Lebanon’s Answer To Economic Failure: A New Digital Currency

hodler November 10, 2020November 10, 2020

When your economy fails, introduce a new currency. Many countries have taken this step along with others to address structural economic issues. Now Lebanon is ready to replace its cash with a new digital currency. Will this help a collapsing nation solve its problems?

Lebanon in a Nutshell

A country with deeply rooted economic problems, endemic political unrest and a population fragmented into different religious groups, needs much more than a new currency to pull through.

Apart from dealing with its own internal strife that stifled economic prosperity, Lebanon is situated in a troubled neighborhood:

Its neighbors are Syria and Israel
Syria is still in the midst of its own bloody civil war
According to Human Rights Watch, there are 1.5 million Syrian refugees in Lebanon
The Southern border with Israel is one of the world’s main conflict flashpoints
Both countries fought a series of wars, the last of which was in 2006
That war devastated Lebanon further
With the pandemic, the tourism sector – which accounted for as much as 7% of the country’s GDP – collapsed
A recent explosion at the port in Beirut deepened Lebanon’s economic crisis

Why Go Digital?

Widespread unrest and lack of confidence in the economy and the country’s political class, are also stifling Lebanon. It seems that the country does not have too many paths towards economic growth.

Lebanon is known for its amazing touristic destinations. How would foreigners use a digital Lebanese Lira?

Maybe its only saving grace is exploration and exploitation of natural gas resources from the Eastern Mediterranean basin.

So how does a digital Lebanese Lira solve this? It does not, at least not by itself. Nevertheless there are a few reasons why a country like Lebanon would like to go digital:

Lebanon has the third highest debt to GDP ratio in the world with an estimated 152%
Recently, the country defaulted on its debt
Various media reports point to Lebanese people stashing money at home
If that money enters the market, then Lebanon would have a short-term boost
Remittances are another important lifeline in the embattled country
Controlling foreign currency inflows would help the government raise its revenue through taxation
It would also help stabilize exchange rates
The central bank claims that a digital currency would help restore confidence in the banking sector – which is unlikely

Using a government controlled digital currency is tantamount to having a camera recording every single purchase you make

Digital money under the control of the central bank, would allow the Lebanese government to tackle some of these issues. That would come at the expense of privacy and could have deeper socio-political implications.

The Perils of a Digital Lebanese Lira

On a digital platform that requires KYC, transactions generate troves of incredibly useful data:

Suddenly the government knows how much each citizen has and how much they spend
Government can track expenditure
This allows for more effective taxation policies
It also opens the door to political retribution

If you think about the implications of a digital currency, you will understand that they go well beyond the scope of the mission the Lebanese government has right now.

Digital currency in Lebanon will allow the government to have greater control over the economy and its citizens

Yes, the government will be able to incentivize people to spend the money they have stashed at home. It will also be able to adjust taxation policy and collect more easily. But the negatives outweigh the positives:

Contribute to your favorite candidate’s campaign and you can face retribution – it is easy to freeze you out of the economy on a government-controlled digital currency platform
What if you purchase goods or services from the opposition or from a different religious group from the ones in power?
Are you saving too much money? The government can decide to tax those savings
Tax collection can be automated
All your remittances could be forcibly converted to local currency and taxed before you get the funds
Analyzing spending patterns will give those who have access to data an insurmountable advantage in the market
A new kind of corruption will inevitably rise

Is Bitcoin the Way Forward for Lebanon and its Citizens?

Above all, a digital currency will not solve structural economic, political, or social issues. It might even end up deepening them. Lebanon needs structural reforms, starting from a de-fragmentation of its sectarian politics, true accountability, and incentives to innovate and attract foreign investment.

Who will be watching transactions in Lebanon? What is their agenda? Can Lebanese citizens avoid this using Bitcoin?

Until the Lebanese government solves those problems, it seems that Bitcoin is the only way forward for the people who live in this country. BTC will allow people to continue trading without having the government track them.

Bitcoin users will remain invisible, and their savings will not get taxed. This is what might help save Lebanon from its own corrupt leaders. A new digital Lebanese Lira will almost certainly achieve the opposite result, especially if the country cannot achieve structural change.