What El Salvador’s Bitcoin strategy means for crypto, India

The move could allow Salvadorians to hold on to more of the cash coming in from abroad

The tiny Central American nation of El Salvador has become the first to greenlight the use of Bitcoin as legal tender throughout its borders, marking what could be a watershed moment for digital currencies.

President Nayib Bukele’s proposal was adopted by a huge majority of the country’s parliament and will now facilitate the use of the digital currency in day-to-day transactions, alongside the US dollar, in the hope that it will let people hold on to more money wired into the country and foster investment.

What’s so good about Bitcoin?

Bukele’s hope is that the digital currency will help cut down on charges citizens pay to intermediaries while receiving money from beyond its shores.

El Salvador relies greatly on remittances sent by Salvadorians from abroad, with about a quarter of the country’s citizens settled in the United States. Last year, they sent home more than $6 billion in remittances and accounted for more than 20% of the GDP, despite the Covid-19 pandemic. Moreover, many citizens do not yet have a bank account and digital banking is not widespread.

Bukele’s contention is that using Bitcoin could help foreign remittances circumvent traditional intermediaries, who sometimes charge cuts as high as a fifth of the transaction value. The use of Bitcoin could theoretically allow Salvadorians to retain much more of the money coming in. The move could help cushion the impact of looser US Federal Bank monetary policy on the nation’s purchasing power.

The tech-savvy businessman-turned-politician also argues that it could help draw more talent and investment and has drawn up crypto-friendly guidelines to that effect.

What it means for cryptocurrency

The move has been welcomed with enthusiasm in much of the crypto community, who view it as a first step in legitimising the digital currency and are excited by the prospect of more widespread use of the digital coins and the blockchain technology.

El Salvador’s plunge into the unknown waters of crypto could also encourage other emerging market economies with limited bank penetration to adopt the strategy and avoid high remittance charges.

However, sceptics warn that the use of bitcoins could make it harder for countries to get easy credit and is prone to being used to launder money and illegal activities. Some critics have also pointed out that it could lead to goods getting more expensive if cryptocurrencies prove inflationary in the long run.

What’s in it for India?

In terms of monetary policy, India has little to glean from the crypto experiment in El Salvador. Indian regulators have usually expressed concerns over the digital asset and have even framed a bill that could prevent trading in crypto and pave the way for a central bank digital currency (CBDC), which has been put on ice amid some pushback from crypto stakeholders in the country.

However, India could keep an eye on what the move does for the remittance market in the country, being the world’s top receiver of remittances. Independent workers in the country are already turning towards crypto to cut down on remittance charges and grow personal income.

The other aspect to look out for is how El Salvador does on the efficiency, money laundering and illicit activity fronts, something that many experts have flagged as a potential threat in using crypto.