In September 2021, El Salvador made headlines as the first country in the world to adopt Bitcoin as legal tender. President Nayib Bukele’s goal was to boost financial inclusion, reduce reliance on the U.S. dollar, and position the nation as a tech hub for digital innovation.
The decision sparked mixed reactions globally and within the country, raising questions about the viability of cryptocurrency as a national currency. Nearly three years later, has the El Salvador Bitcoin experiment paid off?
In this post, we’ll explore why the country adopted Bitcoin and the initial response from citizens and international bodies, as well as provide an update on its progress in 2024.
Why and When El Salvador Adopted Bitcoin
El Salvador’s adoption of Bitcoin began in June 2021, when the country’s legislative assembly passed the Bitcoin Law, which authorized Bitcoin as legal tender alongside the U.S. dollar. Here are the reasons why:
- Financial inclusion: Around 70% of the population was unbanked, lacking access to traditional financial services. Society began to see Bitcoin as a way to promote financial inclusion. We take a closer look at this later in this post.
- Remittances: Money sent to Salvadorans from family members working in other countries makes up over 20% of the country’s GDP. These transactions also faced high fees and slow transaction times. Bitcoin can reduce costs and speed up transfers.
- Innovation: President Bukele sought to attract foreign investment and position his country as an innovation hub. The government launched the Chivo Wallet, a state-sponsored digital wallet, and incentivized Bitcoin usage by offering $30 in free Bitcoin to every registered user.
Alongside these initiatives, Bukele aimed to create a “Bitcoin City” powered by cryptocurrency and funded through Bitcoin-backed bonds. Despite these ambitious goals, the International Monetary Fund (IMF) and the World Bank raised concerns about Bitcoin’s volatility and the potential risks to an already fragile economy.
Initial Reaction from Citizens and the Global Community
El Salvador’s decision to adopt Bitcoin yielded mixed reactions within the country and on the global stage. Domestically, many Salvadorans were skeptical, with a large portion of the population expressing confusion or indifference.
According to surveys conducted shortly after the Bitcoin Law took effect, most citizens hesitated to embrace the new currency, with many preferring the familiarity of the U.S. dollar.
Further complicating matters was the botched launch of the Chivo Wallet, marred by transaction delays, glitches, and hacking losses. Public protests erupted in the months following the law’s implementation, with citizens fearing economic instability and the impact of Bitcoin’s volatility on their everyday lives.
In contrast, the global crypto community praised the small country for its bold move, with Bitcoin advocates hailing the experiment as a significant step toward mainstream cryptocurrency adoption.
Why Haven’t Salvadorans Fully Embraced Bitcoin?
Bitcoin’s everyday use among Salvadorans remains limited. According to recent reports, less than 20% of the population actively uses Bitcoin for transactions, while most still prefer the U.S. dollar.
The Chivo Wallet has seen relatively low adoption after the initial surge driven by government incentives. Small businesses didn’t see a compelling upside in the complexity and volatility of Bitcoin, making it an impractical option for many.
Relative Stability of Existing System
One possible reason for Bitcoin’s low adoption rate could be the relative stability of El Salvador’s economy compared to the Latin American countries facing severe financial crises.
In Argentina and Venezuela, hyperinflation and drastic currency devaluation led citizens to seek alternatives like Bitcoin to hedge against economic collapse. In contrast, El Salvador has had a more stable financial environment due to its adoption of the U.S. dollar in 2001.
The dollar’s stability provides a sense of security for Salvadorans, making them less inclined to switch to a volatile cryptocurrency like Bitcoin for everyday transactions.
The Flip Side of “Financial Inclusion”
The second reason requires a deeper look at “financial inclusion”. A fascinating article summarizing findings from a survey by Yale University shows that many “unbanked” people in developing economies prefer to remain anonymous actors in the financial system – and who can blame them?
Most Latin American countries permit predatory banking practices with extremely high interest rates that are often unregulated. They also have anti-money laundering laws that allow the government to monitor cash flow in bank accounts.
Many Salvadorans make a living from the informal economy. Their profits are quite low, and they are understandably not interested in “financial inclusion” if it simply means the government can automate tax collection.
When combining that context with the problematic launch and early hacks of the Chivo Wallet, it’s not hard to see why Bitcoin adoption is lagging despite government incentives. Many citizens see no urgent need to transition from an existing cash-based system that, while far from perfect, is working for them.
2024 Progress Report: Has El Salvador’s Bitcoin Experiment Worked?
As of 2024, the Bitcoin experiment has yielded mixed results. On the one hand, the government has touted several successes, including a reported increase in tourism and foreign investment linked to its pro-Bitcoin policies.
President Bukele has pointed to the rising value of Bitcoin over time, especially during bull market cycles, as evidence of the country’s sound investments.
While tourism and some foreign investment have increased, critics argue that these gains have not offset the risks associated with Bitcoin’s price volatility. The volatility of Bitcoin remains a primary concern for both Salvadorans and international observers.
Another issue is transparency. Several financial articles criticize the government for lack of transparency around bitcoin reserves and policy direction.
The Bitcoin experiment strained El Salvador’s relationships with international financial institutions. The IMF has repeatedly urged the country to abandon its cryptocurrency policy, warning of long-term financial risks.
Nonetheless, El Salvador’s commitment to Bitcoin is fascinating as an evolving case study. The Digital Assets Issuance Law (LEAD) in January 2023 enabled the tokenization of Real-World Assets (RWA) Tokenization set the groundwork for stablecoin issuance and the tokenization of debts and agricultural commodities.
In August 2024, the government passed significant reforms to LEAD affecting Bitcoin service providers (PSB), Digital Assets Services Providers (DASPs), and actors involved in issuing digital assets.
The controversy continues, though, as critics pointed out concerns over reduced public consultation and ongoing lack of transparency developing regulations.
Lessons Learned from El Salvador’s Bitcoin Experiment
As this experiment progresses, several key lessons have emerged that could inform future cryptocurrency adoption efforts by other nations:
- Cryptocurrency volatility is an ongoing wild card that governments can’t necessarily control.
- Adoption requires education and easy-to-use infrastructure that offers improvements to existing systems.
- Challenges to global financial relationships with large TradFi institutions
- Cryptocurrency may attract tourism and niche investments but may not address deeper economic issues.
What’s Next for El Salvador?
El Salvador’s experiment mirrors Bitcoin’s trajectory on the global stage in that the full consequences—both positive and negative—are still unfolding. The global financial community will watch closely to see if El Salvador can turn its Bitcoin gamble into a sustainable economic strategy.
For now, it serves as a fascinating case study in action for any country considering integrating cryptocurrency into its financial system.
What do you think? Have you been following the El Salvador experiment? If you are a crypto investor, ZenLedger can help you stay organized for tax time if you trade crypto assets. Our platform automatically aggregates transactions across your wallets and exchanges, computes your capital gain or loss, and generates the paperwork you need to file. This paperwork includes personal tokens you issue or purchase and the income or loss they generate.
The above is for general info purposes only and should not be interpreted as professional advice. Please seek independent legal, financial, tax, or other advice specific to your particular situation.
