The adoption of Bitcoin as legal tender by El Salvador in 2021 marked a historic moment in the world of finance. This article explores the journey, challenges, and potential future of this bold monetary experiment.
The Beginning of a Bitcoin Nation
In 2021, El Salvador became the first country to adopt Bitcoin as legal tender alongside the US dollar. President Nayib Bukele’s announcement drew global attention—from both enthusiastic Bitcoin supporters and concerned international financial institutions like the International Monetary Fund (IMF).
The country began purchasing Bitcoin at an average price of around $52,000 per coin. To date, it has invested approximately $104 million in Bitcoin, including a recent purchase of 80 coins at $19,000 each. However, due to the sharp decline in Bitcoin’s market value, the value of El Salvador’s holdings has dropped by more than 50%, leaving the portfolio worth only about $45 million.
This depreciation has contributed to a downgrade in the country’s credit rating. Standard & Poor’s lowered El Salvador’s rating to CCC+, one of the lowest possible grades. Such a rating can hinder the nation’s ability to borrow in international markets.
Early Bitcoin Adoption in El Salvador
Even before Bitcoin was made legal tender, it had already found a home in El Salvador. In 2019, an anonymous donor funded a pilot project in the coastal town of El Zonte, known today as "Bitcoin Beach." The initiative aimed to create an economy where Bitcoin was the primary medium of exchange.
The project was a success. Tourists and locals in El Zonte could pay for nearly everything—from beer to hotel stays—using Bitcoin. The community even developed its own wallet, the Bitcoin Beach Wallet, and established a self-sustaining payment ecosystem.
Socioeconomic Background
El Salvador has a young population with a relatively low average life expectancy and an annual per capita income of just $3,000–$4,000. Only about 30% of the population has a bank account.
The government hoped that adopting Bitcoin would increase financial inclusion. Electronic wallets are easier to set up than traditional bank accounts, and the decentralized nature of blockchain technology could appeal to those distrustful of government and financial institutions.
But practical challenges emerged. How could people afford high transaction fees or wait over 10 minutes for confirmations? How could local farmers ensure they received payments reliably?
Technological Solutions: Lightning Network and Chivo Wallet
To address these issues, the Salvadoran government introduced two main solutions:
The Lightning Network
The Lightning Network is a second-layer Bitcoin technology that enables faster and cheaper transactions. It allows users to create off-chain payment channels while still benefiting from Bitcoin’s security.
This solution, however, was primarily aimed at tourists and foreigners.
Chivo Wallet
For locals, the government launched Chivo Wallet—a state-supported application available only to Salvadoran residents. To encourage adoption, the government offered a $30 bonus for downloading and registering.
Over 4 million people—out of a population of 6 million—downloaded the app. Chivo is powered by Bitso, a Latin American cryptocurrency exchange, with security support from BitGo.
It’s important to note that Chivo is not a self-custody wallet. Transactions occur off-chain, and users do not control their private keys. While this allows for instant, low-cost transactions, it sacrifices some of Bitcoin’s decentralized characteristics.
Public Response and Real-World Usage
Reception among Salvadorans has been mixed. Younger generations are more open to using Bitcoin, while older citizens remain skeptical. Many people downloaded Chivo only to claim the $30 bonus and continue to use cash or US dollars in daily life.
A study by the National Bureau of Economic Research found that only 20% of the population continued using Bitcoin after the initial incentive. Moreover, a German journalist reported that outside of El Zonte, only about 30% of businesses accepted Bitcoin, often due to a lack of technical resources.
Infrastructure and Future Plans
Despite these challenges, the government remains committed. Athena Bitcoin plans to install 1,500 Bitcoin ATMs across the country, allowing users to buy Bitcoin or withdraw cash without fees. Approximately 200 such machines are already operational.
President Bukele’s vision includes the creation of a "Bitcoin City" at the base of the Conchagua volcano. Geothermal energy would power both the city and Bitcoin mining operations. The government also issued $1 billion in Bitcoin-backed bonds, offering a 6.5% annual yield. These funds will be used to purchase more Bitcoin, with repayments scheduled after five years.
International and Expert Reactions
The project has faced criticism from economists, international organizations, and some Salvadorans. Protests erupted after Bukele’s announcement, with many arguing that public funds should be spent on education and healthcare rather than speculative investments.
Nevertheless, partnerships with blockchain firms like Koibanx and Algorand aim to improve transparency and official record-keeping through blockchain technology.
Samson Mow, a Bitcoin entrepreneur, founded JAN3 to support digital infrastructure development in El Salvador. He also announced that other regions, such as Roatán in Honduras and Madeira in Portugal, are considering similar moves.
Frequently Asked Questions
Why did El Salvador adopt Bitcoin as legal tender?
El Salvador aimed to increase financial inclusion and attract foreign investment. With a large unbanked population, Bitcoin offered an alternative to traditional banking. The government also hoped to reduce reliance on the US dollar.
How do Salvadorans use Bitcoin daily?
While adoption is growing, usage remains limited. Some businesses accept Bitcoin via the Lightning Network or Chivo Wallet. However, many people still prefer cash or US dollars for everyday transactions.
What is the Lightning Network?
The Lightning Network is a layer-2 solution built on Bitcoin that enables fast, low-cost transactions. It uses off-chain channels to reduce congestion on the main blockchain.
What are the risks of adopting Bitcoin as legal tender?
Volatility is a major concern. Bitcoin’s price fluctuations can affect national savings and purchasing power. There are also technical barriers, regulatory challenges, and potential issues with financial stability.
Can other countries adopt Bitcoin as legal tender?
Yes, but each country would need to consider its economic stability, regulatory framework, and technological readiness. El Salvador’s experiment serves as a case study for others.
What is Bitcoin City?
Bitcoin City is a proposed special economic zone powered by geothermal energy. It aims to attract Bitcoin mining and tech companies through tax incentives and modern infrastructure.
Conclusion
El Salvador’s Bitcoin experiment is a work in progress. While the government remains optimistic, the real-world impact is still unfolding. The success or failure of this project will depend on broader adoption, technological development, and global market conditions.
Whether Bitcoin can function effectively as legal tender remains an open question. What is clear is that the world is watching—and learning from—El Salvador’s bold step into the future of money.