On September 7, 2022, El Salvador became the first country in the world to adopt Bitcoin as legal tender. Despite international criticism of its cryptocurrency policy, 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 Represents “Significant Risks”
IMF Softens Its Stance
2022 Survey: Majority of the Population Dissatisfied with Bitcoin as Legal Tender
El Salvador’s Bitcoin Policy
President Bukele’s Response to Criticism
Cathie Wood, founder of Ark Invest and hailed as the “female stock market guru,” met with El Salvador’s President Nayib Bukele and American economist Art Laffer on May 29. They discussed the future development of Bitcoin and AI. Wood praised Bukele’s use of Bitcoin and AI to promote economic and educational reforms, predicting that El Salvador’s GDP would increase tenfold during his upcoming five-year presidential term.
How did El Salvador transform from being dismissed to becoming the renowned “Bitcoin Nation”? And what role did President Bukele play in this? This article will delve into the origins of El Salvador’s relationship with Bitcoin and external opinions on the matter.
The Republic of El Salvador is located in northern Central America, with a population of approximately 6.82 million people as of 2021. Its economy is primarily based on agriculture, with coffee and cotton being major exports. The country also has small-scale industries in textiles, tobacco, and beer production, concentrated in the capital city of San Salvador and surrounding areas.
El Salvador initially had the Salvadoran colón (SVC) as its official currency, but on January 1, 2001, the government adopted the US dollar as the legal tender, with the central bank no longer issuing colón. However, the colón continued to circulate in the market, with an exchange rate fixed at 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 many 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 National Assembly passed the Bitcoin Law, making El Salvador the first country in the world to adopt Bitcoin as legal tender on September 7 of the same year.
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 Parliament also approved a bill regarding the “issuance of digital assets,” allowing public issuance and transfer of digital assets. This not only established a legal framework for digital assets but also laid the legal foundation for Bitcoin bonds.
President Bukele has actively promoted multiple Bitcoin policies, including the development of a nationally designed cryptocurrency wallet, the introduction of an investment citizenship program (investing $1 million in Bitcoin or USDT to obtain residency and citizenship), and the issuance of $1 billion worth of Bitcoin volcano bonds.
Under the leadership of Nayib Bukele, El Salvador installed 300 mining machines in a state-owned power plant near the Tecapa volcano to mine Bitcoin using geothermal energy provided by the volcano.
According to a report in Mayo by DONGQU, since September 2021, El Salvador has successfully mined approximately 473.5 Bitcoin, 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 dedicated to Bitcoin mining.
Bukele announced at the end of 2022, “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 website, the Salvadoran government has indeed implemented the policy of daily investing one Bitcoin.
In the past, international authoritative institutions generally held a pessimistic view of El Salvador’s decision to adopt Bitcoin as legal tender and were not optimistic about its future development. However, opinions seem to be gradually changing.
The International Monetary Fund (IMF) stated in a declaration in November 2021 that El Salvador should not adopt Bitcoin as legal tender and that Bitcoin poses “significant risks” to consumer protection, financial integrity, and financial stability. The IMF recommended that El Salvador immediately implement stronger and more effective regulatory measures to protect the safety of US dollars and Bitcoin funds through measures such as isolating reserve assets.
In early 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 financing gap of $1.2 billion in 2022, which is expected to increase to $2.5 billion by 2023, and has nearly $1.2 billion in external debt repayment.
In response to external criticism, Bukele responded in January 2023:
On February 11, 2022, an IMF delegation visiting El Salvador pointed out that the risks associated with Bitcoin in the country had not materialized due to limited usage. However, given the legal status of Bitcoin, government encouragement of the use of cryptocurrencies, and the promotion of tokenized bonds, the usage of Bitcoin in El Salvador is likely to increase, and risks still exist.
In September 2023, after visiting El Salvador, an IMF negotiating team stated that the visit had been “very productive.” Although the IMF does not support the adoption of Bitcoin as legal tender, they are working with El Salvador to resolve “technical issues” and minimize the risks associated with the country’s adoption of Bitcoin as legal tender.
According to a local research institute’s survey conducted at the end of 2022, 61.3% of respondents expressed negative views on Bitcoin, with only 24.4% stating that they had used Bitcoin. (The situation after two years is yet to be updated.)
On average, all respondents gave a score of less than 5 out of 10 in their evaluation of Bitcoin policies (4.61). Women had an average score of 4.21, while men had a score of 5.07. In terms of age groups, respondents between 18 and 25 years old gave a score of 5.38, those between 26 and 40 years old gave a score of 4.55, those between 41 and 55 years old gave a score of 4.36, and those above 56 years old gave a score of only 4.09. This indicates that as families get older, they are less supportive of Bitcoin as legal tender.
In terms of education, respondents with a university degree or higher were the only audience to give a score above 5 (5.01). Other respondents with a high school, junior high school, elementary school, or no education gave scores of 4.79, 4.51, 4.28, and 3.39, respectively. This shows that the higher the level of education, the more acceptance there is for Bitcoin.
Related Reports:
Cathie Wood: Bukele’s Embrace of Bitcoin and AI Could Increase El Salvador’s GDP Tenfold in the Next Five Years
Exclusive Interview: Samson Mow, the “Bitcoinization Advocate” Behind El Salvador’s Bitcoin as Legal Tender, Talks About the Demise of the US Dollar: BTC Will Surpass $1 Million, and Ethereum is Just Child’s Play
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