2019. They stopped providing financial services and were no longer allowing transfers abroad, nor providing loans, or savings premiums. Cryptocurrencies, on the other hand, are a digital and decentralized cross-border medium of payment exchange which can be used to buy regular goods and services, despite their highly volatile nature. In addition, Bitcoin is allowing Lebanese to transmit wealth abroad through electronic wallets, without the intervention of any third party.

By definition, Bitcoin is a peer-to-peer electronic cash system. It is by design intended to facilitate the transfer from point A to point B by eliminating the intervention of an institutional party. It removes bureaucratic procedures, elevating limitations on transactions, saving time, and shifting complete control to the transacting parties while disrupting traditional banking systems. To help onboard more local users, Dirany suggests supporting merchants to accept payments in crypto and stablecoins (digital tokens that declare they are backed by real-world assets), considering the difficulties surrounding bank card payments. “An announcement attributed to Banque du Liban would for instance incite merchants to explore the cryptocurrency culture,” Dirany says. “The Bitcoin community of Lebanon, that interacts in groups on messaging platforms, mainly Telegram and hosts tens of thousands of users, is ready to start lobbying for the implementations of regulations and the foundation of a syndicate for the cryptocurrencies exchange counters.”

From Switzerland of the East to Venezuela of the East

Several historical factors influenced the promotion of the banking sector to its prominent position in Lebanon. In short, the Lebanese economy became part of the famous Bretton Woods monetary system. As a result of the 1944 Bretton Woods conference, countries agreed that their central banks would maintain fixed exchange rates between their currencies and the US dollar, which was in turn pegged to the price of gold. In 1956, the Lebanese parliament enacted the Banking Secrecy Law, which kickstarted foreign capital inflow into the country.

After the 1971 Nixon Shock, when US president Richard Nixon’s new policy ended the Bretton Woods system or the Gold Standard era, the Lebanese currency remained pegged to the dollar. Banque du Liban (BDL) and bankers in the early 1970s believed that the peg was a cornerstone for stability. As a result, it attracted traders and foreign investors to a now-dollarized Lebanese economy. Foreign inflow was also generated from diaspora remittances and neighboring Arab nations like Syria, United Arab Emirates, Saudi Arabia, Kuwait, Qatar, and so forth. 

Whether they simply wanted to store their money in a trusted banking system that offered concealment from the prying eyes of tax collectors, or were attracted by the interest returns on banking deposits in the Lebanese market, or had other reasons not to entrust funds to the banks in their home countries, inflows from foreign depositors found their way to domestic banks.  From early on in the post-conflict reconstruction of the 1990s, high yields of government-issued treasury bills, certificates of deposit, and later Eurobonds, drew banks to provide funds to the government. When maturing after a few months or years, these debts were rolled over into new debts, in what was a profitable and comfortable spiral from the perspective of the lenders. But as time went on, the government stopped paying its debt to both local and foreign lenders, which resulted in mushrooming debt and a lack of liquidity. 

Cryptocurrency Status Quo

Despite the contraction of the trade balance deficit as a result of the decline in purchasing power and multiple local and international efforts to boost local exports, the imports of goods reached $14 billion at the end of 2021, according to Bank Audi’s Lebanon Economic Report for the second quarter of 2022. As a result of the recent measures taken by banks, suppliers have been seeking alternatives to banks to conduct business transactions with cross-border traders. This is particularly significant as the Lebanese economy depends largely on imports (up to 60 percent of goods as a percentage of GDP are imported). Within these circumstances, a digital currency with the characteristics of Bitcoin has allowed traders to transmit wealth abroad through electronic wallets, without the intervention of any third party. However, the current market cap in Lebanon is difficult to establish and the volume cannot be tracked since most transactions entail off-exchanges, through an underground market or motorcycle delivery exchanges, sources interviewed for this article told Executive. 

Dirany guesses there are hundreds of “ad-hoc sellers” in the crypto community in Lebanon, and says there are only two other over-the-counter markets besides his. “For this reason, it is hard to tell what is the exact exchange volume of Bitcoin,” he adds. This year traders saw extreme volatility in the price of Bitcoin, and as such the expectations of the local community vary according to their power of purchase. Large traders consider Bitcoin as a long-term investment, according to Michel Haber, crypto expert and CEO of Astrofi, a digital marketing platform. Meanwhile, small traders who are attracted by the ‘get-rich-fast scheme’ are there for the excitement, speculation, and a potential way to make a passive income when Bitcoin’s price goes up. A survey by the Dutch bank ING on the perceptions around cryptocurrencies showed that countries with lower per-capita income levels are more likely to consider using cryptocurrency as a payment medium.

