WHEN the bond market speaks, savvy investors should listen. The bond market is much smarter than the equity market, which is often prone to manic excesses and deep depressions when expectations of future earnings change. With bonds, future returns and other variables don't need to be forecast; they are known in advance, like your return (yield), and the number of years till maturity. The key variable in whether you end up getting the return is whether the bond issuer will default. Even this can be estimated with reasonable accuracy, as well as the recovery rates in the event the bond issuer is unable to meet its obligations.
The bond market has voted on El Salvador's Bitcoin-as-legal-tender experiment. El Salvador 11-year maturity sovereign bond was trading at 110 per cent in April, before getting congress approval to make Bitcoin a country-wide accepted form of payment. A price significantly above par generally means that the bond market thinks the country has a lower risk of default compared to when the bond was first issued.
How quickly things change; since April the bond price has fallen every month as the country embarked on its Bitcoin voyage, falling to 75 per cent now. The drop in price caused the yield of the bond to increase from 7 to 13 per cent. Clearly the bond market's perception of El Salvador has dramatically worsened and, at least so far, Bitcoin has not proven to be the panacea that the government hoped for.
In our July column when we first highlighted El Salvador's plans, we said that there was a high risk that the country's decision to set aside US$150 million of its FX reserves to support the experiment would end in tears and run out. With its US dollar reserves dwindling, the expected benefits of this adoption would not come to pass, creating problems for the economy. So far, the bond market is agreeing with this assessment.
Crypto-fans will focus on the glitches that came up in the mass roll-out on Sep 7, saying that they were temporary and to be expected. requiring the government to either give up on its Bitcoin experiment, or dip further into its real-money reserves. It is estimated that 10 per cent to 20 per cent of El Salvador's population was already using crypto. The government gave out additional Bitcoin to all residents, encouraging its uptake. If a Bitcoin-as-money cannot succeed with all these incentives, does it have a chance elsewhere? Success in El Salvador could have prompted companies to more widely adopt Bitcoin as a payment option, cementing its viability as the rest of the world became convinced that it has moved beyond a fad into a real investable asset.
Bitcoin prices have shrugged off these developments, gaining strongly this month and closing in on the all-time high achieved in mid-April. The first attempt at Bitcoin as legal tender isn't looking good so far, making it less likely that other countries will embark on the same path, but there are many more different options to try.
This brings us to an interesting experiment that Bhutan is considering. Instead of Bitcoin, the government opted for Ripple to create an open-sourced ledger for the country's currency, the ngultrum. The pilot claims to be carbon-neutral by being 120,000 times more efficient than Bitcoin in processing transactions, an thus avoiding its high electricity usage. India will be watching this experiment closely, because the ngultrum is pegged to the Indian rupee.
Bhutan, despite its poverty, is often described as the world's happiest nation, given the government's adoption of Gross National Happiness (GNH), instead of Gross National Product (GNP). I visited in 2013, and when I asked our tour guide about the happiness level of the population, he had an interesting reply: the government decides what makes us happy.
One of the four pillars of GNH is environmental conservation. Bhutan already claims to be the world's only carbon-negative country, but adopting the blockchain for monetary transactions would reduce the country's carbon footprint even further, automatically increasing happiness.
Bhutan is in some ways the perfect country for this experiment. Cash is relatively new to the country. Citizens still bartered with rice, meat and butter up until 1950, so fiat money is not as entrenched as in the rest of the world.
Why not skip it and move directly to crypto money, the way many developing markets skipped expensive broadband wiring and went straight to wireless Internet? A third of Bhutan citizens do not have a bank account, so skipping the commercial banking system altogether holds significant attraction to the government while benefitting its citizens. While the population is largely unbanked, it is technologically savvy. Ninety-seven per cent of the population has access to the Internet, with the latest mobile cellular subscription being 100.9 per cent of the population (meaning that some citizens have more than one mobile phone), making Bhutan the ideal testing ground for this experiment.
Tokenising happiness
The tokenisation of Bhutan's currency may be ambitious, but the government has even more interesting plans. In discussions with the United Nations, it discussed tokenising happiness. Provinces in Bhutan that are 'laggards' in achieving happiness would buy, with real money via the country's blockchain, tokens from happiness 'overachievers' to meet government mandates. Can happiness be bought? In my experience of managing money for more than two decades, there is a strong correlation between the size of one's wealth and one's level of unhappiness, where money becomes the source of many disputes. Bhutan's concept may not be as far-fetched as it seems.
The system would work in a similar manner to Europe's carbon credit trading, where carbon emitters like oil companies buy carbon offset credits from companies that do not pollute the environment. While carbon has a physical footprint and can easily be measured, happiness is more ephemeral. But that has not stopped anybody in the crypto world so far, where 'invisible' sculptures and bad drawings of a rock are tokenised into Non-Fungible Tokens and sold for real money. It's as if we are living in a dream matrix world concocted by crypto programmers.
In reality, by the World Happiness Report, Bhutan ranks 95th out of 156, largely due to the nation's poverty. But direct material wealth is not part of GNH - only living standards. And during my visit, the average Bhutanese did look happy, more so than the people in many modern cities that are much richer. But no one was happier than Bhutan's pigs, where marijuana plants grow prolifically and are used in pig feed.
Bhutan's crypto experiment to replace parts of its finance system looks to be well thought out, and should have a better chance at succeeding than El Salvador's attempts to make it legal tender, on top of the philosophically interesting concept of using crypto to tokenise happiness. Unfortunately Bhutan does not have outstanding sovereign bonds, so we would not be able to measure the success of this experiment via bond prices.
- The writer is co-founder of AL Wealth Partners, an independent Singapore-based company providing investment and fund-management services to endowments and family offices, and wealth-advisory services.
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