El Salvador Ends Bitcoin As Legal Tender - Here's Why Bitcoin Didn't Work

(MENAFN- Newsroom Panama) El Salvador, the first country to adopt bitcoin as legal tender in 2021, recently reversed its decision after pressure from the IMF. What led to this change, and what were the outcomes of its nearly four-year crypto experiment?

The Curious Case of El Salvador

The 2021 law in El Salvador made Bitcoin legal tender, meaning it became not just legal but mandatory for transactions. Merchants were required to accept Bitcoin, and the government started collecting payments such as taxes and fees in Bitcoin. To facilitate this, the country launched the Chivo wallet, a government-backed mobile app designed to help Salvadorans transact with Bitcoin. The app allowed users to send, receive, and store Bitcoin, and even offered an incentive of $30 in Bitcoin for those who downloaded it. However, the law did not replace the U.S. dollar, which had been El Salvador's only official currency since 2001. Instead, it made Bitcoin the country's second legal tender in 2021. This meant Salvadorans who preferred not to use Bitcoin could still conduct all transactions in USD without any restrictions.

Polls from 2021 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. While the international crypto community lauded the El Salvadoran law, the residents of the country protested the law on the streets, and many in the financial world criticized the legislation's flaws. One key issue was that many merchants across the country were not equipped to accept Bitcoin, and the law did not address this gap. Furthermore, a large portion of the population lacked bank accounts, and many businesses still only accepted cash payments. Many merchants were also reluctant to accept Bitcoin due to its volatility, fearing that its fluctuating value could lead to losses.

What are the Results of the El Salvador Bitcoin Experiment?

A nearly four-year period during which Bitcoin was legal tender in El Salvador, has yielded mostly negative results, although there are a few positives to note. On the positive side, the 2021 Bitcoin adoption helped expose more people to cryptocurrencies. A measurable outcome was the boom in tourism. The announcement of Bitcoin's adoption piqued international interest, leading to a 20% increase in tourist arrivals in 2024 compared to 2023, with growth also seen in previous years. However, the broader impact has been largely negative. Bitcoin failed to serve as a hedge against inflation in El Salvador. Issues such as its extreme volatility and technical difficulties with the Chivo wallet are often cited as reasons for the public's reluctance to use Bitcoin.

Additionally, multiple hacking incidents involving the Chivo wallet further eroded trust in the cryptocurrency, leading to its limited use. The Bitcoin law also fell short of significantly improving financial inclusion. In 2021, approximately 70% of Salvadorans were unbanked, and an even larger percentage had never used Bitcoin. In fact, most people in the country largely ignored the digital currency. By 2024, a report from The Central American Group indicated that 92% of Salvadorans did not use Bitcoin for transactions. While Bitcoin was intended to facilitate cross-border payments, it had little impact in this regard. In 2023, only 1.3% of remittances were made using Bitcoin.

A 2022 survey also revealed that 86% of local businesses had no Bitcoin transactions, and 91.7% of respondents said Bitcoin adoption had not affected them. Only 3.6% reported an improvement in sales. One of the key flaws in the Bitcoin adoption strategy was the timing. The law was enacted in 2021, a year following a major crypto rally fueled by Bitcoin's halving. Historically, bull markets are followed by downturns, and the law was passed just before another crypto winter began. The sharp Bitcoin crash in 2022 only served to further discourage Salvadorans from using the currency.

How did the El Salvador Bitcoin Experiment End?

Since 2022, the International Monetary Fund has urged El Salvador to amend its Bitcoin law. On January 30, 2025, the Salvadoran Congress took action, agreeing to revise the law in exchange for a $1.4 billion loan from the IMF. One key condition for securing the loan was the removal of Bitcoin's legal tender status in the country. The loan agreement stipulates that“public sector engagement in Bitcoin-related economic activities, transactions, and purchases will be limited.” While reports suggest that Bitcoin will remain legal for trade among Salvadorans, it will no longer be accepted for taxes or other government payments, and businesses will have the right to refuse Bitcoin payments. The requirement for all businesses to accept Bitcoin had faced stark criticism due to the BTC's volatility and the public's limited understanding of digital currencies. The new legislative reform also addresses these concerns by giving businesses the option to choose whether or not to accept Bitcoin. However, the full scope of these restrictions is yet to be fully determined, and further details are expected soon.

A Notice that Appeared on Twitter, Now Known as X

We are now in DAY FIVE since El Salvador rescinded Bitcoin as legal tender, at the request of the IMF There continues to be a lot of misunderstanding about what happened on Wednesday, so it might be worth giving a brief overview In 2021 El Salvador made history by becoming the first nation in the world to adopt Bitcoin as legal tender. The president announced this too much fanfare at the largest bitcoin conference in the world. In the next days the president did a sort of media tour, appearing on various twitter spaces and podcasts to champion the new law Fast forward 3+ years.

In December of 2024 El Salvador and the IMF announced a draft agreement for a loan which came with various conditions, many relating to Bitcoin in El Salvador The way IMF loans work, the nation needs to conform to various conditions before the agreement becomes official and any payments are disbursed. The revisions passed Wednesday were sent by the president and was passed with no discussion or comment. There was no media tour; in fact there has been almost no information at all from the government.

The IMF Takes Away a Nation's Sovereignty.

The law changes passed Wednesday and other changes to come are at the behest of the IMF, so it makes sense they would not be very keen to draw attention to this, but still, the silence has been deafening. It has also created a lot of confusion.

Some quick facts: – The laws passed on Wednesday need to be published in the Official Gazette, and then 90 days from that date they will become law. This is standard for El Salvador. For example, the 2021 Bitcoin Law was announced and passed in June but went into effect in September. – No word on when the new law will be published, but likely this week. – Once these new laws go into effect Bitcoin will cease to be legal tender in El Salvador – The govt will no longer accept Bitcoin as payment for anything (taxes, immigration fees, etc.) – The government Bitcoin wallet application, Chivo, will be sold – The loan will be disbursed over a 40-month period and in that time the IMF will have deep access to anything related to the terms of the agreement and effectively have to approve any changes/ may mandate further changes from the government to conform to the terms.

In addition to the above, there may be further changes related to this line in the draft agreement: For the public sector, engagement in Bitcoin-related economic activities and transactions in and purchases of Bitcoin will be confined. Due to the lack of communication, it is pure speculation how this will be interpreted. It's possible that the above changes will be enough to satisfy this line. It's also possible El Salvador will be forced to make further concessions. Hopefully the government gains its voice back and can clarify the various changes, but otherwise it will months of close observation before we can fully understand the impact.

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