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The Next Countries That Should Adopt Bitcoin
Now that El Salvador has adopted Bitcoin, which countries are most likely to follow suit?
El Salvador adopted Bitcoin as legal tender on September 7th, 2021.
The reasons for this are numerous. Examining the motivations behind El Salvador’s move, could give insight into the question:
Who will be next?
A compelling reason behind El Salvador’s Bitcoin adoption is remittances. Salvadorians living and working abroad send money home to friends and family via remittance services, which accounts for roughly 24% of the country’s GDP. Salvadorian president Nayib Bukele estimated that by bypassing remittance service fees and delays via the Bitcoin network, his countrymen could save roughly $400M USD annually.
To ensure Salvadorians capitalize on this opportunity, president Bukele’s administration installed Bitcoin ATMs throughout El Salvador, as well as in foreign cities that host significant Salvadorian ex-pat populations. By facilitating Bitcoin as a preferred remittance option, El Salvador is effectively redirecting time and money towards its citizens via a remittance alternative that settles in minutes or seconds, and with minimal fees.
Global remittance services charge fees based on the size, origin, and destination of funds being sent, resulting in roughly a 6.3% global average cost for sending $200 in Q1 2021. With global remittances expected to grow to $589 Billion in 2021, up 7.8% from the previous year, there are substantial opportunities for countries to follow El Salvador’s example.
Countries that received the largest personal remittance inflows in 2020 included India ($83.1B), Mexico ($42.8B), the Philippines ($34.9B), Egypt ($29.6B), and Pakistan ($26.1B). As a share of gross domestic product, the top recipients in 2020 were Tonga (37.2%), Somalia (35.3%), Kyrgyz Republic (31.3%), Tajikistan (26.7%), Lesotho (25.5%), and El Salvador (24.1%). For each of these countries, remittance fees and settlement times represent an annual encumbrance on their economies, creating an incentive to seek alternatives.
For any country that relies on remittances to support its economy, Bitcoin is a disruptive remittance technology, capable of redirecting value and liberating time directly to its citizens.
El Salvador is one of many countries that doesn’t operate with their own sovereign currency. By adopting the US dollar, El Salvador has gained the relative stability of US currency, as well as access to global US dollar liquidity, however, this comes at the cost of sovereignty over their monetary policy.
The US Federal Reserve manages interest rates and money supplies in accordance with American economic objectives, such as unemployment and price stability. The benefits of loose monetary policies, such as stimulus checks, access to credit, and government deficit spending programs, come predominantly, or exclusively to Americans, while the inflationary pressures caused by such policies are felt by anyone who uses USD, including foreigners.
All countries that do not issue one of the globally dominant currencies suffer the same predicament. They must continuously demand foreign currency to engage in international trade, while never gaining the benefits of being able to supply a world reserve currency.
By adopting a secondary legal tender, El Salvador has effectively diversified its exposure to foreign monetary policy risk. Unlike the Fed’s policies, which change periodically and are explicitly inflationary, Bitcoin’s monetary supply is fixed, disinflationary, and immutable. El Salvador’s geothermal mining operation is essentially a way to print an emerging world-reserve currency.
With 65 countries pegging their exchange rates to the USD, and 7 sovereign countries using it directly as their official currency, there are many places that could mitigate inflation risk by diversifying their monetary policy exposure. Encouraging citizens to diversify their cash holdings to include Bitcoin would allow a nation’s savings to be less vulnerable to US money printing, which has increased to 40% over the past 18 months.
For countries that have weak, unstable, or foreign currencies as their primary medium of exchange, Bitcoin represents an alternative, neutral and global currency for both citizens and governments to utilize.
The World Bank estimated that 1.7 billion adults lacked a bank account in 2017, impeding their ability to save, invest and transact. Among the commonly cited barriers to having a bank account include bank accounts being too expensive, financial institutions being too far away, and a lack of documentation to open an account. The inability to store value and transact securely means unbanked populations are more vulnerable to economic hardship and unable to capitalize on opportunities.
Since Bitcoin is an open, decentralized protocol, anyone with a smartphone and an Internet connection can effectively become their own bank. Digital Bitcoin wallets are free, have minimal transaction costs, have no minimum balance requirements, and are able to operate 24/7/365. With emerging market smartphone adoption having risen above 45%, the potential to provide banking services to unbanked people digitally is real.
In El Salvador, 70% of people are unbanked, while roughly 59% use the internet, 59% use social media, and there are 1.45 mobile phone subscriptions per capita in the country. To address this issue, El Salvador launched its Chivo Bitcoin wallet, offering $30 worth of Bitcoin to citizens who download and open an account. Within a month, more than 3 million people had downloaded the wallet, accounting for over 40% of Salvadorians.
In countries where Internet access and smartphone adoption exceed banking access, Bitcoin is a way to deploy banking services digitally, far faster and easier than with legacy systems.
CAPITAL & TALENT
The 21st Century economy will be shaped by emerging technologies such as AI, robotics, biotech, space, and crypto. Any country able to attract and retain top talent in these fields will reap the benefits of their companies, products, and taxes. By providing clear regulatory approval and favourable conditions for Bitcoin operations, El Salvador has become a jurisdiction of note for potential relocation or domiciling of people and companies.
Just as China’s implementation of Special Economic Zones was able to spark business formation, investment, and employment in an otherwise stagnant economic environment, so too could countries gain advantages through favourable Bitcoin policies. Hong Kong, Macau, and Singapore are all examples of how resource-poor jurisdictions can make outsized economic advancements through policy and government initiatives.
El Salvador’s “Bitcoin City” initiative, which promises 0% income tax, 0% property tax, 0% capital gains tax, and 0% payroll tax, and only a 10% value-added tax (VAT), is an example of how countries can seek to attract capital and talent. As Bitcoin is a digital asset that is traded in digital marketplaces, there is little by way of geographical impediments to any country becoming a host for Bitcoin businesses.
Unlike the previous justifications for Bitcoin adoption, the pursuit of capital and talent is a competitive global marketplace. Early movers providing the most favourable conditions for bitcoiners will be able to gain a foothold, requiring subsequent latecomers to provide ever more enticing incentives to lure the same talent away.
As the digital economy grows, and the global pool of talent and capital becomes increasingly detached from geography, countries with the most favourable conditions will get the privilege of hosting the best and brightest.
The first country to adopt an unorthodox strategy is likely to face the most opposition. Now that El Salvador has taken the first step, a model exists for how nation-states can successfully navigate the adoption of Bitcoin.
The case for government consideration of Bitcoin is no longer theoretical, but practical. Remittances, democratizing banking services, mitigating monetary policy risk, and attracting capital and talent are all reasons why countries should consider following El Salvador.
As time passes, remittances are wasted, people continue to be unbanked, inflation erodes peoples’ savings, and capital and talent are migrating elsewhere.
Bitcoin could be the solution.