El Salvador: is bitcoin the best way to send remittances?

El Salvador: is bitcoin the best way to send remittances?

El Salvador: is bitcoin the best way to send remittances?

El Salvador has become the first country in the world to officially authorize bitcoin as legal tender.

After a vote in Congress on Tuesday, in 90 days the cryptocurrency will adopt the new status that it will share with the US dollar.

The new law means that all companies must accept bitcoin as payment currency for goods or services, unless they do not have the necessary technology to carry out the transaction.

President Nayib Bukele said the measure would make it easier for Salvadorans living abroad to send money home, a process known as remittances.

Many people in countries like El Salvador rely heavily on money sent by diaspora communities, which represents around the 20% of the country’s gross domestic product (GDP).

More than two million Salvadorans live outside the country, but they continue to maintain close ties to their place of birth, leading them to send US $ 4 billion each year.

But will bitcoin be a best way to send remittances?

El Salvador: is bitcoin the best way to send remittances?

When remittances are sent home from abroad, it is normal to use a bank or other financial service that facilitates the transaction.

But these intermediaries increase the cost of shipping money internationally.

If someone sends US $ 1,000 from the United States to El Salvador, for example, even though there is an attractive “zero commission” exchange rate, customers will still find charges from banks on both sides of the transaction.

An advantage of bitcoin, or any cryptocurrency, is that it does not depend on any of these intermediaries.

What can make bitcoin very attractive to the poorest countries and to those who want to avoid traditional financial institutions they charge for the service.

However, it should not be forgotten that cryptocurrencies carry other risks important.

El Salvador: is bitcoin the best way to send remittances?

Nigel Green, CEO and founder of deVere Group predicts that, “after El Salvador’s leadership we can expect that other developing countries follow the same path“.

“This is because low-income countries have suffered for a long time because their currencies are weak and extremely vulnerable to market changes and that triggers rampant inflation “.

If bitcoin becomes even more of a widely used currency, it could become more stable.

American dollar

“This is why most developing countries become dependent on major ‘first world’ currencies, such as the US dollar, to complete their transactions,” says Green.

“But the dependence on the currency of another country it also comes with its own set of problems, often very costly. “

For example, it can make a nation more vulnerable to foreign influence and lose the ability to fully set its own monetary policies.

El Salvador: is bitcoin the best way to send remittances?

Value fluctuation

But cryptocurrencies also have some disadvantages, and these could have an impact on those who receive remittances in El Salvador.

Bitcoin is a virtual asset with no direct connection to the real economy, that has experienced large fluctuations in value in a very short period of time.

And also not everyone understands how it works or the risks involved.

Unlike traditional banking systems, there are no mechanisms to protect the customer from the fluctuation of the value of Bitcoin.

El Salvador: is bitcoin the best way to send remittances?

The two essential characteristics of the success of a coin are, on the one hand, that it is a effective form of exchange and on the other, which is a stable store of valuesays Ken Rogoff, an economics professor at Harvard University and a former chief economist at the International Monetary Fund (IMF).

It says that Bitcoin is neither.

Vehicle to speculate

“The fact is, it’s not used much in the legal economy right now. Yes, one rich person sells it to someone else, but that’s not an end use. And without that, you don’t really have a long-term future.”

It states that bitcoin exists almost exclusively as a vehicle to speculate.

And although it is gaining popularity around the world, it is rarely used in transactions.

People who own bitcoins tend to keep them to earn more money from them.

But some voices argue that cryptocurrencies can be a tool to avoid hyperinflation.

During the pandemic, many major powers have been printing money to keep their economies afloat.

With traditional currencies, as more and more money is created, value is eroded of the one that exists in circulation.

El Salvador: is bitcoin the best way to send remittances?

People do not necessarily notice this erosion because the nominal amount of their money remains the same; however, they note that their weekly shopping, eating out or going to the movies is getting more and more expensive.

The supply of bitcoins is carefully controlled and limited, and no one can create or issue more bitcoins at will.

There will never be more than 21 million bitcoins in circulation and each Bitcoin is itself divisible into 100 million units known as Satoshis.

This avoids the kind of value erosion that affects “normal” currencies (a phenomenon that residents of Zimbabwe and Venezuela are well aware of).

El Salvador: is bitcoin the best way to send remittances?

A ‘bold move’

“There is no doubt that there will be critics, probably those who live in rich countries will be against this bold measure by El Salvador,” says Green.

US Treasury Secretary Janet Yellen has previously described bitcoin as “an extremely inefficient way to transact.”

He also expressed concern about the “staggering” amount of energy consumed in transaction processing of digital currencies.

It is unclear exactly how much energy bitcoin uses.

The Center for Alternative Finance at the University of Cambridge (CCAF), which studies the business of cryptocurrencies, estimates that the total energy consumption of bitcoin is between 40 and 445 terawatts annualized hours (TWh), with a central estimate of about 130 terawatt hours.

UK electricity consumption is just over 300 TWh per year, while Argentina uses roughly the same amount of energy than the CCAF’s best estimate for Bitcoin.

El Salvador: is bitcoin the best way to send remittances?

Critics also say that while transactions can be traced with traditional banks, there is a risk that Bitcoin becomes a tool for the super rich to evade taxes.

Meanwhile, most of the world’s central banks are studying the possibility of creating their own digital currencies.

In fact, countries like China have already released their own version centrally controlled.

Even though you are digital currencies issued by banks They are regulated by the government, cryptocurrencies are not regulated by a central power.

President Bukele has previously said that the decision to use bitcoin will open up financial services to 70% of the Salvadorans who do not have bank accounts.

In a tweet posted shortly before this week’s vote, he said: “It will bring financial inclusion, investment, tourism, innovation and economic development for our country “.

El Salvador: is bitcoin the best way to send remittances?

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