Bitcoin Will Transform El Salvador’s Economy
El Salvador’s grand bitcoin experiment, embracing what is arguably the granddaddy of cryptocurrencies as legal tender, is one that has had its share of turbulence.
In the lightning quick three months that have passed from announcement to rollout on a national stage, there have been technical glitches, bitcoin price volatility, and even protests in the street.
But as Stellar Development Foundation CEO and Executive Director Denelle Dixon told Karen Webster, bitcoin will be just the beginning, opening the national conversation to bring cryptos more widely into the mix.
Blockchain adoption will scale, she said, and a range of other currencies will be considered and used in everyday commerce — including stablecoins.
“Any country that decides [crypto] is going to be legal tender sort of changes the idea of the digital coin from just being something that is ‘out there’ that only a certain segment of the population focuses on, to something that everyone needs to pay attention to” as they assess strengths and weaknesses, she said.
“Getting this right is important,” she added.
After all, there will be only a short window to convince consumers and businesses to move beyond the tried-and-true methods of cash and dollars. And getting them to trust bitcoin, volatile as it is, when a hypothetical purchase of a can of Coke costs an infinitesimal fraction of a $48,000 (at this writing) bitcoin, may be difficult.
It’s not easy to think in fractions, she noted. No one quite knows what the tax implications and pricing implications are when it comes to using a digital coin that can move several percentage points in a day, even in an hour.
The larger issue at hand is trust. It’s true that at least for now, many consumers do not trust bitcoin. A vast majority of consumers — 70% of them — in El Salvador have said that they do not want to use bitcoin in everyday commerce.
But at a high level, she said, bitcoin is indeed a store of value, which means consumers will start to adopt and adapt cryptos to their own comfort levels. There will be faster and greater progress with education, which necessitates joint efforts between the private sector and governments.
The Key Initial Use Cases
Key initial use cases will focus on remittances, she told Webster. There is indeed the opportunity to streamline cross-border payments right out of the gate. The remittance market and the way remittances work is highly fragmented and ripe for a digital overhaul.
Remittances into the country recently totaled 23 percent of gross domestic product (GDP), or $6 billion, equivalent to $195 per household per month. But costs are high, and fees can account for 7% to 8% of transactions on top of the amount being sent.
Competition between developers in the market will create new remittance-related offerings so that the price of the remittances themselves will come down.
Bitcoin and other cryptos can cut those costs significantly.She pointed specifically to the use of stablecoins to reduce the costs for transactions to settle more quickly and with greater transparency. In addition, there’s stability introduced into those transactions, as there is a one-to-one backing with fiat.
“They’re not volatile,” she said. “They don’t have the challenges associated with other cryptocurrencies — the transfer happens pretty seamlessly, and in three to five seconds, it’s done.”
On the Stellar network, for example, it’s possible to do 100,000 transactions for roughly a penny. Stablecoins also have a competitive advantage, as they are transparent in what the assets “backing” them are (increasingly toward dollars and highly liquid short-term treasuries).
Stablecoins, she said, can work with existing financial infrastructure, and the dollar’s sovereignty in El Salvador, in an interoperable way. That interoperability runs counter to criticism and concern that President Nayib Bukele will look to launch his own digital fiat to evade sanctions and cement his own grip on the economy.
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As regulators continue to sharpen their focus on stablecoins, the competitive picture should improve as well in a way that benefits consumers, she said.
Looking ahead, she said, “we’re going to see other countries that are going to look at bitcoin and at the plethora of other opportunities available to them, as well.”