On September 7th 2021, El Salvador became the first country in the world to adopt Bitcoin as legal tender. This ushered a new age where many countries with developing economies are considering the same, or similar routes. The reasons for this shift in public policy range from reduced international transfer fees to increased economic autonomy. That being said, this approach also comes with certain risks that the people of the countries adopting digital currencies should be educated about. We will be discussing those risks in another article.
Reduced transaction fees & shorter transaction time For Remittances
To make international transfers, exchange rates as well as processing fees can take up to 6% of the total payment sent – sometimes those fees can be higher. With cryptocurrency transactions, the fees are 1% or less of total transactions. Additionally, as it currently stands, international transfers may take up to 5 days to clear, while cryptocurrency transactions clear within minutes. The adoption of Bitcoin in El Salvador will lead to an increase in what El Salvadorans receive from their peers overseas since those remittances won’t be eaten up by high transaction fees. This in turn helps increase external funds that go right into El Salvador’s economy.
Increased access to investment loans for the unbanked
Over 70% of people in El Salvador don’t have a bank account. This is an issue that many developing economies face, and it is a hindrance to development because most unbanked do not have access to loans, investments or other banking services. With the adoption of Bitcoin as legal tender, a significantly higher number of people will have access to those banking services, especially as just one only need a smartphone to own Bitcoins. In addition, as the technology evolves and more El Salvadorans create a track record, they may be able to borrow much more easily to finance their business endeavors. This in turn will create more jobs and economic growth. With Bitcoin being a store of value in other parts of the world, it constitutes a de-facto investment vehicle for those who wish to save their bitcoins.
Increased foreign direct investments
The use of Bitcoin as currency as El Salvador may leads to an in direct foreign investments. As this article from Entrepreneur explains, a whole new set of infrastructures such as payment platform developers, ATM manufacturers, and bitcoin miners would need to be put in place to support this new way of life for El Salvadorans. This will in turn lead to the creation of more crypto-industry jobs in El Salvador.
Increased purchasing power & intra-regional trade
Bitcoin can help citizens from El Salvador and other developing economies – especially in Africa – not only maintain but also increase their purchasing power. Many Latin American and African countries have historically struggled with Inflation. In the 1990s, the CFA in West and East Africans lost a significant part of their value, thus decreasing the purchasing power of citizens in those countries. Adopting bitcoin as a legal tender will help prevent such lost in purchasing power and increase trade among countries with different currencies. Africa is the continent with the lower level of regional trade – one reason for this is the high number of currencies in Africa. Adopting Bitcoin will help African countries trade more with each other and with other countries accepting the digital currency as legal tender.