President of El Salvador Nayib Bukele said the country would save $ 400 million a year in transfer fees by adopting bitcoin. This statement does not necessarily add up.
Why is El Salvador adopting bitcoin?
A quick recap: The Central American country rolled out its bitcoin wallet app, called Chivo, on September 7. Companies are now forced to accept the crypto token and the US greenback, which was already a national currency, for payments. Bukele seeded the wallets using taxpayer dollars with $ 30 worth of bitcoin to get things done. The president hopes to attract a new generation of crypto entrepreneurs and reduce spending on remittances, which account for around 20% of gross domestic product.
Unfortunately for Salvadorians, there may not be any time or cost savings for remittances using bitcoin compared to PayPal (via its Xoom offering) or Western Union, according to Jason Mikula, a fintech consultant. . Mikula calculated the numbers for sending $ 200 from the United States to El Salvador; his analysis assumes that the sender starts out in US dollars and traded them for bitcoin using Coinbase, the largest US crypto exchange. (He notes that some crypto supporters assume the transaction begins in bitcoin, which he says is unreasonable because most people hold their funds in fiat currency.)
Is bitcoin good for transferring money?
Exchanging $ 200 for bitcoin costs between $ 2.99 and $ 7.67 at Coinbase, depending on whether the transaction is funded by PayPal, ACH, or debit, Mikula explains. The exchange may charge an additional spread for the transaction (the spread between the bid and ask prices of bitcoin on its exchange). There is also a network fee (paid to crypto miners who process transactions on a blockchain) to send bitcoin from Coinbase to a Chivo wallet in El Salvador, which costs around $ 3. El Salvador bitcoin wallet allows users to switch between US currency and bitcoin at no cost.
In contrast, a person can send $ 200 from the United States to El Salvador using Western Union’s mobile wallet, called Tigo, at no cost and within minutes, according to the company’s website. Mikula speculates that Western Union may be willing to eat up the transaction costs (debit / credit exchange) because fewer installments are sent this way. Western Union charges a hefty fee for transactions using physical cash: it costs $ 9 to $ 18 to send $ 200 in cash from the United States to El Salvador. This is probably a popular way to send money, as around 70% of people don’t have a bank account.
Chivo could still help unbanked people in El Salvador
Bukele is right about at least one thing: Remittances are an essential lifeline for millions of people in El Salvador. About 18% of households receive them, which averages out at about $ 195 per month, according to a report by researchers at the Johns Hopkins Institute for Applied Economics, Global Health and the Study of Business Enterprise. They found that the costs of remittances there absorb about 2.95% of transactions, the lowest level of any country in the Latin America-Caribbean region.
And they, too, have discovered that sending funds using Bitcoin’s blockchain rails is more expensive than the systems already in place. Their analysis is based in part on the assumption that Salvadorans want paper greenbacks, not bitcoins, and will have to pay a crypto ATM to withdraw the hard currency. (They note that the coastal town of El Zonte, El Salvador, made bitcoin a local currency in 2019, but that didn’t catch on.) “At present, traditional transfer methods are the cheapest way to make installments, ”they wrote. .
Bukele’s controversial bitcoin bet carries a number of serious risks for El Salvador, including the potential to undermine financial stability. That said, there could be some benefits if the Chivo wallet succeeds in making digital payments and mobile wallets into the hands of the vast majority of the country that is unbanked. This infrastructure could actually reduce transfer costs, without using bitcoin.