Bank of America (BofA) believes El Salvador could have a lot to gain with its adoption of Bitcoin as legal tender.
BofA analysts believe the adoption of bitcoin in El Salvador could streamline remittances, promote financial digitization, provide consumers with greater choice and open up the country to American firms and digital currency miners.
State-run newspaper Diario El Salvador shared an image of an excerpt from the report on its official Twitter account.
The report has highlighted 4 potential benefits.
Worker remittances could benefit from lower transaction costs
Remittances constitute 24% of the country’s GDP. “Using Bitcoin for remittances could potentially reduce transaction costs compared to traditional remittance channels,” the report reads.
“The idea is that Bitcoin could be used as an intermediary for the cross-border transfer, so that dollars are converted to Bitcoin by the sender and then converted back to dollars domestically by the receiver.”
The report has cited the Bank for International Settlements (BIS) estimates that “the average cost of a bank-based cross-border remittance is over 10%.”
Bitcoin’s peer-to-peer network might solve these issues, reduce transaction costs compared to traditional remittance channels.
It may also increase the recipients’ disposable income and reduce the proportion of remittances lost to financial intermediaries.
Financial digitalization, with a progressive touch
“70% of the adult population in El Salvador does not have a bank account. For that reason, democratizing access to electronic payments, through Bitcoin, has a progressive touch,” as per the report.
The smartphone penetration is quite high which can make digital currency payments a viable medium for the flow of money. As per a Statista report, there are 146.9 mobile cellular subscriptions per 100 inhabitants.
Strike, a lightning node-powered payments application, is highly used in El Salvador for making payments.
Greater consumer choice
Users have more choice in accepting payments. They can embrace digital currency and innovation. Also, they can interact with businesses across the borders as Bitcoin is not a single country’s currency or central bank run currency.
The report says that it is not believable “that businesses will be legally bound to accept Bitcoin”. The recipient can automatically convert the payment to dollars using the Chivo electronic wallet which is linked to the clearinghouse, though transaction costs may be applied.
Business with American firms, and potential to attract Bitcoin mining FDI
The adoption can open the floodgates for FDI in El Salvador.
Bitcoin miners, ATM manufacturers, and other crypto entrepreneurs may flock to the country in search of better opportunities.
A potentially lucrative source may be Bitcoin mining. As mentioned in the report, Iceland became a hotspot in Bitcoin mining, attracting firms mainly because of the country’s low-cost geothermal energy.
El Salvador is also a country of high volcanic activity.
President Bukele has said that the state-owned geothermal company, LaGeo, could produce clean energy from volcanoes which could be supplied to supply Bitcoin miners.
But mining has developed independently of any country’s acceptance of Bitcoin. Moreover, electricity costs in El Salvador are currently relatively high.
Only continuous and controlled experimentation will bring about the required changes necessary to make cryptocurrencies mainstream. El Salvador’s famous Bitcoin Beach is one of the most successful experiments of community adoption. Only when the cryptocurrencies go mainstream just like in the aforementioned experiment, will people be able to reap their macro benefits.