Cryptocurrencies have had an impressive journey so far. Although in the beginning, they weren’t seen in a good light, things have gradually started to shift for the industry as significant innovations started to emerge, and people became increasingly aware of the many attractive features these digital assets offer. After Bitcoin became successful, another promising cryptocurrency emerged – Ethereum- which was set to further transform the crypto landscape and fans of Bitcoin wanted to learn how to buy Ethereum as well. As the crypto space continued to evolve, major milestones catapulted cryptocurrencies into the spotlight and changed the narrative around them.
In 2021, El Salvador became the first country ever to embrace Bitcoin as a legal tender, with President Nayib Bukele promising a revolutionary economic transformation. For a nation where more than 70% of the population didn’t have access to the traditional banking system, this bold experiment empowered people and offered them a glimpse of hope.
El Salvador became a beacon for financial innovation as other nations started to keep a closer look at this experiment. However, the road hasn’t been smooth, as critics raised concerns about the volatility of cryptocurrencies like Bitcoin and the risks associated with them when it comes to economic stability. At the end of 2024, however, El Salvador’s experiment started to see signs of tangible benefits; as tourism increased, national reserves increased due to Bitcoin’s rising value, and the country gained a burgeoning reputation as a crypto-friendly place to travel to.
El Salvador’s experiment started with a vision for change
Before Bitcoin became a legal tender in El Salvador, another quiet test of the digital asset’s capabilities happened in El Zonte – a small town in the country. An anonymous U.S. donor started a local initiative in 2019, encouraging people in the town to use Bitcoin as a form of payment for utilities, groceries, and medical care. In 2022, around 90% of families in El Zonte made transactions with Bitcoin, while local youths earned Bitcoin through development projects in the community.
After the success of this initiative, President Bukele planned to achieve something bigger, so in June 2021, he unveiled the Bitcoin Law by posting an enthusiastic tweet. This law ushered in a dual-currency system, where Bitcoin became a legal currency alongside the U.S. dollar. As Bukele stated, this initiative wasn’t meant to just chase headlines: behind it was the bigger motivation to address deep-rooted issues in the country, such as financial exclusion, as half of Salvadorans lacked access to traditional banking, as well as remittances, constitution around 20% of El Salvador’s GDP. Bitcoin promised low-cost, near-instant cross-border transactions, which was incredibly appealing. The government wanted to empower citizens by bypassing traditional intermediaries and putting more money directly into their hands. Beyond these financial benefits, Bukele also had a vision of El Salvador becoming a global hub for crypto innovation.
The economic impact of El Salvador’s adoption of Bitcoin as legal tender
El Salvador’s openness towards cryptocurrency has left a considerable mark on the country’s economy. One of the major advantages has been the ability to streamline remittances, enabling Salvadorians abroad to send cash home with Bitcoin. This helped eliminate traditional intermediaries and reduce fees, making remittances not only more affordable but also faster and more accessible.
Furthermore, the country has experienced a surge in foreign investment as companies interested in cryptocurrency saw El Salvador as an attractive hub. Digital nomads and crypto enthusiasts have flocked to the country, enhancing tourism and putting El Salvador at the top of the list of Bitcoin-friendly destinations.
The government’s holdings of 5,959 coins in El Salvador also appreciated considerably when Bitcoin surpassed the $100,000 mark, offering a necessary boost to national reserves. This windfall increased confidence in Bukele’s experiment and provided fiscal relief in a country that has long been facing major economic challenges.
While the initiative to embrace Bitcoin as legal tender grabbed headlines, there have been various challenges along the way. Despite the ambitious goals of the government, Bitcoin’s adoption among Salvadorans hasn’t met expectations; only 20% of businesses in the country embrace Bitcoin. Given the volatility and complexity of the cryptocurrency, many merchants see its adoption as an impractical choice, with the U.S. dollar providing more reliability and stability.
Another hurdle to the success of Bukele’s experiment in El Salvador was the population’s limited understanding of crypto assets. Levels of digital literacy are low, so it’s challenging for Salvadorans to navigate transactions effectively. Furthermore, many Salvadorans who were unfamiliar with the crypto landscape worried about the infamous volatility of the leading crypto and its potential risks to the economy, and they even started protesting.
Why did El Salvador pause daily Bitcoin purchases, and what does this mean for the crypto industry?
El Salvador’s daily Bitcoin purchases have been suspended recently, and the reason behind this is an agreement with the IMF for a US$1.4 billion loan. This isn’t necessarily surprising, given that the IMF has been skeptical about the plan since the beginning. Nonetheless, El Salvador still succeeded in building up a 6,000 $BTC reserve, which translates into $600 million, without selling pressure. While El Salvador’s Bitcoin adventure may have come to a halt, that’s not an indicator that the Bitcoin experiment will simply not matter anymore. In fact, El Salvador likely opened a few eyes through its achievements, with bigger countries considering Strategic Bitcoin Reserves.
One of the biggest lessons to learn from what happened in El Salvador is that declaring Bitcoin as a legal tender won’t necessarily guarantee widespread acceptance and usage. To enhance financial inclusion, it is necessary to build a robust financial infrastructure first. The Chivo Wallet’s launch, which was meant to facilitate Bitcoin transactions, had technical issues, like transaction delays, glitches, and security issues, eroding user trust. Moreover, many SMBs lacked the necessary point-of-sale systems and hardware to be able to handle Bitcoin payments, which made it challenging to integrate the new system into everyday commerce.
While Bitcoin’s acceptance was made voluntary instead of mandatory in El Salvador, Bukele’s experiment will likely continue to serve as a model for financial innovation. However, given the lukewarm reception of Bitcoin among people in El Salvador, it’s essential to continue to build trust and awareness among crypto assets before launching similar initiatives. Without a doubt, integrating Bitcoin into everyday life can be revolutionary in many ways, but it is imperative to ensure citizens are able to fully comprehend the benefits that digital assets can offer.
The bottom line
El Salvador’s adoption of Bitcoin as a legal tender started as a daring experiment but became a comprehensive national strategy with significant economic implications. While there have been evident challenges, and the country recently stopped everyday Bitcoin purchases, El Salvador’s approach will remain inspiring for other countries that are also becoming increasingly open towards digital currencies as they notice their tremendous potential in driving economic progress.