El Salvador Bitcoin Law Reform: The Country No Longer Be Mandatory to Accept It for Payments and Transactions
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El Salvador’s Congress has approved a significant Bitcoin law reform, removing the requirement for businesses and individuals to accept cryptocurrency for payments and transactions. Although the law still recognizes Bitcoin as “legal tender,” this change means it will no longer hold the same status as an official currency, as it originally did when the country became the first in the world to adopt it in 2021.
The decision to amend the law comes from efforts to secure a $1.4 billion loan agreement with the International Monetary Fund (IMF). The mandatory acceptance of Bitcoin had been a point of contention in negotiations, with the IMF and other global financial institutions expressing concerns over the cryptocurrency’s volatility, lack of regulation, and potential risks to the country’s economic stability.
A recent survey by the Central American University revealed that 92% of Salvadorans did not use Bitcoin for transactions in 2024, reinforcing the perception that President Nayib Bukele’s financial experiment with the cryptocurrency has not achieved widespread adoption. Despite this El Salvador Bitcoin law reform, the Salvadoran government has stated that it will continue purchasing Bitcoin and maintaining its reserves in digital assets, signaling that it remains a part of the country’s financial strategy.
Why Was Bitcoin Adopted as Legal Tender in El Salvador?
In September 2021, El Salvador became the first nation in the world to declare Bitcoin as legal tender, a decision championed by President Nayib Bukele. The initiative was framed as an innovative move to attract foreign investment, modernize the economy, and provide financial alternatives for millions of Salvadorans who lacked access to traditional banking services. At its implementation, the government argued that Bitcoin would help reduce remittance fees, encourage financial inclusion, and establish El Salvador as a global leader in digital finance.
However, from the outset, Bitcoin’s adoption faced significant hurdles. Many Salvadorans remained skeptical of the cryptocurrency, and technical issues with the government-backed Chivo Wallet, designed to facilitate Bitcoin transactions, further hampered its use. Additionally, Bitcoin’s price volatility created uncertainty, discouraging widespread adoption among businesses and consumers.
What Changes Does the El Salvador Bitcoin Law Reform Introduce?
The most significant change introduced by the El Salvador Bitcoin law reform is that businesses and individuals in El Salvador are no longer legally required to accept Bitcoin as a form of payment. Under the original law, all commercial establishments were obligated to accept Bitcoin if a customer chose to pay with it. This provision was widely criticized, as many small business owners found it impractical or unnecessary to handle cryptocurrency transactions.
Although the reform maintains Bitcoin’s designation as “legal tender,” it makes its use optional. Businesses wishing to accept Bitcoin can continue but are no longer compelled to integrate it into their payment systems. This shift places Bitcoin in a more flexible position, similar to how some businesses voluntarily accept alternative digital or foreign currencies alongside their primary legal tender.
Why Did the Government Modify the Law?
The primary motivation behind the El Salvador Bitcoin law reform is the country’s need to secure financial support from the IMF. The government is negotiating a $1.4 billion loan, and one of the international lender’s key conditions was removing Bitcoin’s mandatory status as legal tender.
Since adopting Bitcoin, El Salvador has faced scrutiny from international financial institutions, credit rating agencies, and global markets. Concerns have been raised about the country’s ability to manage economic risks associated with the highly volatile nature of Bitcoin. The IMF, in particular, has repeatedly advised El Salvador to reverse its Bitcoin policies, arguing that they pose risks to fiscal stability, investor confidence, and the broader economy. By making Bitcoin optional rather than mandatory, the government aims to ease these concerns and improve its standing with global financial institutions.
What Impact Did Bitcoin Have on the Salvadoran Economy?
Despite initial optimism from the government, Bitcoin’s impact on the Salvadoran economy has been minimal, if not disappointing. According to the survey conducted by the Central American University, an overwhelming 92% of Salvadorans did not use Bitcoin for transactions in 2024. The country’s economy continues to function primarily on the U.S. dollar, which has been the official currency since 2001.
One of the biggest obstacles to Bitcoin adoption has been its price volatility. Many Salvadorans who experimented with Bitcoin saw the value of their holdings fluctuate unpredictably, discouraging them from using it as a means of payment. Additionally, small businesses often found integrating Bitcoin into their operations difficult, leading many to avoid it altogether.
What Happened to Bitcoin City, Bukele’s Flagship Project?
One of the most ambitious projects tied to El Salvador’s Bitcoin strategy was the proposed construction of Bitcoin City, a futuristic metropolis powered by cryptocurrency mining using geothermal energy from the country’s volcanoes. President Bukele envisioned the city as a tax-free, tech-driven economic hub that would attract global investors and position El Salvador as a leader in digital finance.
However, more than two years after its announcement, Bitcoin City remains largely theoretical. The project has not moved beyond the initial promotional phase, and no significant construction or development has occurred. While some Bitcoin-friendly communities exist in areas like El Zonte Beach and the city of Berlin, they are primarily composed of foreign crypto enthusiasts and tourists rather than the local population.
What Will Happen to the Government’s Bitcoin Reserves?
Despite scaling back its Bitcoin policy through the El Salvador Bitcoin law reform, the Salvadoran government continues to hold a significant amount of Bitcoin in its reserves. As of 2024, the country reportedly holds 6,050 Bitcoins, valued at approximately $634.8 million based on current market prices.
Bukele’s administration has indicated that it remains committed to accumulating Bitcoin, believing its value will increase over time. However, critics argue that these investments lack transparency, and the government has not provided detailed reports on how it manages its cryptocurrency assets. Economists warn that holding large reserves of a highly volatile asset could threaten the country’s fiscal health, particularly if Bitcoin experiences another sharp decline in value.
What’s Next?
The El Salvador Bitcoin law reform will take effect 90 days after its publication in the Official Gazette. During this transition period, businesses and consumers will have time to adjust to the new legal framework, while the government will continue to promote Bitcoin’s use—albeit without the coercive measures that initially accompanied its adoption.
The long-term future of Bitcoin in El Salvador remains uncertain. While the government continues to support the cryptocurrency, its success will largely depend on broader economic factors, including Bitcoin’s market value and the administration’s ability to manage financial risks. Meanwhile, the agreement with the IMF will provide El Salvador with much-needed financial relief. However, it comes at the cost of modifying one of Bukele’s most ambitious and controversial economic policies.
As the country moves forward, the impact of the El Salvador Bitcoin law reform will be closely watched by Salvadorans and the international community as they assess whether the Bitcoin experiment was a bold innovation or a costly miscalculation.
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