Woman is checking Bitcoin price chart on digital exchange on smartphone, cryptocurrency future price action prediction.

Legal Aspects

To help curb scams and internally regulate his business, Dirany requires his customers to show a valid government-issued ID with every transaction, which is the most basic know-your-customer (KYC) step any financial institution would require, despite its contradiction with Bitcoin’s anonymous philosophy. The exchange fees at the counter vary between minus five to seven percent, depending on demand, while charges among peers could be non-existent, depending on trust. “This business is subject to supply and demand rules par excellence,” Dirany says. 

Lebanon does not yet have regulation on cryptocurrency, leaving exchange counters in a regulatory desert. Charbel Choueh, attorney and expert in blockchain and cyber law, points out that the absence of legislation puts clients at risk. Choueh suggests that BDL, along with legislators and local crypto experts, should issue regulations that would require such counters to register their business, in the same way other money exchangers are required to deposit a guarantee in an accredited renowned bank or at BDL. Such licenses should meet the international requirements of the anti-money laundering and KYC process for the founders and the clients, and be compliant with Lebanese law. This requirement would set up guidelines to eliminate the risk of fraud. 

According to Choueh, local regulations do not prohibit ownership or the use of cryptocurrencies, yet they are not accepted as payment methods. Under Lebanese law, transactions in cryptocurrencies, such as retail exchanges of goods or services against Bitcoin, are considered barter deals. In the case of fraud, users should deposit their claim at the Cybercrime Bureau, where a division revises the claims and presents them to the Public Prosecution Office at the Court of Appeal. Choueh says that this Bureau needs to be equipped with the latest technologies to be able to follow up and track users’ complaints.

Regulating the environment surrounding the trade of Bitcoin does not necessarily mean the adoption of crypto as a legal tender. There have been a few jurisdictions around the world that moved to make Bitcoin a legal tender but many internal and external reasons stand in the way of such a decision for Lebanon. The International Monetary Fund and the World Bank have issued multiple statements to El Salvador against the usage of decentralized cryptocurrencies, due to the high volatility risks. Despite these warnings, Bitcoin according to its proponents, continues to appear as a potential global unit of account – necessary to measure value and price fairly – and more specifically for countries, like Lebanon, that rely heavily on imports.

Uncertain Future

On one hand, the argument that Bitcoin trading is risky because of its volatile nature is accurate; Bitcoin is influenced by supply and demand, user feelings, and government regulations. More than once, Bitcoin’s price altered drastically following a tweet from the tech giant Elon Musk; like in 2021, when Musk announced that Tesla would stop accepting Bitcoin as a payment method. Although Tesla is expected to resume accepting Bitcoin, and it will be interesting to watch the subsequent behavior of the market. Others praise Bitcoin for its deflationary aspect, due to the halving technique which means that the supply of Bitcoins created would be cut by ‘halves’ or 50 percent every four years until the year 2140, when the limit of 21 million supply capacity of Bitcoin is expected to be reached. 

Yet, all currencies with hard supply limits, such as gold, silver, and Bitcoin, have deflationary properties. Conceptually, monetary theorists fear that the halving of new supply is only a way that might delay the moment when the supply of Bitcoin is insufficient to meet the money needs of growing economies; this has not been tested in any economy that we know. But whether risks in the future of digital currencies reside more in issues of volatility or are rooted in deflationary dangers, Lebanon is consumed with more urgent and more immediate money problems, which is reflected in the fact that most people (and many long-standing finance experts) seem far away from regarding Bitcoin as an alternative to payment transactions. The physical relation the population has established with cash has grown since the absence of banks, and the psychological distance with virtual money is riskier according to behavioral economics, especially to a society that lost a lot of physical belongings over the past couple of years. 

Support our fight for economic liberty &
the freedom of the entrepreneurial mind

Sasha Matar

Sasha is a business journalist and content writer with a work experience in the legal industry. Her writing focuses on geopolitics, legislation, and macroeconomics and she is experienced in coaching and training

View all posts by

You may also like