El Salvador to make bitcoin legal tender

President claims the move, a first for any country, will aid remittances and financial inclusion

The president of El Salvador, Nayib Bukele, said on June 5 that he would prepare a law to make bitcoin legal tender. This would make the Central American country the first to give legal status to the private cryptocurrency.

Bukele made the announcement in a video broadcast to a bitcoin enthusiasts’ conference in Miami, Bitcoin 2021. The president expressed hopes that the digital currency would help the financially excluded. On Twitter, he noted that 70% of Salvadorans are unbanked.

The president also said bitcoin would ease remittances from the Salvadoran diaspora. Much of this money “is lost to intermediaries”, he wrote on Twitter.

On June 7, the president’s office posted a press release stating that the new law would also provide for “permanent residence for those who start undertakings related to bitcoin”.

Bukele said his government would form a partnership with Strike, a mobile payments company, to build bitcoin infrastructure. According to a company press release, Strike launched its mobile app in El Salvador in March.

Jack Mallers, Strike’s CEO, said Bukele’s initiative “is the shot heard round the world for bitcoin”. Another fintech CEO, Adam Back of Blockstream, told CNBC: “We’re pleased to help El Salvador on its journey towards adoption of the bitcoin standard.”

The president’s office said Blockstream would provide internet infrastructure in areas where coverage was poor, which would facilitate bitcoin use.

El Salvador adopted the US dollar as its currency in 2001, replacing the colón. The country shares a gross settlement payments systems, Sipa, with four of its Central American neighbours and the Dominican Republic.

Former central bank governor Oscar Cabrera warned that instituting bitcoin as legal tender “only generates uncertainty”. He added that the current central bank law makes the dollar and the colón the sole legal currencies in the country.

A non-profit organisation sponsors the Bitcoin Beach project in El Salvador, which sets up bitcoin accounts for families and small businesses in a coastal community.

Marching through the institutions

Bukele has spearheaded radical changes in Salvadoran policy and governance in recent weeks. The president’s party, New Ideas, and its allies won a majority in congress earlier this year. When the new legislature convened on May 1, it immediately removed the attorney general and the Supreme Court judges that rule on the constitutionality of laws.

On June 3, congress amended the central bank law to exclude the main employers’ association from participating in the selection of two of the seven directors of the central bank. The legislature made similar changes to the laws governing other autonomous agencies, such as the development bank, the tourism corporation and the ports and airports authority.

On June 4, El Salvador withdrew from an agreement with the Organization of American States to create an international anti-corruption commission, known as Cicies. The Bukele administration contended that the OAS had hired as a consultant Ernesto Muyshondt, a former San Salvador mayor, who is accused of crimes.

The OAS denied that it had ever signed a contract with Muyshondt.

Bukele remains very popular in El Salvador. La Prensa Grafíca, a leading Salvadoran newspaper, published a poll on June 2 showing that the president had a 86.5% approval rating.

Sharp contraction

Covid-19 dealt El Salvador a sharp blow, with GDP contracting by 8.6% in 2020 according to International Monetary Fund figures. La Prensa Grafíca reported that the central bank’s net reserves fell by more than a third between March 2020 and March 2021.

El Salvador opened negotiations with the IMF for a three-year loan in March. Some commentators think the adoption of bitcoin could complicate El Salvador’s negotiations with the fund.

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