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El Salvador’s new wallet, the Chivo wallet, will cost Western Union and others a loss of over $400 million as adoption continues.
El Salvador President, Nayib Bukele estimates that the companies may lose as much as $4400 million a year in commissions for remittances. Mario Gomez Lozada, a former banker with Merrill Lynch and Credits believes the figure will be closer to $1 billion.
This is not entirely surprising. About 70% of the Salvadoran population receives remittance payments from their relatives abroad. In 2020 alone, Salvadorans in diaspora transferred up to $6 billion to the country. This accounted for roughly 23% of the country’s gross domestic product.
Why Chivo Wallet Will Be Adopted by Salvadorans
According to Chief Investment Officer of Bitwise, “Remittances are one area where the status quo in our legacy financial system is terrible, with extraordinarily high fees leveled at populations that can ill afford them.”
Hougan believes the free transactions and quick cross-border payments on the Chivo wallet make adoption feasible. This, in comparison with the delay and humongous charges of the traditional payment agencies, will make Salvadorans consider a switch.
Even before adopting Bitcoin as legal tender, some Salvadorans had started using the Strike app to make cheap, quick, and borderless crypto payments. Strike launched in El Salvador in March and was soon the most downloaded app in the country.
With the bitcoin adoption, it means that instead of paying a commission of 12.5-30%, individuals can, for example, use the Muun self-custodial wallet and pay a 1% fee or enjoy free transactions if it is the government’s Chivo wallet.
Additionally, to aid the wallet adoption, the government is offering $30 worth of free bitcoin to every Salvadoran within the country. This will be remitted to them once they sign up for the Chivo wallet. When you compare the $30 to the monthly minimum wage of $365, this amount is not insignificant.
If Western Union and other related companies hope to compete in this market, they will need to adjust their commissions.
Experts Advice Caution in Wallet Use
Users have been urged to exercise caution in embracing the government’s new wallet, according to experts. According to one, the Chivo wallet is no different from a bank as the government can still freeze it. This is contrary and to the spirit of decentralization that undergirds cryptocurrencies.
Rather, the experts urged people to take control of their finances by transferring their funds from the Chivo wallet once received. This can be done into a system where they can exercise more control over the funds.
There were also concerns about the security of the system given that it is a new wallet.