Isn’t El Salvador’s President’s Bitcoin Law A Bit Revolutionary?

Isn't El Salvador's President's Bitcoin Law A Bit Revolutionary?

Thanks to the introduction of cryptocurrency bitcoin as legal tender in El Salvador, President Nepe Bukele will make it cheaper for Salvadorans abroad to send money home. Construction workers, cleaners, and waitresses usually transfer part of their salaries from the United States to their relatives in the smallest country in Central America.

Companies that process these transactions, such as Moneygram and Western Union, charge a fee for each transaction. Bukele believes that thanks to bitcoin, Salvadorans will be able to bypass these brokers from Tuesday. After all, the idea behind this digital currency is that you can transfer funds without the participation of a central party.

But according to researchers at Johns Hopkins University in the United States, El Salvador has not yet reached that far. In their article, under the title “Bukele’s Bitcoin Bluunder’ Error They calculate that bitcoin transactions will in fact become much more expensive than current payments.

Payments are easier and cheaper

Bukele thought not strange. The International Monetary Fund (IMF) is also studying how digital currencies can help workers around the world send money. “We are witnessing a digital money revolution that can make such payments easier, faster and cheaper,” IMF Managing Director Kristalina Georgieva said in April at a workshop for policy makers and business on the topic. “We need to make sure that all countries can benefit from innovations in digital money.”

Last year, migrant workers sent $540 billion to low- and middle-income countries, not much less than in 2019, the year before the pandemic broke out. According to Knomad, the World Bank’s knowledge platform on migration and development, the figure shows that remittances provide a stable social safety net for families in the most vulnerable countries.

Most of the money went to India, China, Mexico, the Philippines, and Egypt. But compared to the size of the economy, El Salvador is among the top five globally, with money sent home amounting to at least 24 percent of GDP, which last year amounted to nearly $25 billion.

The researchers say that transferring money to El Salvador is now relatively cheap. On average, there are 2.85% additional transaction costs per payment. This places the country roughly at the bottom of the outlook held by the World Bank. For Mexico, for example, these costs are 4.20 percent, and those sending money to African countries in Botswana and Angola pay more than 20 percent of transaction costs.

Evangelical misinformation

One problem is that 70 percent of people in El Salvador do not have a bank account. To exchange the received bitcoin for dollars, they must therefore go to a special ATM. There are only three such vending machines in the country. The bitcoin company that installs the hardware charges a fee of 5 percent per transaction. Added to this are additional network costs and travel costs. You also need a connected mobile phone to complete the payment.

The researchers expect the deal to cost at least twice that. They call the president’s sweet words “Bitcoin fanatics” “disinformation.”

Government Digital Coins

El Salvador’s Bitcoin law, passed in June, obligates companies to accept this cryptocurrency as a form of payment. In addition, it can be used for taxes and bank loans – although the value of the currency fluctuates significantly.

El Salvador people don’t have much of it yet. According to a survey conducted by the University of Central America in the capital, 68 percent of respondents are against the introduction of bitcoin as legal tender. Nine out of ten people don’t really know what Bitcoin is.

In her speech, IMF Managing Director Georgieva did not specifically mention bitcoin. A fund dealing with financial stability would prefer to see central banks and governments develop their own digital currency. Georgieva says this payment system must be reliable and put consumer interests first. “Then vulnerable people who send small sums home can benefit the most.”

Read also:

The European Central Bank is testing its cryptocurrency. What can we do with this digital euro?

We are one step closer to a new legal tender: the digital euro. The European Central Bank expects the currency to be ready for use within five years.

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