El Salvador does not have its own currency, making financing growth difficult as debts soar to 90 percent of GDP.
Central American countries are eagerly waiting to see if El Salvador’s adoption of Bitcoin as parallel legal tender cuts the cost of remittances, an important source of income for millions of people, say the region’s development bank.
President Nayib Bukele’s congressional allies have already approved legislation giving the cryptocurrency official currency status alongside the US dollar, a first in the world. The move takes effect in September.
Bukele has touted the adoption of Bitcoin as a way to facilitate remittance payments from Salvadorans living abroad.
“Everyone is watching if it goes well for El Salvador and if, for example, the cost of remittances drops substantially … other countries will probably seek that advantage and adopt it,” Dante Mossi, the executive president of the Central American Bank for Economic Integration (CABEI), told the Reuters news agency on Wednesday. CABEI is an international multilateral development financial institution that has its headquarters in Honduras.
Mossi called the plan an “out-of-this-world experiment” aimed at increasing financial inclusion in a region where many people lack access to bank accounts or credit cards and rely on money sent home from relatives living in the United States.
CABEI, the regional development bank, is giving El Salvador technical assistance on implementing the cryptocurrency, an important show of support as the World Bank had declined to help, citing environmental and transparency drawbacks.
The bank’s technical assistance is focused on helping El Salvador design a legal framework for the adoption of Bitcoin and to make sure strict international money laundering protocols are adhered to.
The assistance is meant to help El Salvador “navigate waters that have yet to be explored,” said CABEI’s head of investments Carlos Sanchez.
Mossi said the Central American nations that receive the most remittances are those most likely to favour using Bitcoin and underscored that CABEI had a “fiduciary obligation” to support El Salvador in its request for help.
“Guatemala, Honduras and El Salvador are the countries that would have the most to gain if the adoption of Bitcoin lowered the cost of sending remittances,” said Mossi.
CABEI participated in a recent meeting of the Central American Monetary Council, part of the Central American Integration System (SICA), where participants asked about El Salvador’s Bitcoin plans and showed interest, he added.
The Central Bank of Honduras referred Reuters to a June 11 statement which said the bank does not prohibit, supervise or guarantee the use of cryptocurrencies as methods of payment in the country.
The governments of Guatemala and Honduras did not immediately respond to a request for comment.
El Salvador has begun installing Bitcoin ATMs, allowing its citizens to convert the cryptocurrency into US dollars and withdraw it in cash, as part of the government’s plan to make the token legal tender.
The government will install 200 of the teller machines to initially accompany its digital wallet called Chivo, a local slang term for “cool”, President Bukele said on Twitter on Sunday. Transactions will be commission-free, he said, adding that there will also be 50 financial branches across the country for withdrawing or depositing money.
Adopting Bitcoin will save Salvadorans $400m per year in fees for receiving remittances from abroad, Bukele said.
Under 1 percent of the volume of global cross-border remittances are currently in cryptocurrencies, according to Autonomous Research but in the future cryptocurrencies expected to account for a larger slice of the more than $500bn in annual global remittances.
Bitcoin offers, in theory, a quick and cheap way to send money across borders without relying on traditional channels.
El Salvador’s Bitcoin law will take effect on September 7 and Salvadorans will be able to download the government’s Chivo digital wallet, enter their ID number and receive $30 in Bitcoin, Finance Minister Alejandro Zelaya said in a local TV interview on Monday. The government has created a $150m fund to back Bitcoin to US dollar conversions, he said.