El Salvador's Bitcoin Fee Problem

What you need to know today in crypto and beyond

June 25, 2021

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GETTING REAL: El Salvador President Nayib Bukele said Thursday the country’s Bitcoin Law, which makes the cryptocurrency legal tender, will come into effect on Sept. 7. The government will use the Chivo e-wallet, which will have $30 of bitcoin preloaded for everyone who downloads the app. Meanwhile, Athena Bitcoin, operator of bitcoin ATMs, plans to set up 1,500 new cash-to-crypto machines in El Salvador, after a $1 million funding.

SMART CITY: Colombia’s capital, Bogota, announced a $2.8 billion investment program to support finance blockchain companies as part of its $8 billion initiative to make the capital a “smart city.” Investments of between $10 million and $50 million will be made into 100 companies that will be advised on implementing blockchain technology into their business models. The program starts Friday.

REGULATORY ADVANCES? The majority of countries overseen by the Financial Action Task Force (FATF) have yet to put in place its requirements for firms that handle cryptocurrencies, according to the agency’s 12-month review of the “Travel Rule.” Separately, a day after Coinbase announced plans to enter the Japanese market, the country’s financial regulator warned Binance it is operating in the country without permission. Finally, Robinhood’s planned initial public offering (IPO) is reportedly facing delays due to its growing cryptocurrency business.

CUTTING TIES: Custodian Prime Trust ended its contract with cryptocurrency lending platform Celcius Network after its risk team raised concerns about Celcius' strategy of “endlessly rehypothecating assets.” Celsius has 30 days to get off Prime Trusts’ platform.

INFECTED: Monero-mining malware “Crackonosh” was found in 222,000 computers that were used for the download of illegal, torrented versions of popular video games such as NBA 2K19 and Grand Theft Auto V, a Thursday report from security company Avast found. The virus installs crypto-mining software, which has yielded its authors over $2 million worth of monero.

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Putting the news in perspective

The Takeaway

El Salvador's Bitcoin Fee Problem

There were two big pieces of news yesterday out of El Salvador, which – let’s all say it again – will become the first country in the world to treat bitcoin as legal tender. First, the South American country set a Sept. 7 date for the activation of its new currency. In the course of the announcement, President Nayib Bukele clarified that “the use of bitcoin will be optional,” which may reassure those concerned about any coercive elements of the law.

Even more interesting was the announcement early this morning that El Salvador will be distributing about $30 worth of bitcoin to any citizen who activates a new state-backed crypto wallet called Chivo. It’s a serious incentive in a country where per-capita income is about $4,000 per year.

But the amount might invite skepticism if you’ve been paying attention to bitcoin metrics in recent months: in April, the average fee for a single bitcoin transaction peaked at just short of $63. Fees were at or near $30 for two weeks in late April, during which time $30 in a bitcoin wallet would have been prohibitively slow or expensive to use for anything.

On-chain fees have since dropped in dollar terms down to under $7 – manageable, though still historically high. Bitcoin fees fluctuate because they’re effectively set by a bidding process for block space. During periods of high price volatility like April, speculators who need to move coins fast can bid prices way up. Even in more stable times, on-chain BTC average fees range from 50 cents up to $2, which is still too much for day-to-day payments in a poor country. (Credit card fees in the U.S. are roughly 2%, which to be clear is itself pretty nuts.)

These fees have often been leveraged as a critique of the Bitcoin system. At the systemic level, of course, that’s absurd because fees are based on competitive bids. Saying, “Bitcoin fees are too high, look how much people are paying!” is the logical equivalent of Yogi Berra’s famous quip about a popular New York restaurant: “Nobody ever goes there anymore – it’s too crowded.”

That said, fee competition between low-income and high-income users seems like a real issue. Luckily, users in El Salvador will have two mitigating options.

Most importantly, El Salvador’s Bitcoin development partner, Jack Mallers’ Strike, offers low-fee bitcoin payments through the Lightning Network. Lightning is a layer two solution that offers BTC transactions costing just fractions of a cent. For bitcoin to work as a day-to-day payments tool, Lightning is a necessity.

Remittances are a slightly different story. One of the interesting and lesser-known features of the Bitcoin network is you can choose your payment fee based on how fast you’d like a transaction settled: high-fee transactions are picked up first, but lower-fee offers usually get into a block within a few hours. So for remittances, which can sometimes be less urgent than retail payments, that’s a second option.

This does raise a bunch of new questions about the El Salvador program, particularly from an educational perspective. Users in the country will have to make a new set of fairly complicated decisions about how to transact, and they deserve to have the options laid out clearly. You can be sure CoinDesk will be watching Strike and El Salvador’s progress closely.

–David Z. Morris

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