Three years ago, El Salvador made history as the first country to adopt Bitcoin as a legal tender to boost financial inclusion and drive economic growth. While the country’s government and major financial institutions benefited from this, smaller businesses and retail users have faced challenges. This is mainly due to Bitcoin’s volatility and the complexity of applying its underlying technology to their day-to-day business operations.
Around 70 per cent of the population does not have a bank account — a problem that El Salvador President Nayib Bukele sees as a way to provide more financial inclusivity for his people.
As cryptocurrency adoption among Southeast Asian countries likewise grows, we can learn many important lessons from El Salvador and use this as a case study of how emerging technologies can overcome such obstacles and unlock new opportunities for startups and small businesses.
Bitcoin as legal tender — a good idea?
El Salvador’s Bitcoin law addressed critical economic issues affecting the nation, such as high remittance fees and financial exclusion. Remittances represent nearly 24 per cent of the country’s GDP, and the use of Bitcoin was intended to provide a more affordable and efficient way to transfer money across borders.
However, while the government launched the Chivo Wallet and set up over 200 Bitcoin ATMs, small businesses and casual users struggled with the volatility of Bitcoin as a means of storing value.
To illustrate, a National Bureau of Economic Research (NBER) study found that only 20 percent of small businesses in El Salvador used Bitcoin regularly. In comparison, 80 percent of citizens who downloaded the Chivo Wallet abandoned it after receiving their initial US$30 incentive.
These challenges are also relevant to Southeast Asia. Micro, small and medium-sized enterprises (MSMEs) form the backbone of the economies in the region, where MSMEs account for at least 97 per cent of business transactions, employing around 67 percent of the workforce.
Layer 2 solutions can make bitcoin more accessible for small businesses
In Southeast Asia, the cryptocurrency and blockchain market is growing, expected to reach US$1.79 billion this year and will grow at a CAGR of 8.75 per cent to US$2.50 billion by 2028. For startups in countries like Indonesia, Vietnam, and the Philippines, where financial inclusion remains challenging, enhancing access to fintech solutions that leverage cryptocurrencies will be transformative.
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However, one of the main reasons MSMEs struggle with adopting cryptocurrencies like Bitcoin is the complexity of transacting directly on the Bitcoin network. Its relatively slow transaction times and high fees make it less practical for everyday transactions, especially for small, frequent payments like microtransactions and retail payments. This is where Layer 2 solutions come into play.
Layer 2 technologies offer a blockchain-based scaling solution that complements or integrates with Bitcoin’s existing blockchain. They provide faster, cheaper, and more efficient transactions without compromising Bitcoin’s security. For example, instead of waiting 10 minutes for a Bitcoin transaction to settle, Layer 2 technologies can finalise transactions in mere seconds, similar to current online payment services like Visa and Mastercard.
Addressing the challenge of volatility
While Bitcoin is a secure and decentralised asset, its volatile value can fluctuate wildly, which is not ideal as a regular mode of payment. Stablecoins offer a solution to this problem, pegged to stable monetary assets like the US dollar or other national currencies. PayPal’s PYUSD, for instance, is a USD-backed stablecoin that has reached US$1 billion in market value.
Financial institutions and technology companies are now able to build upon Layer 2 networks to come up with their own solutions for addressing the payment needs of MSMEs and end consumers. Bitfinity Network’s BitFusion Bridge SDK leverages Chain Key Technology to enable the decentralised bridging of assets from any blockchain, such as Bitcoin, to cheaper and faster Layer 2 networks, enabling developers to integrate fintech apps with the Bitcoin network. This also allows businesses to transact in ckBTC, a 1:1 equivalent of Bitcoin that can be transferred for a fraction of the price and time compared to native Bitcoin transactions.
As another variant, Coinbase introduced cbBTC, a 1:1 equivalent to Bitcoin, enabling users to seamlessly convert BTC to cbBTC when transferring to the Base or Ethereum blockchains.
Also Read: The rise of Web3 and crypto startups: Pioneering the decentralised future
Such bridge protocols allow faster go-to-market strategies for emerging fintechs looking to implement secure, scalable, and interoperable blockchain solutions. And for end consumers to utilise BTC as micropayments, it solves the initial challenges faced by merchants and consumers in El Salvador.
For example, a small business using such a solution could accept payments in Bitcoin but immediately convert those into stablecoins, reducing the risk of holding a volatile asset. This means businesses can still take advantage of Bitcoin’s global reach and liquidity without being exposed to its price swings.
Leading Southeast Asia’s next generation of fintech adoption
The future of Bitcoin and stablecoins in Southeast Asia holds enormous potential, particularly for smaller players. Small businesses, which account for a significant share of the region’s economy, stand to benefit immensely from these innovations. By adopting Layer 2 solutions and leveraging stablecoins, small businesses and their customers can access cheaper, faster, and more secure financial services.
Using lessons from El Salvador, Southeast Asia’s startups have an opportunity to build innovative, scalable solutions that bring millions of unbanked individuals and small businesses into the global digital economy. By addressing these pain points, SEA can pave the way for a more inclusive and accessible financial future.
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