Bitcoin Becomes the Currency of El Salvador – What are the Challenges?


Despite a bullish end to 2021, Bitcoin (BTC) has recently struggled to sustain any price above $42,000, creating an overwhelmingly bearish sentiment in the crypto market as a whole.

This is despite more widespread adoption of the trailblazing cryptocurrency, with El Salvador becoming the first country to make BTC its legal tender back in September. Similarly, draft legislation may push Panama down the same path later in 2022, while China, the US and now the UK have also discussed launching their own, government-backed tokens.

But why has El Salvador taken this step, and how is the project progressing some six months in? Let’s get into it.

Why Did El Salvador Adopt Bitcoin as its Primary Currency?

In some respects, El Salvador’s country and economy has suffered as a result of its close proximity to arguably the world’s most dominant and preeminent superpower (namely the US).

Throughout the last century alone, this has led to a history of economic, military and political interventions in El Salvador, which have arguably combined to stunt growth and wreak havoc on the region’s cultural and socio-economic landscapes. 

One legacy of this is El Salvador’s disparate population, which has caused many people to work overseas as a way of providing for their families. 

As a result of this, the process of citizens sending money home from abroad accounts for nearly 20% of the country’s GDP. However, the same citizens have to pay considerably high transaction costs to move their money across international borders, while the process is further complicated by the fact that some 70% of people in the region have no bank account.

Enter Bitcoin; which theoretically resolves these challenges quickly, efficiently and with the minimum of fuss. 

Certainly, it enables instant and cheap payments across international borders, while driving financial inclusion by completely negating the need for either party to hold a bank account.

Addressing the Challenges of Having BTC as Legal Tender

More than six months into the experiment, the government is certainly hailing the adoption of BTC as a success. To support this, it points to a 30% hike in tourism since the transition, particularly in the country’s rural areas.

However, experts outside of El Salvador are relating a much different story, with the adoption causing a number of economic challenges and issues for financial firms based in other countries.

Firstly, the value of BTC has depreciated markedly by 17.5% since the start of 2022, and 44% since its peak last November. 

As a result of this and the unique buying habits of El Salvador’s President Nayib Bukele, El Salvador is thought to have lost a staggering $22 million in reserves during this time-frame.

Beyond this, the complete and rapid adoption of BTC has been hampered by huge infrastructure issues, particularly in the form of the asset’s inherent price volatility and the fundamental lack of broad Internet connectivity nationwide.

So, despite the legal requirement for both domestic and international firms operating in El Salvador to accept BTC and legal tender from customers, this is proving problematic in practical terms and causing companies to potentially lose custom as a result.

Financial firms active in the region are also concerned that the lack of a viable BTC tax structure could attract huge inflows of tokens into El Salvador from overseas. This will increase the money laundering risks facing active financial companies and the economy as a whole, posing a significant threat to the nation’s fiscal system.

Leave a Reply