The crypto community celebrates El Salvador’s President Nayib Bukele for making Bitcoin legal tender. But couldn’t Bukele give its citizens even more financial inclusion and freedom by adopting decentralized finance (DeFi) and stablecoins as well?
Stablecoins are cryptocurrencies whose value is linked to external assets such as fiat currencies. Therefore, they are far less volatile than cryptocurrencies like Bitcoin or Ethereum. They can be used in many ways, especially in decentralized finance, and theoretically anyone can use them to earn interest. The best-known stablecoins currently include Tether (USDT) USD Coin (USDC), Binance USD (BUSD) and Dai (DAI).
With the help of stablecoins and DeFi, people all over the world have the opportunity to manage and grow their wealth themselves. The only requirement is a smartphone or a computer with an internet connection on which a crypto wallet such as MetaMask is installed. If you now consider that scarce 70 percent of all Salvadorans do not have a bank account, but do over 50 percent If you have access to the Internet, one thing quickly becomes clear: The demand for an efficient digital financial infrastructure is high and the potential for decentralized finance is enormous.
Gigantic potential for DeFi in El Salvador
Between the years 2020 and 2021 alone, the number of internet users in El Salvador increased by over 15 percent gone up. If this trend continues, it will only be a matter of a few years before all Salvadorans have an internet connection.
So if Nayib Bukele’s goal is really to ensure that all of his four million or more bankless citizens have access to digital financial services, then he should take DeFi seriously. By adapting DeFi, it would be possible for the bankless to have access to financial services. The citizens of El Salvador could thus rely on a stable currency, on which at the same time annual returns of up to 10 percent can be achieved in the DeFi-Space.
Because if you are honest – with all the resilience, security and decentralization that Bitcoin offers, for Salvadorans digital gold is only suitable as a store of value with a long-term investment horizon. In the short term, Bitcoin can be extremely volatile, as the recent crash from $ 64,805 to below $ 30,000 at times has once again proven. Bitcoin is therefore only partially suitable for everyday trading at the moment. But that’s not Bitcoin’s only problem.
How will overseas treat Bitcoin from El Salvador?
Bitcoin trading is taxable in most countries around the world. Since Bitcoin is legal tender in El Salvador, that is not the case there. But what happens now when foreign companies receive payments from El Salvador in Bitcoin? According to tax advisor Shehan Chandrasekera from CoinTracker this could mean that companies will have to pay capital gains tax on payments from El Salvador if they want to exchange them for another currency.
In addition, tax authorities, particularly in the US, might view Bitcoin of Salvadoran origin as income. This in turn could mean that a US citizen who receives payments in Bitcoin has to pay tax on them immediately, says Chandrasekera. The fact that El Salvador treats Bitcoin as a currency has no bearing on this.
In other words, this means that, despite being recognized as legal tender, Bitcoin still has to be taxed in many countries. For this reason, Bitcoin is unlikely to be a suitable currency for international trade at the moment. But that doesn’t mean that this won’t change in the future. Nevertheless, El Salvador should face enormous challenges in the short term when Bitcoin becomes the official currency on September 7th. None of these problems would exist with the use of decentralized finance and stablecoins. Nevertheless, the DeFi sector is also facing considerable hurdles.
Is DeFi suitable for the masses?
Excessively high transaction fees, complicated user interfaces and regulatory ambiguities are currently making the mass adaptation of DeFi difficult. Above all, the excessively high transaction fees of the Ethereum network are still the biggest problem at the moment. This is due to the fact that the average Salvadoran only has a monthly net income of $ 375.
Although the Ethereum transaction costs have dropped significantly in the last few months, the Ethereum mainchain is still not ready for the masses.
A single token transfer can currently cost anywhere from $ 2 to $ 5. Until a few months ago, this value was even up to US $ 40 at times. The EIP-1559 upgrade, which many hoped for in July, will not change this problem either. Only with the start of Ethereum 2.0 could it be possible that the transaction fees on Ethereum decrease sustainably. Unfortunately, it will be a few more years before then.
Scaling solutions accelerate DeFi adaptation
Fortunately, there are the so-called Layer 2 scaling solutions for Ethereum. These already offer an ever-increasing range of DeFi applications for which you hardly have to pay transaction fees. Polygon (MATIC) is currently the best known of these scaling solutions, which has become increasingly popular in recent months. Two more scaling solutions, Arbitrum and Optimism, are slated to hit the market in the coming months, which could further accelerate the spread of DeFi.
For this reason, it is likely that more and more people with smaller fortunes will become aware of the DeFi space in the near future. This development could help developing countries like El Salvador in particular to give even more people access to financial services.