When El Salvador brazenly adopted Bitcoin as legal tender in 2021, it straightaway became a kind of lodestone that generated debate about the cryptocurrency’s role in shaping a nation’s economic future. As the first country to take such a daring leap, El Salvador found itself in the global spotlight—a guinea pig for what many considered a revolutionary monetary experiment.
I’ve been following El Salvador’s experiment since day one because it presented a unique opportunity to observe how national policies influence cryptocurrency adoption, something I’ve been closely tracking as the founder of Outset PR. Now that the country is scaling back its Bitcoin ambitions to secure a $1.4 billion loan from the International Monetary Fund (IMF), it raises many questions about whether this effort has failed.
The sudden change in El Salvador’s course has left many wondering: in the first place, can a country’s economy be revitalized by embracing Bitcoin at a government level? And in the second place, what are the actual benefits of adopting it as legal tender, if any? Furthermore, what lessons can other nations still scratching their heads over whether to take this plunge learn from El Salvador’s experience?
I’ve analyzed some of the economic indicators for the Central American nation to see how its economy has progressed—or perhaps regressed—since it adopted Bitcoin as legal tender. So let’s look at what the figures have to say.
El Salvador’s Monetary Landscape Before Bitcoin Adoption as Legal Tender
To start with, it makes sense to look back at what El Salvador had in place before its adoption of Bitcoin as legal tender in 2021. Since 2001, the country has operated under a dollarized economy, with the U.S. dollar replacing its national currency, the colón. The Bitcoin Law was passed in June 2021, mandating Bitcoin’s legal tender status as of September 2021.
However, the cryptocurrency didn’t replace the dollar but rather co-existed with it in the dual-currency system. In addition, the issue of monetary sovereignty had already been transferred to the U.S. Federal Reserve System, which essentially deprived El Salvador’s central bank of its ability to manage key monetary aspects such as money supply and interest rates. This arrangement meant that there was low risk of monetary instability that is common in economies with sovereign national currencies.
The Limits of a Top-Down Approach
Statistics show that in El Salvador’s …
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