On September 7, 2022, El Salvador became the first country in the world to adopt Bitcoin as legal tender. Despite facing international criticism for its cryptocurrency policies, El Salvador continues to embrace cryptocurrencies. This article will take readers through the series of events that led to El Salvador’s adoption of Bitcoin.
Historical Background
Bitcoin as Legal Tender
Promoting Multiple Policies
Bitcoin Mining with Volcanic Geothermal Energy
Daily Bitcoin Investment
External Perspectives
IMF: El Salvador’s Bitcoin Policy Poses “Significant Risks”
IMF’s Changing Attitude
2022 Survey: Majority of Citizens Dissatisfied with Bitcoin as Legal Tender
El Salvador’s Bitcoin Policy
President Bukele’s Response to Criticism
Cathie Wood, the renowned investor and founder of ARK Invest, met with El Salvador’s President Nayib Bukele and American economist Art Laffer on May 29th to discuss the future development of Bitcoin and AI. She praised Bukele’s use of Bitcoin and AI to drive economic and educational reforms and expressed hope that El Salvador’s GDP would grow tenfold during his upcoming five-year presidential term.
How did El Salvador, from being unpopular initially, become known as the “Bitcoin country”? And what role does President Nayib Bukele play in this? This article will delve into the origins of El Salvador’s relationship with Bitcoin and examine external opinions.
The Republic of El Salvador is located in northern Central America, with a population of approximately 6.82 million as of 2021. Its economy is primarily based on agriculture, with coffee and cotton being major exports. The country also has small-scale industries focused on textiles, tobacco, and beer production, mainly concentrated in the capital city of San Salvador and surrounding areas.
El Salvador initially used the Salvadoran colón (SVC) as its legal tender, but on January 1, 2001, the government adopted the US dollar as its official currency, with the central bank no longer issuing colón. However, colón continued to circulate in the market, with an exchange rate of 1 US dollar to 8.75 colón.
During this period, El Salvador’s monetary policy was heavily influenced by US economic policies, and the country faced various financial problems such as high remittance costs, poor financial inclusion, and inflation.
In response, the Salvadoran government saw cryptocurrencies as a new opportunity for solutions. On June 5, 2021, President Bukele announced the expansion of Bitcoin as legal tender, and subsequently, the Legislative Assembly passed the Bitcoin Law, officially making El Salvador the first country in the world to adopt Bitcoin as legal tender on September 7, 2021.
To further enhance Bitcoin’s status as legal tender, El Salvador established the National Bitcoin Office at the end of 2022, responsible for managing all projects related to cryptocurrencies.
In early 2023, the Salvadoran Congress approved a bill on “issuing digital assets,” allowing the public issuance and transfer of digital assets, not only establishing a legal framework for digital assets but also laying the legal foundation for the issuance of Bitcoin bonds.
President Bukele has also been actively promoting multiple Bitcoin policies, including developing a nationally designed cryptocurrency wallet, launching an investment citizenship program (investing 1 million US dollars in Bitcoin or USDT to obtain residency visas and citizenship), and issuing $1 billion Bitcoin volcano bonds.
Under the leadership of Bukele, El Salvador has installed 300 mining machines near the Tecapa volcano in a state-owned power plant to mine Bitcoin using geothermal energy provided by the volcano.
According to a report by Dynamik in May, since September 2021, El Salvador has successfully mined approximately 473.5 Bitcoins worth nearly $29 million using geothermal energy. It is reported that out of the 102 megawatts of electricity generated by El Salvador’s state-owned geothermal power plant, 1.5 megawatts are specifically used for Bitcoin mining.
In late 2022, Bukele announced, “We will continue to buy one Bitcoin every day until it becomes difficult to afford with fiat currency.”
On May 13, 2024, the National Bitcoin Office of El Salvador announced its collaboration with mempool to launch a website dedicated to tracking the government’s Bitcoin reserves. According to the records on the website, the Salvadoran government has indeed implemented the policy of daily investment of one Bitcoin.
In the past, international institutions generally held a pessimistic attitude towards El Salvador’s decision to adopt Bitcoin as legal tender, doubting its future development. However, it seems that external views have gradually changed.
The International Monetary Fund (IMF) stated in a declaration in November 2021 that El Salvador should not adopt Bitcoin as legal tender, as Bitcoin poses “significant risks” to consumer protection, financial integrity, and financial stability. Therefore, the IMF recommended that El Salvador immediately implement stronger and more effective regulatory measures to protect the safety of US dollars and Bitcoin funds, such as isolating reserve assets.
At the beginning of 2022, rating agency Fitch downgraded El Salvador’s long-term foreign currency issuer default rating (IDR) from “B-” to “CCC.” Fitch stated that El Salvador faced a $1.2 billion financing gap in 2022, which would increase to $2.5 billion by 2023, and would have to repay nearly $1.2 billion in external debt.
In response to external criticism, President Bukele stated in January 2023:
“On February 11, 2022, an IMF delegation stated after visiting El Salvador that the risks associated with Bitcoin in our country did not materialize because of its limited usage. However, given that Bitcoin has legal tender status, the government encourages the use of cryptocurrencies, and tokenized bonds are being promoted, the usage of Bitcoin in El Salvador is likely to increase, and risks still exist.”
A survey conducted at the end of 2022 by a local research institute in El Salvador showed that 61.3% of respondents expressed a negative view of Bitcoin, with only 24.4% stating that they have used Bitcoin. The average rating for the evaluation of Bitcoin policies by all respondents was less than 5 out of 10 (4.61). Among the respondents, women had an average rating of 4.21 for Bitcoin, while men had an average rating of 5.07. When it came to family ratings, the age groups of 18 to 25, 26 to 40, 41 to 55, and over 56 gave ratings of 5.38, 4.55, 4.36, and 4.09, respectively, indicating that older families were less supportive of Bitcoin as legal tender.
In terms of education level, only respondents with a university degree gave an average rating of 5.01, while respondents with a high school, junior high school, elementary school, and no education gave ratings of 4.79, 4.51, 4.28, and 3.39, respectively, indicating that the higher the education level, the more acceptance of Bitcoin.
Related Reports:
– Cathie Wood: Bukele’s Embrace of Bitcoin and AI Can Increase El Salvador’s GDP Tenfold in the Next Five Years
– Exclusive Interview: Samson Mow, Key Figure in El Salvador’s Bitcoin Adoption, Talks About the Demise of the US Dollar and the Rise of Bitcoin to Over $1 Million with Ethereum Being a Minor Player
– Mirey, Who Advocates Closing Central Banks and Embracing Bitcoin, Elected President of Argentina: Is El Salvador Next?