El Salvador's Bitcoin Law

Bitcoin has been legal tender in El Salvador for a year.

Bitcoin has been legal tender in El Salvador for a year. The results are mixed.

Summer, sun, and Satoshis: With this impression, a BTC-ECHO team toured El Salvador in November, the first country to make Bitcoin legal tender two months earlier. What remains, a year after the Bitcoin Law took effect, from the hype?

What is the Bitcoin Law?

The so-called Bitcoin Law is actually a whole package of laws that determine the legal status of digital gold in El Salvador. Key clauses include Article 3 ("Prices may be expressed in Bitcoin"), Article 4 ("Taxes may be paid in Bitcoin"), and Article 5, which exempts Bitcoin gains from capital gains tax.

In other words, El Salvador treats Bitcoin in exactly the same way as its fiat counterpart. Because besides the cryptocurrency the US dollar is the national currency in the Central American state. And — to be fair — this latter currency is still the undisputed primary means of payment. There were no shortages of acceptance points for the digital currency. But according to our observations, almost no one — aside from the travel-minded Bitcoin group — really used it.

The figures also speak in rather sober terms. In the only representative study published so far on Bitcoin usage in El Salvador, the share of payments made in Bitcoin is estimated at only 4.9%. 95% still prefer the US dollar for daily purchases. The advantages of Bitcoin for remittances, i.e., cross-border transfers, are also less embraced by Salvadorans than hoped. Only 8 percent of respondents said they had already received transfers in BTC via Chivo.

Bukele's Vision

It would be wrong to label the Central American Bitcoin experiment a year after launch as a failure. Forcing a society to adapt overnight to a completely new form of money is a hopeless task. The Bukele government is clear that they think long term. A look at El Salvador's strategic Bitcoin investments shows this. With 2,381 BTC currently, El Salvador is the second-richest country in the world — at least if you value BTC holdings.

Meanwhile, the communications pro and country leader Bukele, always uses price dips as a chance to "buy the dip," as the internet-savvy 41-year-old likes to stress.

The timing, however, was less than ideal. The investment may pay off in the long run. So far the already-poor country has nonetheless incurred millions in losses.

This, as expected, has been a frequent source of criticism. The IMF, for example, urged economic caution, warning it could force credit lines to be pulled.

Bukele's sometimes lighthearted, sometimes authoritarian governing style has also caused trouble. In May it emerged that the "coolest dictator in the world," as Bukele flamboyantly calls himself on Twitter, trades BTC from his smartphone — and does so openly. Accountability for the whereabouts of the coins? None at all.

Bitcoin Scene Grants Leeway

The crypto scene, however, is more forgiving of the startup hurdles. For example, Paolo Ardoino, CTO of Tether, says that one year after launch you shouldn't expect an orange future yet.

The decisive factor is more that El Salvador, with its Bitcoin Law, has a so-called "first-mover advantage." After all, 2,381 BTC could currently be in the red. But if the rising price expectations come true, Bukele has blessed El Salvador with a financial buffer the country can benefit from for a long time.

There are already tangible results from the law. Compared with last year, tourism has risen by not less than 30% — and with it, GDP. The Central American country managed to grow its GDP by 10.3% in a year. That’s at least what Nayib Bukele claims.

Alex von Frankenberg is also optimistic about Bitcoin's future. In an interview with BTC-ECHO, the CEO of High-Tech Gründerfonds says:

"If we see a positive effect, for example stronger economic growth or a drop in crime, El Salvador could be a role model for other countries. And this question remains open. But if the effect is measurably positive, we’ll see a long list of countries adopting Bitcoin — with corresponding effects on the exchange rate."

Despite all the doomsayers, the Bitcoin Law remains an ambitious project with the potential to rebuild the crisis-hit country from the ground up. That should excite every Bitcoiner.