Bank of America (BOA) has released a detailed report examining the potential benefits of El Salvador adopting bitcoin as legal tender, even as the bank maintains an overall negative assessment of the policy. The report, authored by analysts including Latin American strategist Claudio Irigoyen, argues that the market has been excessively pessimistic and is overlooking several arguments in favor of the move.
Four Opportunities Identified
First, the report notes that bitcoin could serve as an intermediary for cross-border transfers. With remittances accounting for roughly 20% of El Salvador’s GDP, using bitcoin could reduce transaction costs compared to traditional channels, potentially leaving recipients with more disposable income. However, BOA cautioned that it remains unclear how bitcoin transaction fees would compare directly with conventional remittance services.
Second, the analysts highlight financial digitization as a key benefit. Over 70% of El Salvador’s adult population lacks a bank account, and bitcoin-based electronic payments could democratize access to financial services. The report describes this as having a “progressive touch,” enabling broader inclusion through digital wallets and mobile payments.
Third, adopting bitcoin as legal tender gives more choice to consumers. The report rejects the notion that mandatory acceptance by businesses is coercive, explaining that merchants with the proper technological infrastructure can accept bitcoin, and the government’s Chivo wallet can automatically convert payments to U.S. dollars, mitigating volatility concerns for everyday users.
Fourth, bitcoin adoption could attract foreign direct investment (FDI). The report cites examples such as Strike, bitcoin mining operations, and ATM manufacturers Chainbytes and Athena Bitcoin, which have already announced plans to install cryptocurrency ATMs in El Salvador. These investments could bring capital and technology to the country.
Overall Assessment Remains Negative
Despite these potential benefits, Bank of America concludes that the adoption of bitcoin as legal tender in El Salvador is overall negative, primarily due to the extreme volatility of the cryptocurrency. The analysts express particular concern about allowing taxes to be paid in a highly volatile asset, warning that a sharp price decline could lead to a significant drop in government revenues. They emphasize that the market should not ignore these fiscal risks.
The report comes just weeks before El Salvador’s bitcoin law is set to take effect in September 2021. While acknowledging the innovative aspects of the policy, BOA’s analysis underscores the delicate balance between financial innovation and macroeconomic stability.