In 2021, El Salvador made headlines by becoming the pioneering nation to recognize cryptocurrency as legal tender alongside the US dollar.
In December of the same year, as bitcoin surged past $100,000 (£77,765) for the first time, President Nayib Bukele shared on social media that the Central American country’s cryptocurrency assets had seen significant growth. However, following the conditions for securing a $1.4 billion (£1.1 billion) loan from the International Monetary Fund, the nation has had to retract its controversial bitcoin policies.
Businesses in El Salvador are now able to choose whether or not to accept bitcoin, and tax obligations will no longer be settled in the cryptocurrency. The IMF stated, “The potential risks associated with the bitcoin initiative will be significantly reduced, in accordance with Fund policies.” Essentially, the era of bitcoin as legal tender in El Salvador has come to an end.
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‘Cryptocurrency Paradise’
Bukele’s push for bitcoin was part of an effort to “rebrand the small and impoverished” nation as a “surfing and cryptocurrency paradise,” according to the Financial Times. He unveiled ambitions to construct a “Bitcoin City” in the rainforest, “powered by geothermal energy from a volcano’s slopes.”
The president asserted that cryptocurrency would integrate the “70% of Salvadorans who lack access to traditional banking” into the financial system, as reported by France24. Disregarding concerns about volatility, he injected an “undisclosed amount of public funds into cryptocurrencies.”
However, the IMF had consistently opposed Bukele’s bitcoin initiative, as noted by the BBC, warning that it could hinder any financial support. The Salvadoran economy has long been “on the brink of default,” with the IMF remaining “cautious” about lending while the unpredictable currency—with its “potential for money laundering and other illegal activities”—was legal tender, The Economist reported.
‘More Costs than Benefits’
While El Salvador remains “a focal point for the global bitcoin community,” Forbes reports that the atmosphere is presently “somewhat subdued,” according to a local journalist.
“Many international bitcoin enthusiasts relocated to El Salvador because of the Bitcoin Law; some locals returned,” Joe Nakamoto stated. “Now, uncertainty about the nation’s future concerning bitcoin has emerged.”
Yet The Economist argues that bitcoin’s “demotion may be more beneficial than a concession.” The impact of crypto on El Salvador has “involved more costs than advantages.” The expected investment and tourism “have been minimal,” and financial returns have been “poor at best,” as the currency “never truly gained traction.” A January poll by Universidad Centroamericana revealed that 92% of Salvadorans did not use it last year.
Overall, the policy has resulted in a loss of $375 million (£291 million), according to estimates from Moody’s rating agency—a figure that “far exceeds the profits from bitcoin investments, which could still vanish.” The much-anticipated Bitcoin City is yet to materialize.
Bukele’s “fixation with cryptocurrency has done little to alleviate El Salvador’s economic challenges,” the magazine noted. He is “merely the latest crypto-utopian whose lofty visions have crumbled upon confrontation with reality.”
