El Salvador becomes first country in the world to adopt bitcoin

1
4 minutes
El Salvador becomes first country in the world to adopt bitcoin

LONDON - El Salvador may be promoting bitcoin's use as a way to help citizens from abroad send away funds to their home, but the biggest remittance firms are cautious about offering cryptocurrency services.

In a move that could be a precursor to blockchain becoming a better way to send money across borders, El Salvador on Wednesday became the first country to adopt Bitcoin as a legal tender.

President Nayib Bukele opened up bitcoin's potential as a remittance currency for Salvadorans overseas.

But despite the potential long-term risk to their business should such move escalate, only a few of the traditional remittance companies that send the bulk of cross-border transfers are dabbling.

Any efforts to get into crypto could be a double-edged sword, pushing down the fees that form the foundation of their business.

For Western Union and some of the other remittance providers keep in mind that most of the volume in the remittance industry is currently flowing from emerging markets to developed markets primarily because of people - families and friends - that operate in cash, said Kenneth Suchoski, U.S. payments and fintech analyst at Autonomous Research.

To the extent that bitcoin hasn't been adopted and there's not widespread acceptance, these remitting institutions will continue to be relevant for years to come, he added.

Less than 1% of the transnational payments in crypto, such as Suchoski estimated, are currently online. However, in the future, crypto is expected to account for a bigger share of the global assets which rise in annual notes at $9 billion.

Yet bitcoin offers in theory a rapid and cheap way to send money between borders without relying on traditional remittance channels.

An early mover among remitting firms, Coinme stated last month it would allow customers to buy and sell bitcoins for cash at 12,000 U.S. retail locations under a partnership with MoneyGram International, the largest licensed crypto exchange in the world.

We have built a bridge to connect bitcoin and other local currencies to virtual funds, MoneyGram said in an emailed statement to Reuters. As the digital currencies and digital currencies decline in prominence, a fundamental barrier to further growth is the on-off ramps to crypto currencies.

Suchoski, the largest remittance company, had tested bitcoin and crypto in the past and hasn't come up with a significant case that involved small cost savings, said Western Union.

Western Union and other large players, including Wise, WorldRemit, Remitly, Xoom and Ria Money Transfer did not respond to requests for comment.

The remittance industry has successfully made the evolution from transfers via online retail outlets to physical in the past few years, a trend further hastened by the COVID - 19 pandemic.

Transborder remittances with mobile money, from 65% onwards, rose to $12 Billion by 2020.

But the transition from digital to crypto might prove more difficult.

I really have a hard time seeing how they gonna compete if they really slash their price - you can't compete in Africa and try to compete with traditional remittance businesses.

Remittance firms are already under pressure to cut fees, which have averaged 6.5% for the fourth quarter of 2020, according to a WorldWorld Bank report, more than double the 2030 target for Sustainable Development Goals in the United Nations.

In contrast, Bitcoin transfer fees in Nigeria would typically be 2% -- 2.5%.

The more traditional remittance costs related to efforts to combat money laundering and terrorism financing are another burden for regulators in India.

Western Union's annual compliance costs had increased from roughly $400 million a decade or so ago to $200 million, said Suchoski.

Bitcoin would likely add to this burden.

The potential of bitcoin for anonymization has been worrying regulators for years, who fear it can facilitate money laundering and terrorism financing. Many crypto companies have boosted the process of verification, such as requesting user ID, but this is a long process.

Suchoski said that Bitcoin has been used in a lot of underground transactions.

  • Comments
Loading comments...