Bitcoin Could Boost El Salvador’s Economy by Making Overseas Payments Cheaper and Boosting US Business, Bank of America Says

Like many financial institutions, Bank of America says there are more risks than potential benefits to El Salvador’s adoption of bitcoin as legal tender.

Yet the bank’s analysts said in a note last week that there could be a number of benefits, including making it easier for migrants to send money back to El Salvador; helping digitize banking; and increasing business with the US.

“The market has been excessively pessimistic about it and is overlooking any argument in favor, even if those benefits are admittedly more uncertain,” the analysts, including Latin American strategist Claudio Irigoyen, wrote.

Worker remittances could be cheaper

Like many developing countries, remittance flows are worth a substantial amount to El Salvador’s economy, at 24% of GDP, due to workers leaving the country and sending money home.

Using bitcoin could therefore benefit the economy by lowering transaction costs on remittances to the Central American country, BofA said.

The average transaction cost of bank-based cross-border remittance is over 10%, but could be much cheaper if bitcoin is used. However, bitcoin is highly volatile and transaction fees can vary.

Bitcoin can help the economy digitize

Currently more than 70% of El Salvador’s adults don’t have a bank account, BofA said. But bitcoin is a form of digital money that can be easy to use, for example through mobile phone apps.

“For that reason, democratizing access to electronic payments, through bitcoin, has a progressive touch,” BofA’s analysts said.

Adoption could increase business with US firms

The US is a crypto hub, and El Salvador’s adoption of bitcoin could see American firms move into the country to take advantage of the change – and bring investment with them.

“There could be [foreign direct investment] from Strike (developer of the payments platform), bitcoin miners, ATM manufacturers, among other types of firms,” BofA said.

Bitcoin miners may be attracted to geothermal energy from El Salvador’s volcanoes, for example. Yet overall electricity costs are relatively high, making large-scale mining unlikely.

Yet BofA says bitcoin adoption is overall negative

To be clear, Bank of America still isn’t keen on El Salvador’s adoption of bitcoin as legal tender. This is largely down to bitcoin’s wild volatility, with the world’s biggest cryptocurrency known to swing 10% in a day and plunge 50% in a matter of weeks.

Allowing people to pay taxes in highly volatile bitcoin is particularly worrying, and could lead to sharp falls in revenues if the price tumbles, the bank said. (https://markets.businessinsider.com/news/currencies/bitcoin-el-salvador-remittances-investment-developing-countries-bank-of-america-2021-8)