Bank of America says El Salvador’s decision to accept Bitcoin as legal tender could benefit the cash-starved Central American country, bucking a consensus among other leading financial institutions that the move will hurt a fragile economy.
The report by the second-largest bank in the US was posted on El Salvador’s President Nayib Bukele’s Twitter account. While still urging caution, the American bank says Bitcoin could help El Salvador in four ways: streamline remittances, encourage financial digitization, attract American investment and give banking choices to citizens.
In 2020, remittances from abroad counted for 24% of El Salvador’s gross domestic product or nearly $6bn, according to the country’s central bank. BofA’s analysts noted a large chunk of remittances are eaten up by fees that can cost upwards of 10%.
“Using Bitcoin for remittances could potentially reduce transaction costs compared to traditional remittance channels. The idea is that Bitcoin could be used as an intermediary for the cross-border transfer, so that dollars are converted to Bitcoin by the sender and then converted back to dollars domestically by the receiver,” the report says.
Open to innovation
In early June the El Salvador Legislative Assembly greenlighted Bitcoin as legal tender, making the country the first to do so. The digital currency, politicians said, will advance “financial inclusion.” The US dollar is also legal tender in the country.
The Bank of America report doesn’t agree with media reports that the law forces all businesses to offer Bitcoin as a payments option when it goes into effect on 7 September.
“We disagree with the notion that it is coercive that businesses will be legally bound to accept Bitcoin as form of payment as long as they have the proper technological infrastructure. In this case, the seller/payee can automatically convert the payment to dollars using the electronic wallet (“Chivo”) which is linked to the clearinghouse (though transaction costs may apply),” the report reads.
The report also suggests that making bitcoin legal tender could persuade American firms to invest in the country, especially manufacturing.
"There could be [foreign direct investment] from Strike (developer of the payments platform), bitcoin miners, ATM manufacturers, among other types of firms," the bank says.
While BofA is looking at the tech sector, the Nayib administration is stressing the country’s manufacturing base in hopes of attracting multinational corporations. According to the Index of Industrial Production in El Salvador, exports for the first five months of this year showed an aggregate value of nearly $2.3bn, a 42% increase from 2020.
Among the key sectors, according to El Salvador’s Central Reserve Bank, is textiles and clothing, which represented 39.7% of manufacturing output.
Elated El Salvadorian officials posted the report on social media and in-country news media reported extensively on the mostly positive report.
Other leading financial institutions have been far more critical in the past.
JPMorgan has expressed concerns that remittance conversions could “cannibalise onshore dollar liquidity” with risks to the balance of payments and fiscal stability. The International Monetary Fund said it was worried the law could present “macroeconomic, financial and regulatory challenges.”
On Friday 20 July, Moody’s issued a stern statement about the country’s economic stability saying, “deterioration in the quality of policymaking” around the Bitcoin law and other actions reflected “weakened governance in El Salvador, raising tensions with international partners – including the United States – and jeopardizing progress toward an agreement with the IMF.”
Many Salvadorians are skeptical as well. According to a poll of more than 1,200 people across the country conducted for the university thinktank Disruptiva, fewer than one in five approved of Bitcoin adoption.
The survey discovered 46% of respondents “knew nothing” of Bitcoin, while nearly two-thirds said they’re not open to being paid in any currency but US dollars.