Why El Salvador Still Matters for Crypto Adoption
In September 2021, El Salvador adopted Bitcoin as legal tender, becoming the first nation to do so. President Nayib Bukele predicted the move would boost financial inclusion, sovereignty, and technology. Proponents believed it was a revolutionary move away from the current financial system. Critics were concerned this could be a volatile gamble for a small developing economy.
El Salvador's Bitcoin adventure four years on is messier and less grandiose than first conceived. Bitcoin isn't mandatory for payments and isn't widely used in government. Yet the country retains Bitcoin in reserves and remains friendly to crypto assets. This article explores the rationale behind El Salvador adopting Bitcoin, reviews how the policy played out, why it pivoted, and lessons for other countries.
Why El Salvador Looked Beyond the Dollar
One way to understand why El Salvador adopted Bitcoin is to examine its monetary history.
In 2001, El Salvador switched from using its national currency, the colón, to using the U.S. dollar. Prices became stable with low inflation, but El Salvador lost monetary policy autonomy. Interest rates, money supply, and currency value were set by the U.S. Federal Reserve, often not corresponding with El Salvador's needs.
Remittances are extremely important to El Salvador's economy. Remittances to Salvadorans from abroad account for over 20% of El Salvador's GDP. Transfers are often mediated by middlemen who take a fee and require recipients to travel to pick up cash.
As of the late 2010s, approximately 70 percent of Salvadoran adults remained unbanked. Most Salvadorans did own mobile phones however. The combination of limited banking services, heavy remittance dependence, and widespread mobile phone ownership created an ideal testing ground for payment technologies.
From Local Experiment to National Policy
Bitcoin was piloted in a community before it became federally legalized.
In 2019, a donor-funded project piloted Bitcoin in the coastal village of El Zonte in an effort to empower local economic activity. Residents made transactions with mobile wallets and Bitcoin ATMs without requiring bank accounts. The project gained worldwide attention, earning the nickname "Bitcoin Beach."
President Bukele later pointed to El Zonte as evidence Bitcoin could function as legal tender. During June 2021, he announced El Salvador would become Bitcoin legal tender at a major Bitcoin conference. Days later, the Legislative Assembly approved the Bitcoin Law. It went into effect September 7, 2021, becoming legal tender alongside the U.S. dollar.
Key Elements of the Bitcoin Law
- Mandatory acceptance of Bitcoin by merchants, with limited exceptions
- Zero capital gains tax on Bitcoin transactions
- Legal recognition of Bitcoin for payments, debts, and taxes
- Residency incentives for foreign investors holding Bitcoin
The government also released Chivo, a government-backed cryptocurrency wallet. They provided users who registered with $30 worth of Bitcoin.
Implementation Challenges and Public Response
The rollout was fast but uneven.
Millions downloaded the Chivo wallet but few retained use of it. Questionnaires administered in 2021 and 2022 discovered that Salvadorans had downloaded the app merely to claim the bonus and subsequently abandoned it. Cases of identity theft and downtime impacted confidence early on.
Bitcoin's volatility also deterred users from using it on a day-to-day basis. For low-income households living paycheck to paycheck, price stability was more of a concern than cheaper remittance fees or financial sovereignty.
By 2022:
- Only a minority of businesses regularly accepted Bitcoin
- Bitcoin accounted for a small fraction of remittance flows
- Most Salvadorans continued to prefer the U.S. dollar for daily transactions
Many people stayed skeptical, especially older adults and those with lower incomes.
Why Bitcoin Did Not Become Daily Money
Central bank surveys found about two-thirds of Salvadorans were using Bitcoin just as frequently as they did before the law's implementation, and only about 27% of businesses were accepting Bitcoin. Bitcoin may never be widely used by the public.
One problem is that Bitcoin has little practical value to most people. Crypto enthusiasts often argue that Bitcoin can be used to send money to friends and family, make donations, or withstand inflation. For most people around the world living far above the poverty line, none of these use cases are a priority.
That's in stark contrast to the way people in many developing countries use cash. In these places, money serves functions beyond merely buying goods from businesses. It allows people to send money to family members in rural areas who may not have bank accounts. It helps people receive donations from relatives living abroad. And it lets people insulate themselves from the oppressive inflation that often comes with struggling economies.
In other words, cash is often used by people who are financially underserved by their governments. Bitcoin's main value proposition is that it can substitute for cash. If you don't use cash, Bitcoin isn't likely to be useful to you.
When a Government Penalty Creates Demand
To understand the key reason why people use cryptocurrencies, look no further than Iran. Faced with US sanctions, ordinary Iranians have turned to cryptocurrencies to send money abroad, pay for overseas goods, and protect their savings from inflation. Government penalties have given Iranians a reason to use crypto.
Government penalties haven't given most Bitcoin users a reason to use crypto. Most people who buy Bitcoin are investors hoping to grow their wealth. Many Bitcoin holders buy it with the intention of never spending it.
That's a problem if the goal is to have citizens widely use a cryptocurrency. If people buy Bitcoin but don't actually spend it, then Bitcoin isn't doing anything that current financial networks don't already do. At that point it's merely a speculative asset that users will earn interest on when stored in a wallet that generates Bitcoin-based interest.
