El Salvador’s new bitcoin wallets could cost WU and similar companies $400 million a year

Jaime Garcia despises using Western Union to send money to his family in El Salvador.

“It's crazy in this day and age that I had to go to a physical Western Union office, hand them actual cash, and then hand them another $25 on top of that before they would send my money over,” Garcia said.

“And then, of course, it takes three days to arrive in El Salvador.”

García, who now lives in Saskatchewan, Canada, fled El Salvador when he was 11 years old after rebels bombed his house. His main concern with sending money abroad is not so much the inconvenience on his end as it is what happens to his loved ones who receive the money.

“They have to take a bus to go to a physical location to pick it up, and there are gangs that hang out around those offices. They know what people are going there for, and they basically rob them,” said García, who leads a team of researchers at SGI Canada Insurance.

Since he last sent money home, García told CNBC, he now has the option to make an online payment via the Western Union app, but he still faces steep fees – 12.5% for a $100 transfer – and it doesn’t solve the problem of what happens to those picking up the cash in El Salvador.

García is not alone in his dissatisfaction with the legacy payment rails that have long dominated the cross-border payments industry.

Many Salvadorans in the 2.5 million-strong diaspora send money to friends and family in El Salvador. Last year, they transferred nearly $6 billion, or roughly 23 percent of the country's GDP, with a portion of that going to the middlemen who facilitate these international transfers.

“Remittances are one area where the status quo in our legacy financial system is terrible, with extraordinarily high fees levied on populations who cannot afford them,” said Matt Hougan, a chief investment officer of Bitwise Asset Management.

It’s a worn-out Twitter saying, but bitcoin really does fix this,” said Hougan.

The hassle around remittances is one chief reason El Salvador President Nayib Bukele cited for declaring bitcoin legal tender. As part of the rollout, the government has launched its own national virtual wallet — called “Chivo,” or Salvadoran slang for “cool” — which offers no-fee transactions and allows for quick cross-border payments.

“It won’t be overnight; 100% of remittances aren’t going to move to the Chivo app tomorrow. These things take time, and people naturally worry about trying new things with money. But the current fee levels of charge for remittances are going to prove unsustainable,” Hougan said.

The Chivo wallet

Bukele is a young, tech-savvy authoritarian on the rise. He has also linked his political future to the country's bitcoin experiment, so he is going all out to make it work.

One of these perks is that every Salvadoran inside the country who signs up for the Chivo wallet will receive $30 in free bitcoin. In a country where the monthly minimum wage is $365, that is no small sum.

Remittances from abroad account for nearly a quarter of El Salvador's GDP, and approximately 70% of the population receives them. The average monthly remittance transfer is $195, and it accounts for half of the total income of households that receive remittances. So the funneling of cash from abroad back home to El Salvador is critical to survival for most of the country.

According to official data, remittance companies receive roughly 60% of that cash and banking institutions receive 38%. Fees vary by company, but the lower the payment, the higher the percentage that goes to fees.

For example, if García wants to send $10 to his cousin in San Salvador, he will pay $3.24 to Western Union, a nearly 33 percent commission.

However, if he uses his Muun self-custodial wallet for the transaction, he will be charged 10 cents or a 1% fee. And if Garcia paid with a Chivo wallet, which is only available to Salvadorans living in the country or abroad, the transaction would be free. Once his cousin receives the funds, he can then go to any of the 200 new Chivo ATMs the government has rolled out and withdraw U.S. dollars from his virtual wallet.

Western Union did not respond to a CNBC request for comment on whether the company was concerned about how this might affect business and whether there were plans to change the fee structure to account for increased competition.

A woman shopping at a store that accepts bitcoin in El Zonte, El Salvador.

García admits that he is not a Bukele supporter, but he is a fan of the project, owing in large part to the remittance use case.

García had not given cryptocurrencies much thought prior to the June announcement. “But my birth country decided to get into bitcoin, so I wanted to learn everything I could about how it works,” Garcia explained. After digging in and experimenting with friends and family, García said he feels one of the most powerful features of the Chivo wallet is the fact that users can operate in either U.S. dollars or bitcoin.

In a country where 70% of citizens do not have access to traditional financial services, Chivo not only provides a convenient on-ramp for those who have never been a part of the banking system, but it also helps them test the waters by initially only dealing in US dollars.

“It will be interesting to see the impact on remittances in a few months and how much of it uses the bitcoin network rails,” Lozada said. “My guess is that most people will convert bitcoin to US dollars at first because that is what they are used to, but we should see a gradual adoption of bitcoin as the primary means of transaction and pricing.

Street vendors in San Salvador with anti-bitcoin stickers.

Not your keys, not your coins

Before Bukele staked his reputation on bitcoin, some Salvadorans were already using the Strike app to make cheap, quick, and borderless crypto payments.

Strike debuted in El Salvador in March and quickly became the country's most downloaded app. Many people have begun to use the mobile payments app to send and receive money from abroad.

Strike declined to reveal specific transaction volumes over the last six months. Still, a reckoning for the current remittance system and its high fees is underway between Strike and Chivo.

However, experts advise users to proceed with caution before fully committing to the government's new wallet.

Gladstein, who recently visited El Salvador, points out that the Chivo wallet functions similarly to a bank, which means that the government has the authority to freeze the value. That is why he believes Salvadorans should take control of their financial futures by transferring their bitcoin out of Chivo and into a wallet where they have more control over the funds.

García also points out that we are still in the early stages of implementation. “Can it be hacked?” “We don't know yet,” he explained.

“I believe there is financial bitcoin hygiene that many people do not understand when it comes to a custodial wallet, which is what Chivo is,” he said. “It isn't even that people distrust the government. People are wary of platforms like Mt.Gox, which are centralized entities that hold money and have been hacked in the past.”

“The entire concept of bitcoin is decentralization - the fact that individuals can take control of their financial health and money.”