- With fast speeds and low transaction costs, Bitcoin can easily disrupt wire transfer services.
- Should Bitcoin receive widespread acceptance, remittance firms would witness a sizable reduction in their net income.
- However, price volatility remains an obstacle, driving the mainstream away.
On September 7, El Salvador became the first country to adopt Bitcoin as legal tender, granting the leading cryptocurrency legal currency status. The move prompted mixed global backlashes, with proponents claiming Bitcoin could ease money transfers and decrease costs, while critics warned illicit activities and money laundering could witness a surge.
However, President Nayib Bukele believes Bitcoin has the potential to become a promising remittance currency for Salvadorans overseas. He argues Bitcoin can cut off remittance costs, further helping improve the country’s economy.
El Salvador is heavily reliant on remittances. According to the World Bank, remittances finance nearly 25% of households in the country. In 2019, Salvadorans overseas sent around $6 billion home, with around $400 million of that going into fees and costs.
Remittance companies usually charge about 6% on money transfers. However, Bitcoin can help reduce that cost to exceptionally low levels. “It’s going to be beneficial … we have family in the United States and they can send money at no cost, whereas banks charge,” said Reina Isabel Aguilar, a Salvadorian store owner.
Can Bitcoin Replace Wire Transfers?
With fast speeds and low transaction costs, Bitcoin can easily disrupt wire transfer services. However, a lack of understanding among the mainstream is the biggest barrier on the way. Explaining this, President Bukele said:
Like all innovations, El Salvador’s bitcoin process has a learning curve. Every road to the future is like this, and not everything will be achieved in a day, or in a month.
Backing this, a survey by the Central American University revealed that less than 5% of Salvadorians understand Bitcoin. The survey also showed that over 90% of the contestants admitted they don’t have even a basic understanding of cryptocurrency.
However, should Bitcoin prove to be a suitable substitute for money transfers and receive widespread acceptance, major remittance firms would witness a sizable reduction in their net income.
Kenneth Suchoski, a fintech analyst at Autonomous Research, also believes remittance providers wouldn’t be relevant once Bitcoin receives widespread acceptance. He said:
For Western Union and some of the other remittance providers keep in mind that most of the volume in the remittance industry is going from developed markets to emerging markets primarily to people -families and friends – that operate in cash. To the extent that bitcoin isn’t adopted and there’s not widespread acceptance, these remittance providers are still going to be relevant for the years to come.
Nevertheless, it is worth mentioning that the extreme price volatility rampant in Bitcoin could pose a significant challenge in mainstream adoption. Just yesterday, Bitcoin plummeted by over $10,000 in a matter of hours, dropping from highs around $53,000 to as low as $42,800.