El Salvador’s Bitcoin Policy: Transfer Costs Will Increase

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Person at a protest against the use of Bitcoin as legal tender and legal reforms to extend President Nayib Bukele’s term in San Salvador, El Salvador, September 15, 2021 (Jose Cabezas / Reuters)

Bukele’s Bitcoin dream is based on a lie.

After the disastrous Bitcoin rollout in El Salvador on September 7, President Nayib Bukele, feeling the heat, recycled one of his favorite Bitcoin sermons. He claims that Bitcoin will lead to a dramatic reduction in the cost of transmitting remittances to Salvadorans. This sermon, if true, would be an expensive item for Salvadorans. Remittances represent 24 percent of El Salvador’s gross domestic product, the highest percentage of any country in the Western Hemisphere. But there’s just one little problem with the sermon. It is not based on the facts.

Sadly, but predictably enough, the press fell in love with the Bukeles hook, line and bunkum sinker. It reports on hand-picked cases of high transfer fees and claims the Bitcoin law will cost traditional money transfer companies such as Western Union millions of dollars. But remember my 95% rule: 95% of what you read in the financial press is either wrong or irrelevant. Indeed, it’s time to stop listening to Bukele and start tracking the data.

Traditionally, remittances are sent and received through money transfer services provided by private companies. According to the World Bank, in the first quarter of 2021, these companies (Western Union, MoneyGram, Ria and Remitly) charged between 0 and 4% fees for a deposit of $ 200, depending on the transfer method. El Salvador has the sixth lowest transfer cost of 104 countries monitored by the World Bank and the lowest of any country in the Latin American Caribbean region, with average transaction fees for sending a transfer by 2.85%.

What about Bitcoin remittances? Well, on the one hand, most Salvadorans aren’t interested in Bitcoin. They don’t want to use it. They prefer the US dollar, which has been legal tender in El Salvador since 2001, when El Salvador shelved the coln and put it in a museum. Indeed, according to a recent survey by the University of Central America, nine out of ten Salvadorans know little or nothing about Bitcoin. In addition, eight in ten Salvadorans have little or no confidence in Bitcoin. In El Salvador, Bitcoin is for the birds. These same sentiments are shared by the remittances sent to the mother country, Salvadoran expatriates. They are paid in US dollars, not Bitcoin. For Salvadorans, the greenback is king.

What are the total costs associated with Bitcoin remittances? For a typical Bitcoin transfer transaction, senders need to convert their US dollars to Bitcoin. Using Coinbase for example, the largest crypto exchange in the United States, it costs 2.0-4.5%, depending on the payment method. Then the Bitcoin transfer is sent to El Salvador. In order for recipients to exchange Bitcoin for the dollars they actually want, they must do so at a Bitcoin ATM. Athena Bitcoin Global plans to install 1,500 Bitcoin ATMs in El Salvador. But exchanging Bitcoin for dollars at an Athena ATM will cost you a minimum fee of 5%. And that 5 percent is just reductions from Athenas, it doesn’t include the network fee to complete the transaction. These network fees vary, but the more you pay, the faster (if at all) your transaction completes. Athena even recommends over-erring with higher fees. Thus, the typical Bitcoin remittance transaction will have a minimum sticker price of between 7.0-9.5%.

Bukeles’ handover sermon is a bunkum. It’s based on invented math. Remittances sent through traditional money transfer services have an realized cost of just 2.85%. But remittances sent via Bitcoin will force Salvadorans to shell out over 7.0-9.5 percent to get the dollars they want.

Steve H. Hanke is Professor of Applied Economics at Johns Hopkins University in Baltimore. He is Principal Investigator and Director of the Troubled Currencies Project at the Cato Institute in Washington, DC Nicholas Hanlon is the Chief of Staff at the Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise.

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