Bitcoin in Beirut: Cryptocurrency Adoption in the Face of Financial Turbulence

Introduction

While much of the rest of the world was confined to their homes due to the COVID-19 pandemic, protestors in Lebanon defied curfews and took to the streets. Burnt tires, firebombed cash machines and confrontations with security forces are the culmination of months of popular protests and unrest due to Lebanon’s worst economic crisis since the 1975-1990 civil war.[1] The crisis’ roots lie in Lebanon’s history of high public debt that dates to post-civil reconstruction in the 1990s.[2] Years of endemic corruption, nepotism, and horse-trading between the three confessional groups in government has resulted in a meagre 1% annual GDP growth in recent years. Regional geopolitics have also played a role in Lebanon’s economic crisis: US sanctions targeting the Iranian regime and the Syrian civil war have both impacted Lebanese exports, and a crippled Iranian economy has resulted in a drop in the volume of funds sent to support Hizballah.[3]

With the drying up of the Banque du Liban’s (BdL) foreign exchange reserves [4], Lebanon defaulted on $1.2 billion of foreign debt in March [5][6]. Although a waking nightmare for the Lebanese government, which started talks with the IMF on May 13th to secure a multibillion-dollar bailout [7], the reality of the situation is increasingly grim for the wider public. The crisis triggered a currency shock on the black market for US dollars, resulting in hyperinflation [8] and a crash in value of the Lebanese Lira to the tune of 60% (compared to the official exchange rate) by early May [9]. With the ensuing monthly rises in food prices of approximately 6.2% [10], the World Bank has predicted that by the end of the year more than 40% of the population will live under the poverty line [11]. In addition to inflation, a liquidity crisis has forced the government to put caps on cash withdrawals to avoid a run on the banks, leaving many with access to only a fraction of their already devalued savings.

Alternatives to Traditional Currency

In response to the Lira’s crash in value, some have turned to Bitcoin, an asset outside of Lebanon’s fractured banking system, to provide protection against hyperinflation and to preserve their economic freedom. This trend has been observed across the globe in countries experiencing economic turbulence, most notably in South America and Turkey.[12] Bitcoin is a decentralised form of electronic cash that is not controlled or issued by a central entity.[13] It was created by the pseudonymous Satoshi Nakamoto in the wake of the 2008 financial crisis, and was designed to exist outside of the traditional financial system by using peer-to-peer transactions which are processed by a network of millions computers around the world. Bitcoin and other cryptocurrencies operate using a technology known as a ‘blockchain’ which, at its core, is a public ledger which provides a community with a decentralised and immutable record of transactions.[14] Finally, and perhaps most importantly, the total number of Bitcoin is capped at 21 million, making it a scarce asset. For many this hard-coded scarcity makes Bitcoin attractive to investors because unlike government-issued fiat currencies (such as the US dollar) it is not subject to inflation. It is important to note that not all blockchain projects are designed to be used solely as money. For instance, the second biggest cryptocurrency by market capitalisation (~$26 billion at the time of writing [15]) is Ether, the native cryptocurrency of Ethereum, which is a blockchain on which decentralised applications can be run.[16]

Since its creation, Bitcoin has oft been regarded with a deep suspicion by the financial sector, governments and the wider public. It is a speculative and highly volatile asset that can be transferred with a relative degree of anonymity outside of institutional oversight. These features mean it has been associated with illicit activities such as drug trafficking and, more specifically to the MENA region, the funding of international terrorism.[17] As the technology has matured and other projects using blockchain technology have sprung up in their thousands, the narrative of Bitcoin and cryptocurrencies as a whole has shifted from that of a tool used by criminals to that of a technology with the potential to disrupt global finance and revolutionise money.

Al Jazeera reported in February that people in Lebanon have increasingly chosen to purchase Bitcoin to protect their savings. Although the price of Bitcoin is notoriously volatile, the decline of the Lira has made “digital gold” look like an increasingly good investment.[18] However, restrictions such as slow internet, the intermittent availability of electricity and restrictions on purchasing Bitcoin have led to the rise of informal WhatsApp groups in which Bitcoin is purchased or exchanged for other types of goods. Reportedly houses, cars, and phones have all been posted for sale on a group of 250 members.[19] Because of the informal nature of the networks involved in Lebanon’s burgeoning Bitcoin trade, hard statistics are hard to come by; however, one anonymous trader estimated that the monthly trading volume is between $1 million and $5 million. This boom stems from a deeply eroded trust in Lebanon’s banking system but also the hike in fees of hawala [20] networks due to increased demand.[21]

An Early Model for Lebanon: Turkey

The economic factors that drew attention to cryptocurrency in Lebanon display similarities to those during Turkey’s financial and economic crisis of 2018. Triggered by a high current account deficit and high inflation, the crisis saw a currency collapse in which the value of the Turkish Lira tumbled against the US dollar (from 3.75 in January 2018 to a peak of 7.22 in August).[22] The sudden devaluation of Turkish Lira led to a mass adoption of digital assets [23] and by the summer of 2019, Turkey had the highest percentage of investors in digital assets globally, with one poll finding that one in five Turks owned cryptocurrencies (for comparison ownership in the United Kingdom was 6%).[24] With the surge in interest amongst retail investors, the Turkish government has capitalised on the trend, announcing a spate of projects within a national blockchain technology framework for use in public administration late last year in a bid to reinvigorate the economy.[25] Plans for a digital form of the Turkish Lira based on blockchain technology (known as a central bank digital currency, or CBDC) were announced in July 2019. According to the Resmi Gazete, the government’s official journal, it is due to be deployed at the end of this year.[26]

Turkish blockchain adoption is not limited to projects of national scale. When I visited the Anatolian city of Konya, famous for being the home of the 13th century poet Rumi and the mystic Mevlevi order (better known as the Whirling Dervishes), it came as a surprise to discover that this seemingly conservative city steeped in history is at the forefront of national effort to adopt this cutting edge technology. According to a detailed report by the city’s chamber of commerce, 10 smart city projects are in the pipeline ranging from payment systems for public transport to the disbursements of social benefits. These projects coupled with the establishment of the city’s “Science and Technology Valley” aim to lay the foundation for a blockchain-based financial system.[27] On the back of the nationwide push for adoption, the CEO of Binance, one of the largest cryptocurrency exchanges (platforms on which digital assets are traded), stated that he believed that Turkey had the potential to become a major player in the financial technology space.[28]

Conclusion

Despite having a long history of being a major financial hub, whether Lebanon will follow Turkey’s lead in creating a favourable environment for blockchain technology is uncertain. Firstly, the official government position on cryptocurrencies is ambiguous. In an announcement in 2017, the Banque du Liban unveiled plans for a CBDC and recognised that digital currencies will play a prominent role in the future of finance and money. Since the original announcement, updates have been far and few between. Additionally, high levels of corruption and instability make for an unfriendly business environment: over the last decades the nation has dropped 40 places to 143rd in ease-of-doing-business rankings.[29] These problems will likely ward off foreign investment from the financial sector until reforms are implemented and trust in government is regained. If the Lebanese government manages to overcome these domestic issues in combination with the creation of a favourable business environment via legislation, regulation, and reform, one might hope a scenario similar to that seen Turkey to play out.