As of September 7, Bitcoin is an official legal tender in the Central American country of El Salvador. President Nayib Bukele, 40, says that one of the main reasons for the new law is so residents can save money on remittances. Many Salvadorans send and receive money to and from family and friends abroad; transactions that can carry hefty fees. With bitcoin, a cryptocurrency, there are no transfer fees. According to Kenneth Suchoski, U.S. fintech and payments analyst at Autonomous Research, “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.” El Salvador is one of these developing markets.
The GDP of El Salvador is significantly dependent upon these remittances, which make up nearly $6 billion or a fifth of their GDP, according to the World Bank. Globally, remittances total $500 billion each year. However, remittance providers like Western Union need not worry — at least for now. Suchoski says that these providers “…are still going to be relevant for years to come,” provided that Bitcoin does not gain widespread adoption and use. Currently, less than one percent of global cross-border remittances are in cryptocurrency, according to Autonomous Research.
MoneyGram, another remittance provider, has already made moves into the cryptocurrency markets. Earlier this year, MoneyGram announced that it would allow U.S. customers to buy and sell Bitcoin at 12,000 retail locations throughout the country. In a statement to Reuters, MoneyGram officials said that “We’ve built a bridge to connect bitcoin and other digital currencies to local fiat currency. As crypto and digital currencies rise in prominence, a core barrier to further growth is the on/off ramps to local fiat currencies.”
Western Union is apparently in agreement that there are multiple barriers to crypto growth. The company has dabbled in the use of cryptocurrencies, but has yet to come up with a sufficient “use case” to justify incorporating them into their business model.
Salvadorans have the option to receive payments in Bitcoin and may convert the funds to U.S. dollars. Economists predict that most Salvadorans will immediately convert Bitcoin to USD upon receipt. The Central Reserve Bank of El Salvador has been stocked with $150 million, a figure that some economists deem inadequate. If the price of cryptocurrency keeps rising, that means that El Salvador’s reserve of Bitcoin will pay off. However, there are a few concerns surrounding a national bank which is experiencing a “constant outflow of US dollars and constant inflow of bitcoin,” says economist Daniel Munevar to Yahoo! Finance. According to Munevar, a global debt specialist, Salvadoran president Bukele possesses a “disregard for public resources.”
El Salvador’s adoption of Bitcoin is likely to lead to an increase in volatility in the short term. This will likely make Salvadorans less inclined to hold onto the cryptocurrency. On the contrary, Edward Snowden tweeted on September 7 that El Salvador’s new law “massively incentivises early adoption and latecomers may regret hesitating.”
Moreover, Salvadoran financial markets were not in good shape to begin with; the country is in debt distress, leading the International Monetary Fund (IMF) to set indicative discal restructuring targets to grant a loan of $389 million. The IMF is traditionally very conservative, so if El Salvador is unable to repay its debts, it is highly unlikely that the IMF will want to help out with more loans.
What’s more, the laws and regulations regarding cryptocurrency are inchoate. Munevar states that the new law allows transactions that “skirt anti-money laundering regulations.” It is up to the Salvadoran government and president Bukele to manage this transition without relying on illegal activity, all while simultaneously encouraging the public to view Bitcoin as a legitimate currency.