El Salvador, the first country to adopt Bitcoin as its fiat currency in 2021, recently reversed the decision after pressure from the IMF. What led to this change and what were the results of those almost four years of cryptography experiments?
A strange incident in El Salvador
El Salvador's 2021 law made Bitcoin (BTC) into fiat currency. In other words, it's not just legal, it's become essential for trading. Merchants had to accept Bitcoin, and the government began collecting payments such as Bitcoin taxes and fees.
To facilitate this, the country has launched Chivo Wallet, a government-supported mobile app designed to help Salvadorans deal with Bitcoin. The app allowed users to send, receive and store Bitcoin, providing an incentive of $30 for those who downloaded it.
However, the law did not affect the situation in the US dollar, which was the official currency of El Salvador from 2001 to 2021. This meant that Salvadorans who didn't want to use Bitcoin could use USD for all their transactions. A 2021 poll showed that only 15% of the population trusted Bitcoin, and 70% of respondents opposed its adoption.
Despite President Nayib Bukele's media campaign and public relations efforts, the law failed to convince many Salvadorans of its value.
The international crypto community praised El Salvador's laws, but the country's residents protested the laws on the streets, and much of the financial world criticised the flaws in legislation.
One important issue is that many merchants across the country were not equipped to accept Bitcoin, and the law did not address this gap.
Furthermore, most of the population lacked bank accounts, and many businesses still accepted cash payments alone. Many merchants were reluctant to accept Bitcoin because of its volatility, fearing that the fluctuations could lead to losses.
What are the results of the El Salvador Bitcoin experiment?
The nearly four-year period in El Salvador where Bitcoin was the fiat currency has had almost negative results, but there are some positive ones.
On the positive side, Bitcoin adoption in 2021 helped expose more people to cryptocurrency. The measurable result was the tourism boom. The announcement of Bitcoin adoption has attracted international interest, with tourist arrivals increasing by 20% in 2024 compared to 2023, and has seen growth in the past few years as well.
However, the broader impact was almost negative. Bitcoin did not serve as a hedge against Salvador's inflation. Issues like its extreme volatility and the technical difficulties of Chivo wallets are often cited as unwilling reasons to use Bitcoin.
Additionally, several hacking incidents, including Chivo wallets, further erode trust in cryptocurrencies, leading to limited use.
Bitcoin laws also fell short of a major improvement in financial inclusion. In 2021, about 70% of Salvadorans were not banked, and an even larger percentage never used Bitcoin.
In fact, most people in this country largely ignored digital currency. By 2024, reports from a Central American group showed that 92% of Salvadorans did not use Bitcoin in their trading.
Bitcoin was intended to promote cross-border payments, but it had little impact on this point. In 2023, only 1.3% of remittances were made using Bitcoin. In a 2022 survey, 86% of local businesses did not have Bitcoin transactions, and 91.7% of respondents said that Bitcoin adoption was not affected. Only 3.6% reported improvements in sales.
One of the key flaws in the Bitcoin recruitment strategy was timing. The law was enacted in 2021, a year after a massive crypto assembly fueled by half of Bitcoin.
Historically, bull markets followed by recessions, and the law was passed just before another code winter began. The sharp bitcoin crash of 2022 helped further discourage Salvadorans from using currency.
How did the Salvador Bitcoin experiment end?
Since 2022, the International Monetary Fund has urged El Salvador to amend the Bitcoin Act. On January 30, 2025, Salvador Congress agreed to take action and amend the law in exchange for a $1.4 billion loan from the IMF.
One important condition for securing a loan was the removal of Bitcoin's statutory bid position in the country. The loan agreement states that “public sector involvement in Bitcoin-related economic activities, transactions and purchases is limited.”
Reports suggest that Bitcoin will remain legal for trade among Salvadorans, but it will no longer be accepted for taxes and other government payments, and companies will refuse to pay Bitcoin I have the rights.
The requirement for all companies to accept Bitcoin has faced severe criticism due to BTC volatility and limited understanding of digital currencies in the general public. New legislative reforms also address these concerns by giving businesses the option to choose whether to accept Bitcoin or not
However, the full scope of these restrictions has not yet been fully determined, and details will be expected soon.
IMF loans are paid over 40 months. This means that these restrictions will be in place for three years, potentially reducing the role of Bitcoin in the country over a long period of time.
Despite changes in policies to secure IMF loans, the Salvador government appears to be maintaining its crypto stance. On February 4th, the Bitcoin office in El Salvador reported that it would purchase a total of 12 BTC through two separate transactions.
The first acquisition included 11 BTC purchased for around $1.1 million with an average price of $101,816 per Bitcoin. On my second purchase, I added one BTC for a price of $99,114 just hours later.
These recent acquisitions bring the country's total Bitcoin reserve to 6,068 BTC, worth more than $592 million at the time of writing. El Salvador has been steadily accumulating Bitcoin, adding 60 BTC in the past month alone.
