A few days ago President Nayib Bukele of El Salvador announced that Bitcoin was approved as legal tender in his country. This is an extraordinary measure for the country, and follows El Salvador’s past experience with regards to Bitcoin, as about a year ago one of the country’s villages had already de-facto accepted it as a currency. In his Twitter thread of the proposed announcement, Bukele further suggested this move could assist in cutting the significant expense of intermediary fees and addressing the country’s severe unbanked problem (70% of its population). His plan could dramatically improve the lives of millions in El Salvador.
According to the IMF’s latest report, El Salvador’s GDP per capita ranks 114th in the world. It struggles with poverty, inequality and gang-related violent crime. Its economy relies heavily on remittances – around 20% of GDP, which ranks as the 6th most remittance-dependent country. It is very interesting to note that since 2001 El Salvador’s currency has been the US Dollar, replacing the Colon. The motive behind this measure was the stabilization of the economy and the facilitation of trade with the United States. However, the move involved sacrificing a major aspect of its sovereignty. El Salvador cannot print US Dollars, which means that it does not control its currency, hence its monetary liberty is severely limited and its economic dependence is intensified.
El Salvador adopting Bitcoin as a legal tender could significantly reduce remittance fees. Will other countries follow?
Having already foregone monetary independence, accepting cryptocurrencies as a legal tender could be a huge leap forward for El Salvador. My guess is that now that Bitcoin is officially accepted, stablecoins will become the predominant means of payment instead. Bitcoin is too volatile and cannot support the scale of expected transactions, hence it is simply not the best solution for that purpose. Stablecoins, on the other hand, are more efficient and better fit for this task. The most significant potential concern is their credibility. However, in the last year stablecoins have experienced a significant rise in value and integrity, with the total market cap of the four largest USD-pegged stablecoins rising to around $100B (Tether – $62B, USDC – $23B, BUSD – $10B, DAI – $5B) at the time of writing. These coins are accepted with full confidence as digital dollars in the crypto landscape.
President Bukele suggested two powerful arguments to support his plan. The first was the egregious fees involved in remittances. A recent World Bank report found that the global average remittance intermediary fee is 6.38%. Perhaps many readers would agree that this fee may be among the most wrongful financial exploits that exist today. Foreign workers are often legally taken advantage of, due to the lack of financial options that they are facing. Using cryptocurrencies could eliminate remittance fees to a fraction of a cent, instead of dozens of dollars. This could have an immediate and long-lasting effect on the lives of the recipients, and on the senders, who would now be able to save more of their own money instead of spending it on a third party transfer. Add to that the convenience of sending the funds to your relative’s mobile device instead of to a local agent exchange where she might get robbed or attacked, as is sadly a common occurrence when dealing with cash. Though it is clear that this process will not happen overnight, the potential value-add to the lives of foreign employees should provide enough incentives for employers to eventually transition into paying with crypto.
As mentioned above, the vast majority of El Salvador’s population is unbanked. I have written before about the social impact that DeFi, and specifically stablecoins, may have on the financial inclusion of the unbanked. In that respect, I can only hope that El Salvador could be an example to many other countries suffering from a similar problem.
It is clear that the transition to a crypto-based economy, even to a partial extent, can be riddled with issues and obstacles. On a global level, we see that the unbanked are willing and eager to adopt new technologies that enable them financial savings, but the technical transition will be challenging. By “technical” I mean migrating one’s financial activity to a crypto wallet and grasping the concept that she is now fully in charge of her assets, with no third party who can assist in case of fraud, mistake or any other type of problem. This challenge should not be disregarded.
While there are many digital wallets to handle crypto, in order to make this transition as safe as possible the government of El Salvador would need to lead an extensive educational public campaign in order to teach people about the potential risks and fraud involved. This may perhaps involve a government-recommended list of wallet service providers, in order to assist the population in avoiding scams. And there may need to be some training provided in order to make sure that people handle wallets correctly, for their own security and for that of their assets. This is the most challenging part of crypto adoption and it encapsulates massive risk of fraud and deceit, therefore it requires detailed planning in order to avoid mass loss of value which might derail the initiative even in its earliest phase.
Despite the risks, if done correctly and responsibly, accepting cryptocurrencies as a form of legal tender is a strategic and correct decision for El Salvador. The country is facing extreme poverty, crime and a tenuous economic situation. Ameliorating even part of the dire financial issues with a greater percentage of remittance income could bring about a significant economic boost. A great many eyes will be on El Salvador in the next few months. This little country might just show the world a way to a brighter future.
Netta Korin is a cofounder of Orbs. Prior to Orbs Netta worked for many years on Wall Street as a hedge fund manager. She later held senior positions in the Israeli government, including Senior Advisor in the Israeli Ministry of Defense to General Yoav (Poly) Mordechai, Head of CoGAT, and Senior Advisor to Deputy Minister Dr. Michael Oren in the Prime Minister’s Office in Israel, focusing on Palestinian issues. Netta has held board positions in several non-profit foundations in both Israel and the United States. She also founded The Hexa Foundation with the aim of promoting blockchain for social impact and harnessing the mind power of the Orbs ecosystem and network to help solve the region’s and the world’s most pressing humanitarian problems.
For more information please contact Netta Korin (firstname.lastname@example.org)