El Salvador’s Adoption Of Bitcoin As Legal Tender Is A Wake-Up Call

Livemint     1st July 2021     Save    
QEP Pocket Notes

Context: In the wake of El Salvador’s adoption of bitcoin as legal tender, there’s pending demand for building alternatives that reduce the cost of remittances to dissuade the use of dangerously volatile cryptocurrencies.

Anticipated benefits of bitcoin as legal tender 

     

  • Low-cost remittance transfers: According to World Bank, the average global cost of sending $200 internationally is $13, or 6.5%, well above the Sustainable Development Goal target of 3%.
    • In 2020, low- and middle-income countries received remittances of $540 billion; reducing fees to 2% could increase remittances by as much as $16 billion per year.
  • Addressing infrastructure gap: As there are 1.7 billion unbanked people worldwide.
  • Seamless coverage: Facilitates money transfer to countries that are not integrated into international payment systems or are restricted to receive cross-border transfers, like Syria or Cuba.

Concerns and challenges: Bitcoin is the wrong tool - 

  • Lessons from El Salvador’s 
    • It was expected that the benefits of macroeconomic stability would outweigh the loss of economic sovereignty, monetary independence, and seigniorage.
    • However, purchasing power suddenly plummeted and left the economy even more dependent on remittances, about 20% of gross domestic product.
  • Regulatory void: Bitcoin heighten economic risks due to the lack of an independent macroeconomic institutional framework to shape domestic policies.
  • Dangerously high volatility: From 15 May to 15 June, bitcoin prices ranged from $34,259 to $49,304, as its prices are entirely market-driven.
    • The risk of a sudden drop in its price means that migrants and their families back home can never be sure about the amount of money transferred.

Way forward: Towards low-cost and low-risk alternatives

  • Embrace critical reforms: Coordinated efforts from public and private sectors to make banking services available to all at low costs.
QEP Pocket Notes