Many see the bitcoin market – the world’s first cryptocurrency – as a game of winners and losers between hedge funds, amateur investors, geeks and criminals.

It is best to leave the enormous risk inherent in a highly volatile anonymous digital currency to those who understand the game well or don’t care because they can mitigate the risk or absorb the losses. But bitcoin has recently become more attractive to countries and individuals with limited access to conventional payment systems, i.e. those less equipped to manage the underlying risk.

Earlier this month, El Salvador became the first country to adopt bitcoin as legal tender, enacting legislation that will take effect in September. This means that bitcoin can be used to pay for goods and services across the country, and recipients are legally required to accept it.

Salvadorians are not new to this type of monetary experiment. The US dollar became legal tender in El Salvador in 2001 and is the currency used in domestic transactions. At that time, the government of President Francisco Flores allowed the dollar to circulate freely alongside the national currency, the colón, at a fixed exchange rate.

Dollar advocates argued that the expected benefits of macroeconomic stability would outweigh El Salvador’s loss of economic sovereignty, monetary independence, and even seigniorage – the difference between the cost of producing coins and banknotes and their loss. nominal value. But purchasing power suddenly plummeted and left the economy even more dependent on remittances, which have averaged around 20 percent of GDP per year over the past two decades.

The use of bitcoin as legal tender will exacerbate the monetary constraints revealed by dollarization, notably the absence of an independent macroeconomic and institutional framework around which to orient national policies. Additionally, bitcoin is much more volatile than the dollar. Between June 8 and June 15, its value fluctuated between US $ 32,462 and US $ 40,993; and in the period May 15 to June 15, it ranged from US $ 34,259 to US $ 49,304. Such large fluctuations – and the fact that they are entirely market driven, with no opportunity for policy makers to manage fluctuations – make bitcoin an unsuitable instrument for macroeconomic stabilization.

President of El Salvador Nayib Bukele tweeted that bitcoin will make money transfers easier and significantly reduce transaction costs. The fees migrants have to pay to send their money home are shockingly high, despite numerous calls from the United Nations and the G20 to reduce them. According to the World Bank, the average global cost of an international shipment of $ 200 is around $ 13, or 6.5%, well above the sustainable development target of 3.0%.

Nonetheless, in 2020, low- and middle-income countries received US $ 540 billion in remittances – just below the total of US $ 548 billion in 2019, and far more than direct investment inflows. foreigners from these countries (US $ 259 billion in 2020) and foreign development aid (US $ 179 billion in 2020). Reducing fees to 2.0 percent could increase remittances by up to US $ 16 billion per year.

The large but globally fragmented remittance industry relies on electronic transfers through commercial bank payment systems, and banks charge high fees for using this infrastructure and benefiting from a secure and reliable international network.

But high fees aren’t the only problem. Many migrants do not have a bank account in the country where they work, and their families back home may also be among the 1.7 billion unbanked people in the world. In addition, some migrants may need to transfer money to countries that are not integrated into the international payment system or that are limited in their ability to receive cross-border transfers – for example, Syria or Cuba.

Bukele is right about the need to question this system, in particular by offering low-cost and low-risk alternatives. But bitcoin is not the right tool. Yes, it allows people to transfer value directly and comprehensively, without the costly intermediation of a third party. But its volatility makes it at best an asset – and an extremely risky store of value – rather than a medium of exchange. The risk of a sharp drop in its price means that migrants and their families back home can never be sure of the amount transferred.

Rather than dismiss the adoption of bitcoin in El Salvador as another example of the crypto craze, we should reflect on the reasons why many people around the world are willing to adopt cryptocurrencies for non-speculative purposes. The answer may lie in whether the current international financial system serves them poorly or not at all.

Innovations in digital money, such as the M-Pesa mobile money service in Africa, have made significant inroads into the payment systems of many developing countries. But there is still a long way to go to provide the infrastructure and regulatory frameworks necessary to support digital currency. For now, the ground remains uneven.

Coordinated cross-border policies are urgently needed to ensure that bitcoin and its variants do not do more harm than good in developing countries. Unless the public and private sectors adopt crucial reforms and make basic banking services available to everyone at low cost, citizens and governments will increasingly be drawn to bitcoin and other low-cost alternatives. expensive, high-risk and obscure to traditional banking services.

Paola Subacchi, professor of international economics at the Queen Mary Global Policy Institute at the University of London, is the most recent author of The Cost of Free Money. © Project Syndicate, 2021www.project-syndicate.org



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