Can Bitcoin as Legal Tender Reshape a Nation's Economy? Lessons from El Salvador

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 real-life use of Bitcoin as legal tender, its impact has been limited. Despite its legal status, the cryptocurrency's integration into the daily financial activities of citizens remains minimal. A recent survey conducted by the Francisco Gavidia University revealed that 92% of respondents don't use Bitcoin for transactions, while only 7.5% reported doing so. 

Bitcoin Usage for Transactions | Survey of Salvadorans by Francisco Gavidia University (2024)

Furthermore, El Salvador ranks 106th in the Chainalysis 2024 Global Crypto Adoption Index, reflecting relatively low cryptocurrency usage compared to other nations. This goes to show that top-down recognition of Bitcoin as legal tender is not enough for its widespread acceptance and use as a medium of exchange.

Looking at examples of other countries where Bitcoin doesn't have legal tender status, we find that mainstream adoption flows more naturally. According to the 2024 Global Cryptocurrency Ownership Report by Triple-A, nations with high adoption rates include the UAE, where 25.3% of the population owns cryptocurrencies, Singapore with a 24.4% adoption rate, and Vietnam at 17.4%. What they have in common is organic economic incentives, supportive regulations, and technological readiness. El Salvador, however, relied solely on the government initiative, leading to slower uptake. This is a clear dividing line between them, and it suggests that the public trust and infrastructure readiness are equally important.

Economic Impact of Bitcoin Adoption as Legal Tender in El Salvador

Let's look at actual numbers and assess how El Salvador’s economy performed after Bitcoin was accepted as legal tender. 

Sector-Specific GDP Trends

I analyzed sector-specific performance in El Salvador's GDP from 2021 to 2024, measured using a Chained Volume Index with 2014 as the base year. This index provides a real measure of economic activity over time, expressed relative to 2014 levels (where 100 equals the base year value).

• Agriculture, Livestock, Forestry, and Fishing: This traditional sector experienced a steady decline, from 113.64 in Q1 2021 to 99.76 in Q3 2024, highlighting persistent challenges in rural industries and limited impact from Bitcoin's legal tender status.
• Wholesale and Retail Trade: Demonstrated consistent growth, peaking at 151.71 in Q1 2024, potentially driven by increased tourism and consumer spending, most likely boosted by Bitcoin’s global attention.
• Information and Communication: The strongest growth occurred in this sector, rising from 139.60 in Q1 2021 to 157.85 in Q3 2024, reflecting El Salvador's efforts toward digital transformation and its increasing integration into the global digital economy.
• Manufacturing: Remained stable, showing minor fluctuations but also no significant growth directly linked to Bitcoin adoption as legal tender. The Q3 2024 figure of 96.40 represents a modest decline from earlier levels (100.15 in Q1 2021). 

El Salvador's Seasonally Adjusted Chained Volume Index | Data sourced from the Central Reserve Bank of El Salvador 

On the face of it, Bitcoin’s disruption of traditional industries hasn’t been as pronounced as expected, yet it’s interestingly contributed to the growth of tech-driven and consumer-focused businesses.

The Foreign Investment Landscape

It was hard to miss the clear investment invitation El Salvador sent to the world when it greenlit Bitcoin as its legal tender: “We're committed to incubating crypto innovation and tapping into the fintech boom.” But was that message truly heard and translated into tangible economic gains? The Foreign Direct Investment (FDI) figures show quite a complex picture. 

FDI Net Inflows by Year | Data sourced from the Central Reserve Bank of El Salvador 

From 2021 to 2024, El Salvador’s Foreign Direct Investment (FDI) net flows have exhibited significant fluctuations across years and quarters. In 2021, FDI totaled $385.67 million, driven by strong inflows in Q2 ($210.76 million) and Q1 ($151.89 million). However, this positive momentum was offset by a sharp decline in Q4, with FDI plunging to -$97.48 million.

The volatility continued into 2022, with FDI totaling $170.85 million for the year. While Q3 saw a strong rebound of $209.07 million (primarily fueled by notable contributions from the Wholesale and Retail Commerce and Transport and Storage sectors) following a steep drop in Q2 (-$95.10 million), the overall yearly performance remained subdued.

In 2024, preliminary data through Q3 reported total FDI of $287.44 million. The year began with a modest Q1 inflow of $95.67 million, followed by a sharp fall to -$33.60 million in Q2. A significant rebound in Q3 saw inflows rise to $225.37 million, with the largest contribution of $103.47 million coming from the Communications and Information sector, highlighting continued volatility despite recent recovery efforts.

Closing Thoughts 

When El Salvador adopted Bitcoin as legal tender in 2021, it captured a lot of global attention. Although the government opened the door for citizens to freely use Bitcoin, only 7.5% currently utilize it as part of their regular financial habits. Compared with higher adoption rates in other countries—where it was a grassroots initiative rather than a top-down government mandate—this suggests that mainstream Bitcoin adoption requires broader economic and social readiness to succeed.

As for the meaningful and transformative economic benefits many had hoped for, El Salvador's growth has been largely concentrated in the information and communication sector, seemingly driven more by digitization efforts than by Bitcoin itself. Meanwhile, the country’s FDI trends remain volatile overall.

So, for other nations seeking to integrate cryptocurrencies into their economic frameworks, the lesson is clear: success requires more than a bold policy. Apparently, Bitcoin cannot be a panacea for economic growth; it can only complement it in one way or another.