El Salvador made history in 2021 as the first country to embrace Bitcoin as legal tender. However, nearly four years later, the government has reversed course, largely due to pressure from the International Monetary Fund (IMF). This article explores why the initiative failed and its lasting impact.
The Rise and Fall of Bitcoin Adoption in El Salvador
When El Salvador passed its Bitcoin law in 2021, the government mandated that businesses accept BTC for transactions. The Chivo wallet, a state-backed app, was introduced to facilitate adoption, offering citizens an incentive of $30 in Bitcoin.
Despite these efforts, Bitcoin never gained widespread acceptance. The U.S. dollar remained the preferred currency, and surveys indicated that only 15% of Salvadorans trusted Bitcoin, while 70% opposed its adoption. Many businesses lacked the infrastructure to accept BTC, and concerns over volatility discouraged its use.
Economic Impact and Challenges
El Salvador’s Bitcoin experiment had mixed results. On the positive side, it sparked global interest, leading to a 20% increase in tourism by 2024. However, the broader financial impact was negative.
Bitcoin's volatility undermined its role as a hedge against inflation. Technical issues with the Chivo wallet and multiple hacking incidents further eroded trust. Financial inclusion also saw little improvement, with 92% of Salvadorans reportedly avoiding Bitcoin transactions by 2024.
Why Did the Bitcoin Law Fail?
Several factors contributed to the failure of Bitcoin as legal tender:
- Lack of Public Trust: Most Salvadorans were reluctant to adopt Bitcoin.
- Volatility: Merchants hesitated to accept Bitcoin due to its unpredictable value.
- Limited Financial Infrastructure: Many businesses and individuals relied on cash transactions.
- Unfavorable Market Timing: The law was enacted just before a major crypto downturn.
The IMF's Role and the Repeal of the Law
Since 2022, the IMF has urged El Salvador to amend its Bitcoin law. On January 30, 2025, the government finally agreed to remove Bitcoin’s legal tender status in exchange for a $1.4 billion IMF loan.
Under the new regulations, Bitcoin will still be legal for private trade but will no longer be accepted for taxes or mandatory transactions. Businesses will have the option to refuse BTC payments, addressing concerns over volatility.
What’s Next for Bitcoin in El Salvador?
Despite the policy shift, El Salvador continues to invest in Bitcoin. On February 4, the government purchased an additional 12 BTC, bringing its total reserves to 6,068 BTC, valued at over $592 million.
While Bitcoin’s role in the country has been significantly reduced, El Salvador’s leadership remains committed to cryptocurrency. The long-term impact of these policy changes remains uncertain.
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