Bitcoin, a two-sided cryptocurrency for Salvadorans and their remittances

Bitcoin or dollars? Salvadoran migrants will be able to opt for a backed currency or a Deregulated cryptocurrency to send remittances to their country, a decision that opens up opportunities but carries risks, analysts agree.

With your decision to make the bitcoin a legal tender to pay for goods and services, the Salvadoran president Nayib Bukele it wants to make “history”, promote banking and prevent the loss of “millions of dollars” in intermediation in the sending of remittances from abroad.

The initiative is both opportunity and risk.

“It is an ongoing experiment that can be successful if bitcoin’s volatility continues to fall, and its price is oriented upwards,” he estimated. Edward Moya, market analyst OANDA, consulted by AFP.

“In May, bitcoin sends to El Salvador quadrupled and could rise if (cryptocurrency) prices continue to rise,” he added.

But will Salvadorans abroad prefer bitcoin over the traditional dollar?

For Moya, some caution will prevail among migrants as long as bitcoin volatility remains elevated. “Traditional methods” of dollar shipping are likely to continue to work “until bitcoin can become a stable asset,” he estimated.

Assumptions and certainties

According to data from the World Bank, In 2020, El Salvador received more than $5,900 million in remittances from its nationals living outside the country. That figure represented 24.1% of GDP and places El Salvador as the Latin American nation that receives the largest volume of money through this channel in proportion to the size of its economy.

With a contraction of 7.9% of GDP in 2020 by the coronavirus pandemic, El Salvador continues to bet on the growth of remittances — 4.8% last year — as an important support for its dollarized economy.

Manuel Orozco, director of the Centre for Migration and Economic Stabilization in Washington, he explained to AFP that “the success” of bitcoin shipments “is supported by two assumptions” that are the operation of “the law that requires accepting the cryptocurrency, (and) that the migrant will send remittances in cryptocurrency.”

“So far, the remittance industry has been very reluctant to get into that market. One of the reasons is that its use value (of cryptocurrency) is limited. Another, that the currency as part of a virtual financial ecosystem lacks strong security controls,” he said.

On the other hand, “it is totally incorrect to assume that there will be no transaction cost” in sending remittances in bitcoin, “since the processing itself and regulatory secrecy requires costs,” Orozco added.

High volatility

The high volatility of cryptocurrencies is seen as a risk factor by experts, following the “express” approval of a law that was presented on Tuesday and approved the next day in the parliament with a majority related to Bukele in El Salvador.

“The adoption of bitcoin as a legal tender raises a number of macroeconomic, financial and legal problems that require very careful analysis,” the IMF spokesman warned, Gerry Rice.

While the IMF agreed to meet this week with representatives of the Salvadoran government, and the Central American Bank for Economic Integration (CABEI) announced that it will provide technical assistance to the country to regulate the use of bitcoin, the World Bank he refused to give him advice.

“While the government approached us for help with bitcoin, this is not something the World Bank can support given the environmental and transparency deficiencies” of the cryptocurrency, a spokesperson for the agency explained.

The extreme volatility in the price of bitcoin, which can vary the value of a remittance between its point of departure and arrival in El Salvador, is one of the problems associated with this mechanism.

“For a currency to fulfill the function of value reserve (…) it shouldn’t be so volatile,” the former president of the state-owned company told AFP. Central Reserve Bank (BCR) of El Salvador, Oscar Cabrera.

A survey of the Chamber of Commerce and Industry of El Salvador published last week showed that 96.4% of entrepreneurs in the country prefer the use of bitcoin to be optional, while 93.2% of workers surveyed indicated that they would choose to keep the dollar to receive their salaries, and 82.5% would choose the U.S. currency to bitcoin to receive remittances.

For Orozco, meanwhile, the circulation of bitcoin would have a positive counterchar that is the generation of “an important liquidity that would allow to generate surplus for credit and investment”, in addition to modernizing banking.

“In the short term, strategically it is an opportunity for the financial system” of Salvador, he said.

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