Jaime García really hates using Western Union to send money home to El Salvador.
“It’s wild nowadays that I had to go to a physical Western Union office, give them real cash, and then give them another $ 25 before they send my money,” García said.
“And then of course it takes three days before it actually arrives in El Salvador.”
García, who lives in the Canadian province of Saskatchewan, fled El Salvador at the age of 11 after rebels bombed his home. His biggest problem with transferring cash abroad is not so much the inconvenience on his part as what happens to the loved ones who receive the money.
“You have to take a bus to go to a physical location to pick it up and there are gangs that hang out in these offices. They know what people are doing there and they basically rob them,” said García, who is the a team of researchers from SGI Canada Insurance.
Since the last time he sent money home, García told CNBC he now has the option to make an online payment through the Western Union app, but he still has high fees – 12.5% for a transfer of 100 US dollars – and that doesn’t solve the problem of what happens to those who pick up the money in El Salvador.
García is not alone in his frustration with the old payment tracks that have long dominated the cross-border payments business.
Many in the 2.5 million Salvadoran diaspora send money to friends and family who still live in El Salvador. Last year they combined transferred nearly $ 6 billion, or about 23% of the country’s gross domestic product, and some of that went to the middlemen who made these international transfers possible.
“Remittances are one area where the status quo is dire in our old financial system, with exceptionally high fees being levied on populations who cannot afford them,” said Matt Hougan, chief investment officer, Bitwise Asset Management.
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“It’s a worn out Twitter saying, but Bitcoin really fixes that,” Hougan said.
The dispute over remittances is one of the main reasons why the President of El Salvador, Nayib Bukele, declared Bitcoin legal tender. As part of the rollout, the government introduced its own national virtual wallet called “Chivo” or Salvadoran slang for “cool”, which offers fee-free transactions and enables fast cross-border payments.
“It won’t go overnight; 100% of the transfers will not be moved to the Chivo app tomorrow. These things take time and people naturally worry about trying new things with money. But the current fees for wire transfers are going to prove unsustainable, “Hougan said.
The Chivo wallet
Bukele is young, tech-savvy, and a budding authoritarian. He’s also tied his political fate to the country’s Bitcoin experiment, so he’s pulling out all the stops to make it work.
One of those benefits is offering free $ 30 worth of bitcoins to every Salvadoran in the country who signs up for the Chivo wallet. That’s not a small sum in a country where the minimum monthly wage is $ 365.
Remittances from abroad make up almost a quarter of El Salvador’s GDP and around 70% of the population receive them. The average monthly transfer is $ 195 and represents 50% of their total income for the households that receive transfers. Therefore, the onward transfer of cash from abroad to El Salvador is vital for most of the country.
According to official figures, around 60% of this cash comes through remittance companies and 38% through banking institutions. Fees vary by company, but as a general rule, the lower the payment, the higher the percentage that applies to the fees.
For example, if García wants to transfer $ 10 to his cousin in San Salvador, he’ll pay Western Union $ 3.24, or nearly 33% commission.
However, if he uses his Muun wallet for self-custody for the transaction, he pays 10 cents or a 1% fee. And if García paid out of a Chivo wallet reserved for Salvadoran nationals resident or abroad, the transaction would be free. Once his cousin receives the money, he can go to any of the 200 new Chivo ATMs the government has introduced and withdraw US dollars from his virtual wallet.
“Wherever you are now, you can send bitcoin to anyone with a Chivo wallet in El Salvador and in minutes they’ll have the value and then you can go to one of the ATMs and withdraw it in cash with no charge,” said Alex Gladstein , Chief Strategy Officer of the Human Rights Foundation.
“It’s amazing. It’s an incredible humanitarian improvement.”
The president estimates that money service providers like Western Union and MoneyGram lose $ 400 million annually in commissions on transfers should the population adopt Bitcoin on a large scale. Mario Gomez Lozada, who was born and raised in El Salvador, worked as a banker at Merrill Lynch and Credit Suisse and now runs a derivatives exchange for crypto assets, believes the number will be closer to $ 1 billion .
Western Union didn’t respond to a CNBC query about whether the company was concerned about how this might affect its business and whether there were plans to change the fee structure to cope with increased competition.
A woman shops at a store that accepts bitcoin in El Zonte, El Salvador.
García says he’s not a Bukele booster, but he’s a fan of the project, largely because of the referral use case.
García hadn’t thought twice about cryptocurrencies before announcing in June. “But my country of birth chose Bitcoin, so I wanted to know all about how it worked,” said García.
For the past three months he has taught himself the topic and has become a Bitcoin investor himself, keeping some of his digital coins in a cold store on a Trezor hardware wallet. After experimenting with friends and family, García said that one of the most powerful features of the Chivo wallet is the fact that users can work in either US dollars or Bitcoin.
For a country where 70% of its citizens do not have access to traditional financial services, Chivo not only provides a convenient point of contact for those who have never been part of the banking system, but also helps them test the waters by only dealing with business trade dollars to start.
“It will be interesting to see the impact on remittances in a few months and see what percentage of them are using the Bitcoin network rails,” Lozada said. “I suspect that most people will initially convert Bitcoin to US dollars as they are used to it, but we should see a gradual adoption of Bitcoin as the primary means of transactions and pricing. I see a future where consumer goods like milk and bread are valued directly in Bitcoin and people might even start holding Bitcoin. “
Street vendor in San Salvador with anti-bitcoin stickers.
Not your keys, not your coins
Before Bukele put its reputation on Bitcoin, some Salvadorans had already started using the Strike app to make cheap, fast and limitless crypto payments.
Strike launched in El Salvador in March and soon became the most downloaded app in the country. Many have started using the mobile payments app to send and receive money from abroad.
Strike declined to disclose exact transaction volumes in the past six months. Nevertheless, the current transfer system and its high fees are settled between Strike and Chivo.
However, according to experts, users should exercise some caution before hitting the government’s new wallet.
Gladstein, who recently stayed in El Salvador, points out that the Chivo wallet is no different from a bank, which means the government has the power to freeze its value. Because of this, he strongly believes that Salvadorans can take control of their financial destiny by transferring their bitcoins from Chivo to a wallet where they can exercise more control over the funds.
García also points out that we are still at the beginning of the introduction. “Is it hackable? We don’t know yet,” he said.
“I think there is bitcoin financial hygiene out there that a lot of people don’t understand when it comes to a custody wallet that is Chivo,” he said. “It’s not even that people distrust the government. People distrust platforms like Mt.Gox – centralized units that hold money and that have been hacked in the past. “
“The whole concept behind Bitcoin is decentralization – the fact that individuals can take control of their financial health and money.”
Correction: The heading on this story has been changed to reflect the fact that President Bukele was referring to the total amount El Salvadorans pay in referral commissions each year, not specifically for a single provider.