Two years of bitcoin as official currency in El Salvador: what has happened since then

Two years of bitcoin as official currency in El Salvador: what has happened since then

The adoption of bitcoin as legal tender in the Central American country completes two years of controversies, mistakes and successes; understand the case

On September 7, 2021, El Salvador became the first country in the world to adopt bitcoin as legal tender. On that date, President Nayib Bukele took to the stage with fireworks to announce the measure that promised to “revolutionize the country's economy” to a crowd of enthusiasts. Now, after two years full of controversies, it is possible to take stock of the country's mistakes and successes.

According to the “Bitcoin Law”, introduced in El Salvador in 2021, taxes can be paid in bitcoin and companies and businesses must accept it as a form of payment, unless they are technologically incapable of doing so.

To date, bitcoin has not yet replaced the strongest currency in El Salvador: the US dollar. Furthermore, adoption levels have not taken off either. A large part of the population does not have enough technical knowledge to adopt technology, which can be complicated even for the most adept.

Tourism

The “Bitcoin City” and “Bitcoin Beach” projects are still standing, attracting some tourists to the location, who make up the group of people who use bitcoin the most in El Salvador after the government itself.

"Awareness about bitcoin is high, but usage is still low. There is a general sense of pride among the population of El Salvador that the country has adopted a new technology early," said Angela Dalton, CEO of Signum Growth Capital, who traveled to El Salvador recently. In her view, the asset still has its use concentrated in tourist destinations.

High government investment in bitcoin

At the launch of the “Bitcoin Law”, each Salvadoran received a digital wallet created by the government, called Chivo. It contained US$30 in bitcoin as a form of incentive for adoption.

The country invested – a lot – in bitcoin. Under the command of Bukele, who became an influential personality in the crypto market, El Salvador began buying bitcoin shortly before the approval of the “Bitcoin Law" and continued to take advantage of declines to increase its reserves. The government is also investing in a mining project for bitcoin with geothermal energy, which comes from volcanoes .

Data from Moody's estimates that the government spent $375 million in total on launching the “Bitcoin Law,” including a $150 million fund to support bitcoin-to-dollar conversions and money for the $30 bonus given to Chivo users.

Public debt securities in bitcoin

The adoption of bitcoin as legal tender caught the attention of the entire world, including the International Monetary Fund (IMF), which has already issued a series of warnings to the Salvadoran government, especially after the country issued public debt bonds in bitcoin this year.

The IMF published a statement advising El Salvador to exercise caution when expanding government exposure to bitcoin due to the “speculative nature” of cryptocurrency markets.

The body's position emphasized that the risks of cryptocurrency for El Salvador and its economy “have not yet materialized” due to the “limited” use of the asset by the country to date. IMF officials recently paid a visit to the Central American nation, the first in the world to adopt cryptocurrency as legal tender.

El Salvador was encouraged by the IMF to rethink its decision to issue tokenized bonds, as the IMF stated that this should be “avoided” due to the legal and financial risks of the operation.

“Given the legal risks, fiscal fragility and highly speculative nature of crypto markets, authorities should reconsider their plans to expand government exposures to bitcoin, including through the issuance of tokenized bonds,” the fund said.

However, titles soared. According to Bloomberg, market giants such as JPMorgan, Eaton Vance and PGIM Fixed decided to acquire these securities or recommend them to their clients in August this year. At the time, bitcoin was up 80% in 2023 and bonds were up 70%, surpassing bonds in dollars and emerging countries.

National Secretariat and bitcoin in schools

Among the Salvadoran government's new initiatives to boost the adoption of bitcoin in the country are the creation of a National Bitcoin Secretariat and the inclusion of a subject on bitcoin in all public schools by 2024 .

Guillermo Contreras, CEO of DitoBanx, previously said that the opening of the National Bitcoin Secretariat in El Salvador will act as “a central entity” to deal with these and other issues linked to cryptocurrency as the country moves forward in its adoption.

In schools, the material on bitcoin will be created through a partnership with the non-profit and non-governmental organization “my first bitcoin”. The intention is to provide support so that the population knows how to deal with cryptocurrencies and digital wallets from an early age through school.

Despite the controversies, some companies claim that there were, in fact, advantages in adopting bitcoin as legal tender. Furthermore, companies and government members are optimistic that the adoption of bitcoin could place El Salvador in a privileged and prominent position in the future, as it adopted the technology before all other countries. To date, El Salvador remains the only country to have bitcoin as legal tender.

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This article was translated from Exam magazine, Mariana Maria Silva.