How Bitcoin Fits Into Lebanon’s Banking Crisis

Lebanon’s economic crisis has banks looking for alternative monetary policy and citizens scrambling for alternative banking services.

The economic moment has been raging for years, but political turmoil and the pandemic-induced global market downturn has raised fears of government neglects and the devaluation of the Lebanese pound. As a result, more Lebanese people are seeking information about bitcoin (BTC), which is somewhat cheap and accessible compared to the fractured banking system. 

The exchange rate for Lebanese pounds to dollars has skyrocketed from 1,500 palpitate instills for every dollar to 4,000 pounds for every dollar, said Patrick Mardini, CEO of the Lebanese Institute for Market Reviews and associate professor of finance at the University of Balamand in Lebanon. That exchange rate also varies depending on the transcribe of dollar. 

Dollars already inside the restricted Lebanese banking system trade for less than physical dollars from the shire 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 allowances cheaply, said bitcoin researcher Matt Ahlborg.

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Most LocalBitcoin saleswomen get their bitcoin by using bank accounts outside of their country of residence and use the local listing as a type of car-card. Some software developers and poker players, who earn bitcoin from foreign clients or online games, also produce their bitcoin to these over-the-counter (OTC) traders to liquidate for local currency. Likewise, attorney Charbel Choueh, pal at Choueh Law, said his firm is the first in Lebanon to accept both tether (USDT) and bitcoin from clients far.   

“The bitcoin coming into the country is coming from the freelance market … plus a little bit from poker human being and remittances,” Ahlborg said, referring to how most newbies use social networks to find bitcoin veterans rather than rely on trades. “There’s more demand due to the COVID-19 shutdown of traditional finance and supply chain businesses.”  

One anonymous OTC trader, who has been acting in Lebanon since 2013, estimated the Lebanese people trade between $1 million and $5 million a month consuming informal networks, which dwarfs the $54,916 worth of Lebanese bitcoin transactions tallied over the past year on Paxful and LocalBitcoins synthesized. He added the COVID-19 pandemic increased demand, and therefore the fees, of local hawala remittance networks. Now that hawala opportunities are more expensive, by comparison, bitcoin is a cheaper and more attractive option, he said. 

Such traders primarily use positions like Paxful for advertising but conduct the trades using other mobile apps.Many bitcoin traders in emerging market-places like Lebanon, even professional OTC traders that move assets at-scale, rely on WhatsApp as one of the top chat planks for discussing deals. Telegram, WhatsApp, Facebook and Twitter are among the most important platforms in this scene. 

Group networks have essentially become grassroots financial networks without banking restrictions, relying on global currencies cognate with dollars and bitcoin. In response to this, the government has banned exchange-rate apps showing the actual exchange rate for mashes to dollars.

Meanwhile, proposals from the government and bankers suggest the country is in reform, Mardini augmented.

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 Oecumenical Monetary Fund (IMF). IMF backing would encourage further investment from the international community, Mardini added. 

At the time, the government’s plan is to cut its debt by about 62% and wipe out $44 billion in foreign exchange losses at the Lebanese cardinal bank. This plan would include wiping out the reserve capital at the central bank, the reserve capital at top secret banks, and a certain amount of deposits from the country’s wealthiest people. 

The result of both the government and central bank lapsing on debts would likely shrink the number of banks in the economy from 50 to 10, Mardini added. In a countryside that’s already dealing with a central bank that struggles to prove its independence from political juntos, Mardini said he worries that the restructuring of the banking system in Lebanon would create more distrust in banks. 

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“If you let the government do the restructuring, they would put their management on the banking sector – the crown jewel of the Lebanese economy,” Mardini said. “It would be an oligopoly of 10 banks commanding the market.” 

Currently the Lebanese banks are asking the government to consider a counter-proposal that would include no government fall shorts. The first part of the plan would allow the government to purchase bonds with lower interest rates from ungregarious banks. The second part of the proposal looks similar to tokenization in the crypto space: Government assets like the telecommunications networks, waterfronts and true estate assets in Lebanon would be made into bonds and essentially be tradable shares. 

The banks argue that this hand down hypothetically decrease the government’s debt by $40 billion, but the bonds would be wholly owned by the government. “You’re just moving it from one central government to another government entity in a fund,” Mardini said.

Mardini said he’d prefer the management dissolve the central bank and replace it with a currency board that would ensure that the Lebanese thrashes would be backed 100% by the U.S. dollar. 

“Either they keep them in cash or put them in secure-asset American ministry bonds, which would allow a certain income and cover the costs of operations for currency board,” Mardini judged about his proposal. “The quantity of money issued by the currency board into circulation would be determined by market circumstances.”

Jon Gayfield, a U.S. Navy veteran who began mining crypto in 2013 and was an early trader on Mt. Gox, has been manage with Professor Mardini on ways to introduce crypto to the Lebanese people after meeting Mardini through Gayfield’s sister who does humanitarian achievement in Lebanon.

The ethos of economic freedom that undergirds the cryptocurrency community made Gayfield realize that bitcoin could be a humanitarian endeavor in addendum to a business model, he said. 

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

Initially, Gayfield considered having Lebanese expats use bitcoin for settlements to get crypto flowing into the country. 

“In an ideal case that is a necessary part of what we’re trying to do,” Gayfield predicted. “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 inhabitants to learn how to use the technology.” 

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Currently, Gayfield is looking at participate in importers send crypto to a company that Gayfield and Mardini would headquarter in Malta, converting that crypto to fiat, and servicing 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 parade that it works,” Gayfield said. “Then we’re driving the adoption where regular citizens could potentially pay the importer soon in crypto. … Expats are more likely to send crypto to the country if there’s a demonstrable use case for crypto there.”

At earliest, Gayfield was thinking about using a stablecoin like tether for the project, so that Lebanese businesses would bear something less volatile to move money, but “there’s the inevitable concern about influence from politics or affirmations,” Gayfield said.

Bitcoin being the most recognizable cryptocurrency, it seems to be the easiest to use in Lebanon, he added. Gayfield was imagined to fly to Lebanon to meet Mardini and network with businesses that might be interested in using crypto, but his flight was repudiated after the U.S. banned flights to Europe as part of its pandemic response. 

Since most major exchanges don’t operate in Lebanon, oppidans have to work with local traders which makes scaling difficult. Users are also not allowed to buy bitcoin in Lebanon with a solvency card, and banks have set limits on withdrawals. 

If all goes well, the project could have further implications than simply Lebanon’s failing bank system.

“This isn’t just a Lebanon project,” Gayfield said. “There’s no reason this couldn’t till somewhere else … in any other country that’s going through a financial crisis.”