Bitcoin will transform the economy of El Salvador
El Salvador’s great bitcoin experiment, embracing what is arguably the grandfather of cryptocurrencies as legal tender, is an experience that has had its share of turbulence.
In the meteoric three months between announcement and nationwide rollout, there have been technical glitches, bitcoin price volatility, and even street protests.
But as the CEO and Executive Director of the Stellar Development Foundation, Denelle Dixon, told Karen Webster, bitcoin will only be the beginning, opening the national conversation to integrate cryptos more broadly into the mix.
Blockchain adoption will intensify, she said, and a range of other currencies will be considered and used in day-to-day trading, including stablecoins.
“Any country that decides [crypto] going to be legal somehow changes the idea of the digital coin from being simply something that is ‘out there’ that only a certain segment of the population focuses on, to something that everyone needs to pay attention to As they assess strengths and weaknesses, she said.
“It’s important to get it right,” she added.
After all, there will only be a short window to convince consumers and businesses to move beyond the proven money-and-dollar methods. And getting them to trust bitcoin, however volatile it may be, when a hypothetical purchase of a can of Coke costs an infinitesimal fraction of a $ 48,000 bitcoin (to date), can be difficult.
It’s not easy to think in fractions, she noted. No one really knows what the tax implications and pricing implications are when it comes to using a digital coin that can scale several percentage points in a day or even an hour.
The biggest issue at hand is trust. It is true that at least for now, many consumers do not trust bitcoin. A large majority of consumers – 70% of them – in El Salvador said they didn’t want to use bitcoin in everyday commerce.
But at a high level, she said, bitcoin is indeed a store of value, which means consumers will begin to embrace and adapt cryptos to their own level of convenience. Progress in education will be faster and greater, requiring joint efforts between the private sector and governments.
The main initial use cases
The main initial use cases will focus on remittances, she told Webster. There is indeed the possibility of streamlining cross-border payments from the start. The remittance market and how remittances work is highly fragmented and ripe for a digital overhaul.
Remittances to the country recently totaled 23% of gross domestic product (GDP), or $ 6 billion, which equates to $ 195 per household per month. But the costs are high, and the fees can represent 7-8% of transactions over and above the amount sent.
Competition among developers in the market will create new offers related to remittances, so the price of remittances themselves will drop.
Bitcoin and other cryptos can reduce these costs significantly. She specifically highlighted the use of stable coins to reduce transaction costs in order to settle faster and with greater transparency. In addition, stability is introduced in these transactions, as there is individual support with fiat.
“They are not volatile,” she said. “They don’t have the challenges associated with other cryptocurrencies – the transfer goes pretty seamlessly, and in three to five seconds it’s done.”
On the Stellar network, for example, it is possible to make 100,000 transactions for about a penny. Stablecoins also have a competitive advantage, as they are transparent about the assets that “back” them (increasingly to dollars and very liquid short-term T-bills).
Stable coins, she said, can work with the existing financial infrastructure and dollar sovereignty in El Salvador, in an interoperable fashion. This interoperability goes against criticism and concerns that President Nayib Bukele will seek to launch his own digital decree to evade sanctions and strengthen his own grip on the economy.
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As regulators continue to focus on stablecoins, the competitive situation is also expected to improve in a way that benefits consumers, she said.
Looking ahead, she said, “we’re going to see other countries that are also going to look at bitcoin and the plethora of other opportunities available to them.”