The role of cryptocurrency in remittances: the case of El Salvador

A lot has been said about El Salvador's adoption of bitcoin as their legal tender (in conjunction with the US Dollar that has been their official currency since 2001); and what this means for the remittance industry. When people ask me that question, my short answer is: “I don’t know”. Nobody really knows, but what do we think? As someone that has been in and around the US outbound remittances to Latin America for the past 20 years, and having made the disclosure that “I don’t know”, I will happily take a stab at it.

If one of the basic premises for the use of bitcoin (and/or other cryptocurrencies) for cross border family remittances is that this would reduce cost and eliminate “friction” (whatever “friction” means…), then I must say we need to look closer and start peeling the onion.

First, the notion of using crypto as a method to lower the price of remittances is, at least for the time being, flawed. Remittances from the US to El Salvador (and to Latin America in general, with the possible exception of a few Caribbean islands) have been fairly priced for a very long time. No, they are not free, as some multilateral organisms and consumer advocates would like, but very few products or services that add value to someone’s life are free.

Buying, transacting or selling bitcoin is not free either. In order to buy bitcoin, one generally needs to have a bank account (to use as a method of payment). 10% of US Hispanics are unbanked, and an additional 22% are “underbanked” (meaning they do have a bank account but still need to use alternative financial services not available through their bank). These figures are probably 2x that rate if we change the denominator to “foreign-born Hispanics” or even more, to “remittance senders”. And even if they do indeed have a bank account, they now need to have a crypto wallet, and most importantly, must be willing to absorb the cost of purchasing crypto that ranges between 0.5%-4.5% (combination of spread + fee as per CoinBase advertising). Can you buy crypto without a bank account? Most definitely! There are thousands of Bitcoin ATMs in the US retail segment that would happily accept your $20 USD bills in exchange for a fraction of a bitcoin, minus a friendly 10-20% commission. So, definitely not free, much less “frictionless”.

Then you have the issue of volatility, the notion of knowing how much money you send, but not knowing how much will make it to the other end is contrarian to the transparency regulators and industry have been advocating for years. To illustrate my point, the bitcoin price on October 20th, was $66,017; and one week later on October 27th, it was $58,455 (-11%). So, the premise of customers being unwilling to pay an $8-$10 fee to send money to El Salvador, but willing to accept material fluctuation in the value of their remittance (thus purchasing power on the receiving end of their remittance) seems flawed. I understand bitcoin volatility can go both ways (bitcoin price is $61,185 on October 28th as I write this article; +4.6% vs the day before), but I highly doubt that Salvadorean immigrants in the US are in the gambling or speculation business, certainly not with the hard-earned money their family members rely on for basic living expenses.

Lastly, what happens on the receiving end of the transaction? Let’s say I do have a bank account, got my crypto wallet, and I am OK paying the fees to buy bitcoin. I now have to make sure my family back in El Salvador also has a crypto wallet to receive the transfer, and most importantly, understand what exactly can they do with such transfer. Until the time when they can use crypto as a method of payment in materially all the merchants where they consume (including rent, school and the occasional street pupusa) they may need to transfer their crypto assets into fiat (in this case USD), that operation would presumably not be free, as with most currency transactions there is an associated spread and fee/commission (in the same order of magnitude as the one the sender had to absorb when first purchased bitcoin). Not the most “frictionless” of processes.

So, I am back where I started. I do not know what the future of crypto is in remittances to El Salvador or for this matter to any other country. I am sure there is a role for crypto to play sometime in the future, perhaps as a “bridge” currency between two fiats, perhaps it is not about crypto but rather about blockchain (for instant settlement, potentially removing the need to prefund remittances, thus minimizing companies’ working capital needs); perhaps it is about stable coins or central bank’s digital currencies, perhaps one day in the future, but not today. For now, it appears to be a solution looking for a problem, that a relatively mature, dynamic and efficient remittance industry does not seem to have.

I am generally not in the business of predicting the future, but if I were a betting man (which I am on occasion, particularly during NFL football season), I would predict the future of bitcoin as El Salvador’s official currency and as the disruptor of the US to El Salvador remittance market to be dead on arrival, and for the almighty US Dollar to continue being the currency of choice for the $7 billion or so the US to El Salvador remittance market. My two cents.