In September 2021, El Salvador made headlines by becoming the first country in the world to adopt Bitcoin as legal tender (see our post). This bold move, spearheaded by President Nayib Bukele, aimed to revolutionize the nation’s financial system, promote financial inclusion, and attract foreign investment. However, the journey has been fraught with challenges and controversies, culminating in a recent agreement with the International Monetary Fund (IMF) that has led to significant policy changes. This blog post explores El Salvador’s Bitcoin journey.
President Bukele announced the Bitcoin Law in June 2021, which was swiftly passed by the Legislative Assembly. The law mandated that Bitcoin be accepted as legal tender alongside the U.S. dollar, which had been the country’s official currency since 2001. The motivations behind this move were multifaceted. First, was financial Inclusion. A significant portion of El Salvador’s population lacked access to traditional banking services and Bitcoin was seen as a way to provide financial services to the unbanked. A second motivation was remittances. Remittances from Salvadorans living abroad constitute a substantial part of the country’s GDP. Bitcoin was expected to reduce the cost and increase the speed of these transactions. Third was economic growth. By positioning itself as a pioneer in cryptocurrency adoption, El Salvador hoped to attract foreign investment and boost economic growth.
The implementation of the Bitcoin Law, which went into effect in September 2021, involved several key initiatives. The government launched a digital wallet called Chivo, which aimed to facilitate Bitcoin transactions To promote its use, the government offered $30 in Bitcoin to every citizen who downloaded it. In addition, hundreds of Bitcoin ATMs were installed across the country to enable easy conversion between Bitcoin and U.S. dollars. And, plans were unveiled for a futuristic Bitcoin City powered by geothermal energy from nearby volcanoes, intended to be a hub for cryptocurrency innovation.
Despite these ambitious plans, the rollout faced significant challenges. The Chivo wallet experienced technical glitches and security concerns, leading to frustration among users. Many Salvadorans were skeptical about Bitcoin, with concerns about its volatility and the lack of understanding of how it works. Furthermore, the IMF and other international organizations expressed concerns about the risks associated with Bitcoin, including financial stability, financial integrity, and consumer protection.
The adoption of Bitcoin had mixed effects on El Salvador’s economy and society. While the Chivo wallet did provide access to financial services for many unbanked individuals, its usage remained limited. Only about 20 percent of citizens downloaded Chivo. Reports indicated that a significant portion of users did not make any transactions after receiving the initial $30 incentive. Bitcoin did facilitate some remittance transactions, but the overall impact was less significant than anticipated and traditional remittance services continued to dominate the market. The Bitcoin Law attracted some foreign investment and increased tourism, particularly from cryptocurrency enthusiasts. However, the overall economic impact was modest.
One of the major concerns with Bitcoin adoption was its price volatility. The value of Bitcoin fluctuated significantly, leading to potential fiscal risks for the government. The country’s Bitcoin holdings, which were intended to be a hedge against inflation, experienced substantial value swings. This volatility raised questions about the sustainability of using Bitcoin as a national currency.
This past week, El Salvador reached a preliminary agreement with the IMF for a $1.4 billion loan. The loan was part of a broader financial strategy to stabilize the economy and secure additional funds from the World Bank, the Inter-American Development Bank and regional development bank (an expected total of $3.5 billion). However, securing these loans came with significant conditions.
First, the government agreed to make Bitcoin acceptance voluntary for the private sector, rather than mandatory, a significant shift from the original Bitcoin Law. Second, the government announced plans to sell or shut down the Chivo wallet, though the many private sector Bitcoin wallets will continue serving El Salvador. Third, the agreement stipulated that taxes will have to be paid in U.S. dollars; Bitcoin will no longer be accepted for that purposes And, fourth, the public sector’s engagement in Bitcoin-related activities and transactions would be confined.
The IMF loan agreement represents a significant pivot in El Salvador’s Bitcoin strategy. While the country remains committed to its crypto initiatives, the concessions made to secure the loan indicate a more cautious approach. Stacey Herbert, director of the Bitcoin Office in El Salvador, posted on X that “El Salvador will continue buying bitcoin (at possibly an accelerated pace) for its Strategic Bitcoin Reserve;” it has purchased one Bitcoin a day since the Bitcoin Law went into effect. However, the focus has shifted towards stabilizing the economy and addressing fiscal challenges.
El Salvador’s experiment with Bitcoin as legal tender has been a bold and controversial journey. From the initial excitement and ambitious plans to the challenges and policy shifts, the country’s experience offers valuable lessons for other nations considering similar moves. The recent IMF loan agreement underscores the complexities and risks associated with adopting a volatile cryptocurrency as a national currency. As El Salvador navigates its future, the balance between innovation and stability will be crucial in determining the long-term success of its Bitcoin experiment.
