It seems that interest in Bitcoin and other cryptocurrencies raises exponentially (“to the moon” as crypto-enthusiasts like to say) every day. This has caused credit unions, financial regulators, and policy-makers to seriously consider how, and to what extent, should credit unions approach the subject. One aspect of these discussions is how to serve the banking needs of the general public using crypto-currencies for everyday transactions. This was something I thought about and investigated during my recent trip to El Salvador, the new “digital gold” frontier, for insights on how the credit union industry can address the subject.
In September of 2021 El Salvador got the attention of the world by becoming the first country to adopt Bitcoin as legal tender and that the country will promote the wide-scale use and acceptance of it in everyday transactions. Many wondered why El Salvador would take this action, and some even called it a publicity stunt. Turns out, one of the big reasons for the bold move is actually … the United States.
El Salvador has a very strong reliance to the American economy and has a long history of facilitating economic activity between it and the United States. The country previously ditched its own local currency (which as called the “Colón”) and adopted the United States Dollar as its official currency (which makes visiting El Salvador very convenient). There are also an estimated 2.3 million Hispanics of Salvadoran origin living in the United States, which is substantial considering that El Salvador currently has a population of about 6.5 million in the country.
This Salvadoran diaspora community is vital to the Salvadoran economy because of remittances, the practice of Salvadorans living and working in the United States and sending money back to El Salvador. In 2020, they sent nearly $6 billion in remittances back to their families in El Salvador. That number is eye-popping when you realize that accounts for nearly 23% of the country’s entire gross domestic product! Nearly 70% of the population receives remittances, which on average is about $195 a month. Though it may seem small, in a country where the monthly minimum wage in El Salvador is only $365 a month, for the households that do receive remittances it accounts for about 50% of their monthly income. As you can imagine, these remittances are absolutely vital for the local population and a major reason why so many Salvadorans leave their country for economic opportunities in the United States.
The Bitcoin Experiment
What does remittances have to do with Bitcoin? Current conventional methods of sending remittances, for example through a company like Western Union, require a substantial amount of fees to be paid to transfer the money. For an economy that heavily relies on remittances, those fees add up to a substantial amount that are prevented from going into your economy.
That is where Bitcoin comes in. The Salvadoran Government has released the “Chivo” (Salvadoran slang for “Cool”) app, its own national virtual wallet (a place to store and utilize cryptocurrency), which promises no-fee transactions and rapid remittance payments. By cutting out the “middle-man”, some estimate that El Salvador could see an additional $1 Billion dollars of remittance payments going into the Salvadoran economy, and a noticeable boost to the Salvadoran GDP.
El Salvador also wants to see Bitcoin utilized beyond remittances. The Chivo app also facilitates everyday transactions and purchases in Bitcoin in stores that accept it. The Government is even getting into the action by accepting Bitcoin payments, hosting cryptocurrency conferences, and even launching a project to use a volcano to mine Bitcoin.
My Visit to El Salvador
In October I flew to El Salvador to visit some family. My father is from El Salvador and I briefly lived there while interning at a major law firm in San Salvador. I especially took an interest in seeing how Bitcoin worked in El Salvador due to my deeply personal connections to the country.
One of the first things I noticed getting off the plane were Chivo ATMs and signs stating that entrance fees could be paid in Bitcoin. Driving through San Salvador you also saw many local businesses with the Bitcoin logo outside, showing publicly they accepted Bitcoin payments. In various stores, you would see the Chivo QR code at the counter in order to facilitate Bitcoin payments. Many of the larger stores have begun accepting Bitcoin payments, though that is much less common with smaller stores and street vendors. In general, it seemed the Chivo app was easy to use and many young people had downloaded it.
I did notice a sharp divide in opinion on Bitcoin. Some Salvadorans are bullish on Bitcoin, viewing it as the future of finance and take pride that their country was the first to adopt it as legal tender. Others were much more skeptical, outright rejecting the notion that it is a valid currency and nothing more than just a scam with ties to crime. Others, taking a positive but cautious approach, agree that finance is evolving but also worry about Bitcoin’s technical complexity, energy needs, and price volatility.
Bitcoin’s price volatility is a major concern of many Salvadorans. While the price of Bitcoin has gone up exponentially over the last few years, and is currently at record highs, there have been frequent and dramatic price swings, sometimes triggered by the statements of celebrities. Many worry that developing a reliance on Bitcoin can lead to frequent feast and famine periods, especially in a country where much of the population lives in poverty on only a few hundred dollars a month. It would be devastating if a Salvadoran worker in the US sends vital remittances back to their family in El Salvador in Bitcoin and it drops in value, reducing the ability of that family to provide for their needs. This is why some in El Salvador wish to see the adoption of a “stable coin”. A stable coin is a type of cryptocurrency that is designed to mirror the value of some other currency, for example the United States dollar. The theoretical advantage is that it would still be cheaper to send the remittances and payments in a stable coin than through a traditional remittance service, while avoiding the wild volatility of Bitcoin.
Another major concern I saw was the technical complexity of Bitcoin. Admittedly, many people in the United States don’t truly understand cryptocurrencies either. In a country where many people have limited access to technology and technical literacy, there has been difficulties trying to convince and teach people in the rural and poorer areas to begin using Bitcoin, where saving on remittance fees would have the most impact.
Lessons for The Credit Union Industry
El Salvador offers credit unions many insights on how to implement Bitcoin and cryptocurrency services. As we can see with the remittances issue, people want to be able to send money to each other in a low cost and rapid manner. To be clear, it’s not just Salvadorans who send remittances, but many other immigrants also send money back to their relatives in their home countries. Why should your members use an outside service like Western Union when instead your credit union can handle the remittance payment directly? If the credit union industry can begin offering crypto-payment solutions like Chivo, this could help credit unions gain a substantial new line of business. As Bitcoin and cryptocurrencies become more widely accepted, using a solution like Chivo to make everyday payments and transactions will be in demand.
However, there are obstacles that need to be addressed. Credit unions will need to help their members gain a basic understanding of Bitcoin and cryptocurrencies. This will help people feel more comfortable using them and understand their advantages. This would also need to extend to teaching businesses how to accept these kinds of payments, such as Tesla and others. Another challenge is the price volatility typically associated with Bitcoin and cryptocurrencies. A potential solution is experimenting with stablecoins pegged to the much less volatile United States Dollar.
The credit union industry needs to actively explore adoption of Bitcoin and Cryptocurrency related services for its members, which are increasingly demanding it. We can look to El Salvador for lessons on how such solutions can be implemented, and learn from their experiences as time goes on. I highly encourage you to visit El Salvador and see the digital gold frontier for yourself. Maybe a country that has been revolutionized by the American economy will help revolutionize our own economy.