El Salvador’s bitcoin experiment reveals the risks of financial innovation

11:32

By: Azzat Manal

El Salvador’s bitcoin experiment reveals the risks of financial innovation

El Salvador made global history in September 2021 when it became the first country to adopt bitcoin as legal tender, launching one of the most closely watched experiments in the use of cryptocurrency at a national level. The government presented the move as an ambitious attempt to modernise the economy, expand financial inclusion and reduce the costs of international money transfers.

At the time, a large share of Salvadorans had limited or no access to traditional banking services. President Nayib Bukele’s administration argued that bitcoin’s decentralised structure and blockchain technology could allow people to make financial transactions without relying exclusively on banks. The policy was also promoted as a way of bringing more citizens into the formal economy through digital payments.

To encourage adoption, the government introduced the state-backed Chivo digital wallet and offered new users an initial bitcoin incentive worth $30. The initiative was designed to familiarise citizens with cryptocurrency and encourage them to use it for everyday purchases and transfers.

Remittances were another central element of the government’s strategy. Money sent home by Salvadorans living abroad represents an important source of income for households and plays a major role in the national economy. Authorities argued that cryptocurrency could make international transfers faster and potentially less expensive by allowing payments to move directly between users, reducing reliance on traditional financial intermediaries.

Bitcoin was also portrayed as a means of giving El Salvador greater financial flexibility. The US dollar has been the country’s official currency since 2001, leaving monetary policy closely tied to decisions made by the US Federal Reserve. By introducing a decentralised digital asset alongside the dollar, the government hoped to diversify the country’s financial system and position El Salvador as a pioneer in digital finance.

The strategy extended beyond payments. Bukele’s administration promoted the country as a potential hub for cryptocurrency businesses, technology companies and international investors. One of the most ambitious proposals was Bitcoin City, a planned development intended to use the country’s geothermal resources, including volcanic energy, as part of a broader vision for cryptocurrency-related economic activity.

The experiment attracted considerable international attention, with Bukele becoming one of the most prominent political advocates of bitcoin. Supporters saw El Salvador’s approach as an example of how a small country could challenge conventional financial systems and embrace emerging technologies. Critics, however, warned that the policy exposed an already vulnerable economy to the extreme volatility of cryptocurrency markets.

Those concerns became increasingly visible as bitcoin prices fluctuated sharply. For consumers and businesses, using an asset whose value can change significantly over short periods created uncertainty around prices, savings and payments. Technological problems and difficulties with the Chivo wallet also complicated the government’s efforts to achieve widespread adoption.

Public enthusiasm proved weaker than officials had initially hoped. Surveys indicated significant resistance to bitcoin, with concerns ranging from financial risk and limited knowledge of cryptocurrency to distrust of the government's policy. By 2024, available indicators suggested that the overwhelming majority of Salvadorans had never used bitcoin, highlighting the gap between the government's ambitions and everyday behaviour.

The experience also demonstrated that technological access alone does not guarantee financial inclusion. Reliable internet connectivity, digital literacy, confidence in financial services and an understanding of cryptocurrency risks are all important factors in determining whether a new payment system can become part of everyday economic life.

The policy subsequently came under pressure as El Salvador sought international financial support. In 2025, changes agreed in connection with an International Monetary Fund programme reduced the compulsory role of bitcoin in the economy. Businesses were no longer required to accept the cryptocurrency in the same way, and tax payments were restricted to the US dollar, marking a significant retreat from the original mandatory framework.

El Salvador's bitcoin experiment nevertheless remains an important case study in financial innovation. Its experience illustrates both the potential and the limitations of introducing a highly volatile digital asset into a national economy. While cryptocurrency can offer new forms of payment and financial access, its successful integration depends on technological infrastructure, regulation, public confidence and economic conditions.

The country's pioneering decision has therefore become less a straightforward success story than a lesson in the complexity of transforming a financial system. El Salvador demonstrated that adopting a new technology at the national level can attract investment and global attention, but turning that innovation into widespread and sustainable everyday use is considerably more difficult.