You can't force citizens to use Bitcoin just because the government says they have to. Giving people a reason to use it can help. This is something the Iranian government has achieved by imposing strict controls on Iranian citizens' economic freedom, which created a need for an alternative currency that Bitcoin could fill.
In El Salvador the government launched a $30 bonus worth of Bitcoin to citizens who downloaded the Chivo wallet. Soon after, about 20% of Chivo's wallet holders had exchanged their Bitcoin bonuses for US dollars. The government was basically throwing Bitcoin at its citizens and hoping they would find a reason to use it.
Government Bitcoin Purchases and Market Volatility
Once Bitcoin was legalized, the government began purchasing Bitcoin into reserves. Several of these purchases were made from late 2021 to 2022 while global cryptocurrency markets were declining. Bitcoin fell over 50% from its all-time high in 2021, causing significant unrealized losses for the government.
President Bukele framed these purchases as long-term investments, and claimed they weren't actual losses because the government had not sold the Bitcoin. Supporters argued it was a prudent way to hedge reserves. Critics felt it endangered public funds.
As of early March 2025, El Salvador owns slightly more than 6,100 BTC worth roughly $500 million at current prices. Despite recoveries in 2023 and 2024, concerns over financial risk remained a theme in international dialogues.
International Pressure and the IMF Agreement
Bitcoin policy quickly became the focus of negotiations with international financial institutions in El Salvador.
The IMF repeatedly cautioned that adopting Bitcoin as legal tender could pose risks to financial stability, consumer protection, and anti-money laundering efforts. Concerns increased as El Salvador pursued external financing amid growing debt.
In February 2025, the IMF agreed to lend El Salvador $1.4 billion. In exchange for the loan, Bitcoin's usage in the public sector was scaled back by the government.
What Changed Under the IMF Deal
- Ending mandatory Bitcoin acceptance by merchants
- Removing Bitcoin as a means of paying taxes
- Reducing and winding down public-sector involvement in the Chivo wallet
- Maintaining limits on future government Bitcoin accumulation
Bitcoin hasn't been banned, but rather its legal tender status is limited to private voluntary usage.
Environmental and Social Concerns
Environmental issues also sparked debate. Bitcoin mining consumes a high amount of energy. Critics wondered if El Salvador should be focusing on mining given its unreliable electricity and water services. The government incentivized miners to use geothermal energy created by volcanoes. This made mining seem renewable.
In practice, mines stayed small. Environmental debates shifted from actual mining outputs to how resources, water, and electronic waste were handled. Bitcoin tourism and speculation affected cities such as El Zonte. While some merchants benefited, others argued that soaring property values and speculation would displace locals and lead to gentrification.
Bitcoin Can Still Drive Financial Inclusion Without Mass Adoption
Even if Bitcoin fails to gain mass public adoption in El Salvador, it could still promote financial inclusion.
Remember that statistic about how 20% of Salvadorans were unbanked before the Bitcoin law. That number fell by about a fifth after the law took effect, according to official government figures.
How did the government accomplish this? By forcing financial service providers to accept Bitcoin as payment. When businesses were given a legal requirement to accept Bitcoin, financial service providers rushed to cater to all of the new Bitcoin customers fleeing banks en masse to open Bitcoin wallets.
Businesses don't have to accept Bitcoin for Bitcoin to drive financial inclusion. If the government requires financial providers to accept it, those providers will adapt whether they like Bitcoin or not. In that sense, Bitcoin doesn't have to be popular to benefit the average Salvadoran. By mandating that financial providers accept it, Bitcoin can penetrate financial institutions which can then open their services up to the unbanked.
What Remains of the Bitcoin Strategy
Despite Bitcoin's demotion in legal status in El Salvador, the Central American nation still has grand ambitions for cryptocurrencies. The country continues to:
- Hold Bitcoin as part of its national reserves
- Promote itself as a center for crypto and fintech companies
- Develop regulatory systems for digital assets and stablecoins
- Host international blockchain and crypto conferences
El Salvador is no longer trying to push everyone onto Bitcoin, but rather innovating, investing, and beta testing new regulations.
Lessons From the Experiment
El Salvador's experience gives several important lessons for policymakers around the world:
- Legal mandates do not guarantee adoption. Earn public trust, educate, and simplify systems rather than relying solely on legislative changes.
- Volatility limits everyday currency use. Assets meant to hold value over time may not work well for everyday payments.
- Regulation and innovation must evolve together. Clear rules can help countries try new things without risking financial stability.
- State capacity matters. Digital currencies need strong institutions, good infrastructure, and public trust to succeed.
- Experiments can still be valuable, even if they are revised. Retrenching a policy is not an admission of failure. It can demonstrate progress and adaptation.
A Living Case Study, Not a Verdict
El Salvador taking on Bitcoin was one of the most audacious monetary experiments in recent memory. The original vision of nationwide Bitcoin adoption hasn't panned out realistically, but El Salvador is reshaping the global conversation around crypto, sovereignty, and financial inclusion.
El Salvador is neither a cautionary tale nor an unmitigated success today. It is a living case study on the limits of crypto-driven policies. El Salvador demonstrates that financial innovation isn't simply technological. It also requires trust, solid institutions, and real-world economics.
As other countries consider whether to make this move, El Salvador's experience will be a valuable real-world case study of ambition, setbacks, course corrections, and lessons learned.
