El Salvador made history in September 2021 by becoming the first country in the world to adopt Bitcoin as legal tender. However, just over two years later, it has become the first nation to abandon this.
The Salvadoran Parliament, dominated by the ruling party, recently passed a low-profile reform to the Bitcoin Law, eliminating its status as an official currency and leaving its use up to the discretion of individuals.
This move comes after persistent pressure from the International Monetary Fund (IMF), which made “mitigating the risks of Bitcoin” a key condition for approving a much-needed $1.4 billion loan for President Nayib Bukele’s administration.
A Controversial Decision from the Start
Bitcoin’s adoption as a legal tender was met with significant resistance from the Salvadoran population. Surveys at the time indicated a 71% rejection rate among citizens, many of whom were sceptical about the cryptocurrency’s volatility and practical use in daily transactions.
Despite the public opposition, the government pushed forward with its ambitious plan, investing over $200 million in infrastructure to facilitate Bitcoin transactions. This included the development of a digital wallet, known as Chivo Wallet, and installing ATMs across the country to support Bitcoin transactions.
Lack of Transparency and Unanswered Questions
In an attempt to provide some insight into its Bitcoin holdings, the Salvadoran government launched a website called Bitcoin Office. However, the website contains minimal details. According to the site, as of this week, the government holds a reserve of 6,049.18 bitcoins, equivalent to approximately $637.3 million.
Crucially, the site does not disclose whether the government has sold any bitcoins, how profits (if any) have been utilized, or who is responsible for managing the cryptocurrency assets. This lack of transparency has raised concerns among critics, who argue that the government’s Bitcoin policy has lacked accountability from the outset.
IMF Influence and the Scaling Back of Bitcoin Adoption
El Salvador’s reversal on Bitcoin comes in the wake of its agreement with the IMF for a $1.4 billion loan in December 2023. The IMF had long expressed concerns about El Salvador’s embrace of Bitcoin, citing potential risks to financial stability and economic sustainability.
One of the lender’s key conditions was limiting the government’s exposure to Bitcoin and ensuring that its use in the private sector remained voluntary. These stipulations were incorporated into the recently approved reform, effectively scaling back the government’s Bitcoin ambitions.
A Politically-Driven Reform
The reform to the Bitcoin Law was passed swiftly, with 55 lawmakers voting in favour and only two opposing. Elisa Rosales, a lawmaker from the ruling party, framed the amendment as a necessary measure to ensure Bitcoin’s “permanence as legal tender” while also facilitating its “practical implementation.” However, the reform’s implications suggest that Bitcoin’s role in the Salvadoran economy will be significantly diminished moving forward.
The Aftermath: What’s Next for Bitcoin in El Salvador?
With Bitcoin no longer a mandatory legal tender, El Salvador’s cryptocurrency experiment is at a crossroads. While the government continues to hold a substantial Bitcoin reserve, its long-term plans remain uncertain.
Whether El Salvador will maintain its crypto-friendly policies or further distance itself from Bitcoin remains to be seen. For now, the country’s financial stability appears to be taking precedence over its initial vision of a Bitcoin-powered economy.
El Salvador’s bold foray into Bitcoin was a landmark event in global finance, but its retreat serves as a cautionary tale. While digital currencies continue to evolve, the country’s experience highlights the challenges of integrating volatile assets into a national economy. As other nations observe El Salvador’s journey, the lessons learned here may shape the future of cryptocurrency adoption worldwide.