The Bitcoin Law was adopted by El Salvador’s new Legislative Assembly, which is controlled by President Nayib Bukele’s New Ideas party. The document establishes this small Central American country as the world’s first to use Bitcoin as legal tender. And it’s not just for gambling online.

Bitcoin is an electronic currency, meaning it does not exist physically. It is not controlled by a central bank, so its value depends solely on market demand.

As cryptocurrencies have grown, many people and governments are considering making them legal tender. This would allow their legal use for purchasing goods and services, as well as for accounting and taxes.

El Salvador, the first country to have Bitcoin as a legal currency

On November 30, 2000, the Legislative Assembly, controlled by the Arena party, approved the Monetary Integration Law, dollarizing El Salvador’s economy.

Twenty-one years later, El Salvador became the first country to accept bitcoin as legal tender. On September 7, the cryptocurrency law took effect, backed by President Nayib Bukele, who believes it will benefit the country’s economy. The measure was quickly approved in June by the majority Congress.

The Ministry of Economy states that 70% of the population lacks access to traditional financial services, a key reason for the initiative.

The Ministry also believes that allowing a digital currency, whose value is set by market forces, will stimulate economic growth and wealth creation.

“The Bitcoin law is ambitious but clear, and it ensures that those unwilling to take risks won’t be harmed,” Bukele tweeted. He also assured that the government will guarantee convertibility to the dollar at the time of transaction.

El Salvador has already acquired 200 bitcoins, with plans to purchase more as the deadline approaches, according to Bukele’s Twitter.

Next, we will outline some features of this bitcoin authorization in El Salvador.

Chivo electronic wallet

Since Bitcoins do not exist physically, they are stored in digital applications that are downloaded to the mobile phone and function as electronic wallets.

The one in El Salvador is called “Chivo”, which in the country is synonymous with “good”, and to use it you must have a Salvadoran document. The businesses must present a tax identification number and a legal representative document.

The user can configure their Chivo wallet with an automatic version in dollars. In this way, a company can receive all the payments it processes in dollars, even if they are in Bitcoins.

The government installed 200 ATMs called “Chivo points” throughout the country for deposits and withdrawals.

The mandatory use of bitcoin

Despite promises from government officials and Bukele himself that adoption will be voluntary, the Bitcoin Law’s proclamation has concerned some members of the public since it stipulates that “any economic agent must accept Bitcoin as legal tender and as a form of payment.”

According to the legislation, “any economic agent must accept Bitcoin as a means of payment when it is offered to him by whoever receives a product or service.”

If a commercial establishment does not want to accept Bitcoins, the “Chivo” app converts the amount into dollars instantly.

For transactions, both parties need an electronic wallet.

This shift in Salvadoran economic policy fits President Bukele’s style—bold announcements that generate significant media coverage. Organizations like the International Monetary Fund have raised concerns. They warn that “the acceptance of bitcoin as legal currency raises macroeconomic, financial, and legal issues that need careful consideration.”

What can be paid with Bitcoins?

The new legislation ensures the automated and rapid conversion of bitcoin to dollars by establishing a trust with the Development Bank of El Salvador (BANDESAL). Those without access to the necessary technology are excluded.

The government will also promote training and processes to help the public engage in bitcoin transactions. The dollar will be the reference currency for accounting.

Bitcoin may be used in any transaction or for any title that requires payment by public or private entities.

With the wallet, users can process service payments, buy and sell products, and transfer funds to bank accounts without fees.

The law also specifies that “all dollar-denominated obligations existing before the law’s effective date can be paid in bitcoin.”

How does El Salvador finance the measure?

To boost the use of cryptocurrency, Bukele offered $30 worth of bitcoin to anyone who downloads the government virtual wallet, “Chivo.”

However, this incentive seems insufficient to overcome the population’s apathy. A study by the Inter-American Development Bank reveals that only 45% of the population has internet access. Additionally, the high cost of connectivity in a nation with 26% of people living in poverty, according to the Household and Multiple Purpose Survey, makes it challenging.

