El Salvador abolishes Bitcoin as a currency again

Launched with much fanfare four years ago, now quietly buried: under pressure from the International Monetary Fund (IMF), El Salvador has abolished the obligation for merchants to accept Bitcoin as a means of payment. The corresponding amendment to the law was passed by the Central American country's parliament on January 29. The IMF had made this a condition for a loan of 1.4 billion US dollars (1.35 billion euros).

Last December, the IMF reached an agreement with the government of President Nayib Bukele on the loan in the aforementioned amount to strengthen the country's "fiscal sustainability" and mitigate the "risks associated with Bitcoin", as was reported. According to the Salvadoran online medium El Faro, which is critical of the government, the agreement includes several points. Accordingly, El Salvador's government is to reduce its spending, increase the banks' liquidity reserves, restrict the use of Bitcoin and make it voluntary, as well as increase government transparency.

Bitcoin law changed in 12 minutes

With the reform of the Bitcoin law last week, parliament revoked the recognition of Bitcoin as "legal tender" in El Salvador. The passage stating that "all tax contributions can be paid in Bitcoin" was deleted. The amended text of the law also states that only natural persons or private companies "may accept Bitcoin as a means of payment when offered". MPs also repealed two articles requiring the government to offer citizens alternatives for transactions in Bitcoin, which enabled the creation of the Chivo Wallet electronic wallet. The reform was adopted with 55 votes in favor and two against. The debate and vote lasted just over 12 minutes. The adoption of the Bitcoin Act in June 2021 took five hours.

In September 2021, El Salvador became the first country in the world to introduce Bitcoin as an official means of payment. The government hoped that this would improve access to payment systems for the poor, make it easier for Salvadorans to transfer money abroad and attract foreign investment to boost the economy. None of this has happened. Only 1.3 percent of remittances between September 2021 and June 2024 were made in cryptocurrencies, according to El Faro, citing figures from the central bank. Most Salvadorans did not use Bitcoin for transactions; more than 70 percent stated in a survey that Bitcoins did not benefit their economy.

Due to the cryptocurrency's large fluctuations in value, critics warned of risks to monetary stability from the outset. There was also a lack of transparency and the risk of money laundering. After a rather bumpy start to the Bitcoin era, there were repeated protests among the population against President Bukele and his Bitcoin Act. At the end of January 2022, the IMF called on El Salvador to abandon Bitcoin as a means of payment. The use of bitcoins was associated with too many risks – for financial stability, financial integrity and consumer protection, as well as the associated contingent tax liabilities. The reforms that have now been adopted are fully in line with the IMF's demands.

(akn)