How blockchain-based finance offers a way out for those living through economic crises.
Six years ago, when Serge Haddad — an engineer based in Glendale, Calif. — moved to the U.S. for college, his father opened a Lebanese bank account using U.S. dollars to cover his expenses. The bank offered fee-free international transactions, making the first several years smooth. Two years ago, Serge received a text from his bank informing him that international transactions were now limited to only $1,000 monthly.
In July 2020, the bank eliminated international transactions entirely.
What’s more, Lebanon’s central bank has restricted the withdrawal of U.S. dollars from domestic accounts. Any withdrawals have to be made at an exchange rate of 3,900 Lebanese pounds (lira) to the dollar, a rate higher than the official rate (1,515) per USD, but far below the free market rate, which (as of July 9, 2021) was estimated at around 19,500 lira to the dollar (and it continues to deteriorate rapidly). This means that withdrawing their dollars would force bank customers to accept a significant loss in order to gain access to cash they might need for basic living expenses, all at a time when the country faces political chaos, hyperinflation, and one of the worst economic crises the world has seen over the past 150 years. One consequence of this has been the development of an informal market in which USD-denominated Lebanese bank deposits, known as “lollars,” are traded for “fresh” U.S. dollars at a fraction of their face value.
Lebanon, a once prosperous country whose capital, Beirut, was known as the “Paris of the Middle East,” is facing the culmination of decades of rapidly growing and unsustainable debt — dubbed as a “nationally regulated Ponzi scheme” — in which the various dysfunctional post-civil-war governments piled on enormous deficits, depending on lavish spending from Gulf Arab states, tourism, and a steady flow of remittances to cover its interest expenses. But as Hezbollah and Iran gained greater influence, revealing Lebanon’s underlying fragility, the external sources of funding dried up, bringing today’s crisis to a head — with more than 100 percent year-over-year inflation and a rise in food prices exceeding 400 percent. In March, Lebanon defaulted on (some of) its debt, the first sovereign default in its history. As The Economist observed, “even during the darkest days of its civil war in the 1980s, the state met its obligations.
As the birth of the lollar has shown, economic and institutional collapse has forced the people of Lebanon to fend for themselves, seeking out any solutions available to help overcome their harsh reality. The Lebanese have turned to a burgeoning black market in foreign currencies, as well as to alternative methods of payment and stores of value.
Another consequence is the rising importance of the al-Qard al-Hasan Association, Hezbollah’s financial arm, which has become an unlikely lifeline for many Lebanese. The association offers a relatively stable banking solution where Lebanese can deposit and withdraw dollars and access small-dollar credit.
The need for new solutions has even contributed to a “Bitcoin boom” in Lebanon, with Coindesk claiming that the Lebanese people could be moving as much as $1–$5 million in Bitcoin a month. However, accurate estimates are difficult to find.
Bitcoin transactions can be slow and expensive, significantly limiting its adoption. But the underlying blockchain technology makes possible various innovations in Decentralized Finance (DeFi) that could help people in Lebanon and around the world access traditional finance and provide viable alternatives in the face of severe corruption and dire economic crisis.
Among the recent innovations in DeFi to watch out for are stablecoins and tokenization.
Stablecoins are cryptocurrencies with a value pegged (generally through reserves) to an asset or a basket of assets, fiat currency, or commodities such as gold. The result ought to be coins whose value is shielded from volatility. Theory has not necessarily been the same as practice, but various stablecoins exist; some are backed 1:1 by currencies such as the USD, Euros, commodities such as gold, a basket of currencies, or even other stablecoins.
As the technology evolves, stablecoins could provide a decentralized and relatively liquid solution to the problems such as those now faced by the Lebanese, without the volatility of bitcoin. As more users in Lebanon adopt crypto technology and the entrepreneurial ecosystem grows, stablecoins have the potential to emerge as a relatively liquid and fungible alternative to a broken financial system.
Tokenization can also provide a means to access capital and facilitate exchange in Lebanon.
Tokenization is the issuance of a blockchain token to represent a real (and exchangeable) asset. Transactions of tokens are automated and completed utilizing smart contracts. Issuance platforms allow individuals to tokenize virtually everything. The technology can be applied to creating IDs and digital deeds. It can even be used to arrange transactions in private or non-listed assets from hedge-fund positions to real-estate deals, introducing liquidity into traditionally illiquid or inaccessible markets, and providing opportunities for nontraditional investors. In the case of Lebanon and other developing economies, tokenization presents a financing solution, offering an avenue for entrepreneurs to access investment and loans.
Through tokenization, companies in Lebanon could crowdfund investments, sell shares, and tap a wide variety of possible applications for blockchain technology, including access to microfinance.
The crisis in Lebanon is a bleak reminder of the cost of corruption and institutional failure. As technology evolves, though, more and more alternatives will become available, helping individuals to overcome these challenges and preserve the value of their assets.