Bitcoin in El Salvador Could Impact the US
On Tuesday, September 7, El Salvador became the first country in the world to adopt a cryptocurrency as legal tender. The country had previously passed a Bitcoin law in June, which has now gone into effect.
President Nayib Bukele, one of the key figures behind the move, highlighted Bitcoin’s potential as a remittance currency for Salvadorans abroad. Salvadorans send home around $6 billion a year from overseas, with over 6% of that going into fees.
Nevertheless, considering that the majority of remittance is sent from the US, El Salvador’s Bitcoin adoption could considerably promote Bitcoin adoption — at least among Salvadorans.
Bitcoin could Disrupt Wire Transfer Services
Bitcoin has the potential to considerably disrupt wire transfer services. In the early stages, wire transfer businesses inside El Salvador would likely notice its impact. Soon though, the trend could find its way outside El Salvador as other remittance-reliant countries follow suit.
Data reveals that Salvadorans are the largest group of Central Americans. Over 2.5 million of them live abroad, mainly in the US. Furthermore, the country is heavily reliant on remittances, money sent home by migrants, which support nearly a fifth of El Salvador’s households.
In 2019, remittances totaled nearly $6 billion, accounting for around 25% of El Salvador’s gross domestic product. However, $400 million of that money was spent on commissions.
President Nayib Bukele, the 43rd president of El Salvador, claims using Bitcoin would help the country cut the bill on these remittance costs. Remittance firms often charge around 6% on money transfers, therefore a $100 transaction would cost $6 to send.
Reina Isabel Aguilar, a store owner in El Zonte Beach, said:
“It’s going to be beneficial … we have family in the United States and they can send money at no cost, whereas banks charge.”
Should Bitcoin prove to ease money transfers, especially in sending remittances, major remittance providers including Western Union would witness a dramatic drop in their net income. Explaining this, Kenneth Suchoski, fintech analyst at Autonomous Research, said:
“For Western Union and some of the other remittance providers keep in mind that most of the volume in the remittance industry is going from developed markets to emerging markets primarily to people -families and friends – that operate in cash. To the extent that bitcoin isn’t adopted and there’s not widespread acceptance, these remittance providers are still going to be relevant for the years to come.”
As of now, crypto constitutes less than 1% of the global cross-border remittances, according to Suchoski. However, he believes this amount would drastically increase, with crypto poised to account for over $500 billion in global annual remittances in the near future.
Salvadorians Concerned About Bitcoin as Legal Tender
Arguably, El Salvador has kicked off a real-world monetary experiment with its move to adopt Bitcoin as a national currency. Proponents argue Bitcoin will help decrease transaction fees, particularly remittance costs, while detractors warn money laundering and illegal activities could witness a surge.
However, a survey by the Central American University revealed that around 70% of Salvadorans were not happy with the country’s decision to adopt Bitcoin as legal tender. This comes even after the country’s attempt to promote Bitcoin among its residents by announcing that every citizen would receive $30 USD worth of Bitcoin when they register for the country’s official wallet.
The survey also revealed that less than 5% of Salvadorians understand Bitcoin, which largely describes why the majority is not optimistic. In addition, extreme price volatility along with environmental issues associated with Bitcoin and cryptocurrencies also pose significant challenges, further driving the mainstream away.
Do you think Bitcoin is an efficient medium for transferring funds across countries? Let us know in the comments below.