To promote Bitcoin further, the government has allocated $203 million in public funds. Of this amount, $150 million guarantees Bitcoin’s convertibility to dollars, $23.3 million finances the project, and $30 million provides the $30 bonus for downloading the Chivo wallet.

How does Bukele defend the measure?

President Bukele assures that the adoption of Bitcoin will contribute to the banking of the population and will generate a saving of 400 million dollars in the cost of remittances that Salvadorans abroad send to the country.

The country receives about seven billion dollars a year in remittances from Salvadorans living abroad, which are equivalent to about 16% of the Gross Domestic Product. An estimated 2.5 million Salvadorans live in the United States.

According to the president, the new norm will help financial inclusion, investment, tourism, innovation, and economic development. He stated, “Don’t tell us we’re too small to be enormous.”

What do economists and international organizations say?

The Salvadoran economist Merlin Barrera believes that using crypto assets as a means of payment is “a complex situation” because their value depends on market speculation. High volatility is his main concern.

Carlos Carcach, a professor at the Higher School of Economics and Business (ESEN), told The Associated Press, “It is neither essential nor convenient to grant bitcoin the status of legal money.” Some Salvadorans already use it as a payment method alongside other options.

He added that, like any currency, bitcoin’s function is to enable transactions, such as buying and selling services. “As long as someone accepts bitcoin, just like they accept dollars, there should be no difficulties.” However, Carcach views bitcoin as an investment, stating that “you risk becoming rich one day and poor the next due to its external volatility.”

The International Monetary Fund (IMF) has warned since June that “the adoption of Bitcoin as legal tender raises several macroeconomic, financial and legal problems that require very careful analysis,” said IMF spokesman Gerry Rice.

The World Bank and the Inter-American Development Bank have also expressed skepticism and warned that the measure is risky.

El Salvador already faces “the impacts of Bitcoin’s volatility,” which worsen “high levels of inequality, poverty, unemployment, migration, and violence,” said Óscar Cabrera, former president of the Central Reserve Bank of El Salvador.

What do fans of Bitcoin think?

Bitcoin is “like digital gold,” according to Brock Pierce, a cryptocurrency billionaire. “This is where you save money for a tough day in the future, this is for your savings account.”

“I do not advise using this for daily payments, to buy essentials, or pay rent,” he said.

“Unfortunately, the issue became politicized. But what people need to know is that if they don’t want to use Bitcoin, they don’t have to. It’s just an added value,” said Mike Peterson, an American pioneer of Bitcoin use in El Salvador.

What do Salvadorans think?

“They should have given more guidance on using bitcoin,” says Óscar Martínez, a street vendor of kitchen utensils. These ATMs allow Salvadorans to obtain cryptocurrency or exchange it for dollars.

In central San Salvador, a major hub for both formal and informal commerce, uncertainty around bitcoin usage is evident. Many people are skeptical about trading with a currency they cannot physically hold. “I am not prepared to use bitcoin, and there are many who don’t have a phone or know how to use one,” says Ileana Ortiz, a street vendor selling coronavirus protective masks.

On the other hand, some traders have decided to embrace Bitcoin as legal tender. Orlando Gómez downloaded an electronic wallet three months ago to get a feel for trading with bitcoins. “My expectations are high. So far, I haven’t had any transactions, but when people ask, I tell them it’s easy. They can transfer the money with just their phone,” he says.

The next country to do this

Following El Salvador, Brazil is expected to accept Bitcoin as currency. Brazilian Federal Deputy Aureo Ribeiro stated that Bitcoin will soon be used to buy houses, cars, and even McDonald’s. This will happen once the law is approved, Ribeiro told local media, according to Brazilian crypto portal Livecoins.

On September 29, Brazil’s Bitcoin bill 2.303/15 was introduced in the Brazilian House of Representatives and passed. The legislation will now be considered in Brazil’s National Congress’s lower body, the Plenary of Chambers of Deputies.