Advantage and Disadvantages of El Salvador Making Bitcoin Legal Tender

Connor D | February 1, 2022

Last updated on February 5th, 2022

As many of you have already read by now, El Salvador, a Central American country of 6.5 million, has become the first country to make Bitcoin legal tender. The digital currency can now be used in any transaction in the country. Any business that operates in El Salvador will be required to accept payments in Bitcoin. The U.S. dollar will continue to be El Salvador’s official currency. Though companies must accept bitcoin, nobody will be forced to make payments in Bitcoin. This post will explore both the positive and negative implications of El Salvador making Bitcoin legal tender.


Share this:


Eliminating Remittance Payments

According to a Stanford University study, millions of Salvadorans live abroad, and many more have relatives outside El Salvador. Last year El Salvador received approximately $6 billion in remittances from Salvadorans living abroad. This large sum represents roughly 22% of the country’s GDP.  Remittance fees on these transfers can reach as high as 50%. Bitcoin can dramatically reduce the cost of sending money home to El Salvador from abroad.


No Capital Gains Tax on Bitcoin

With Bitcoin becoming legal tender, it is no longer subjected to capital gains tax. As bitcoin increases in value, this shift creates an added financial benefit for bitcoin holders in El Salvador.  


No Longer Subjected to the Dollar Dominance

El Salvador’s official currency is the United States dollar. Adding bitcoin to the roster of legal tenders can help to reduce US influence by diversifying the balance of currencies in the monetary system.

Many countries use the US Dollar as their primary currency. These countries have effectively no control over their monetary system and are subjected to any poor decisions and controls made by the US central bank. During COVID-19, the United States has printed a significant amount of new cash to inject into the economy. US citizens may see benefits from this injection, such as stimulus cheques and less drastic unemployment. Countries that use the US dollar do not receive any of these benefits but suffer the consequences of inflation as the currency is devalued by increases in the circulating supply. 

It is essential for countries and people everywhere to have a currency that cannot be manipulated or inflated by a central authority. This type of currency must have a supply that can only be altered in accord with the objective and calculable criteria. 


Give Everyone Access to Financial Services and Markets

70% of the population does not have access to a bank account. This could be due to distrust in banks or because of strict requirements to open an account. Anyone with internet access can open a bitcoin wallet. Using Bitcoin, anyone can access financial instruments that would be difficult to access and tightly controlled through traditional means. This bill effectively gives Salvadorans access to financial tools and world financial markets without needing a bank account without any of the requirements a bank may demand.


No Requirement to Use Custodial Wallets

El salvador has put no restrictions on the types of wallet services that can be used. This gives users freedom and control over their assets. Assets that are stored in non-custodial wallets, hard wallets, or overseas are not subject to government seizure or monitoring like a traditional bank account which can provide peace of mind in unstable or corrupt political environments.  

El Salvador’s government has created its own custodial wallet service that citizens are encouraged to use. Although this is not required, it is unclear how many users will follow government advice without further research. Users who choose to use the government wallet will place their assets in the hands of the government. This service will likely be subject to monitoring and could enable the government to freeze or seize accounts, similar to a centralised bank account. If the government was to use this type of wallet service against their citizens this could negatively impact adoption of bitcoin worldwide. This is a potential risk to be considered and monitored as the situation matures. 



Forcing Merchants To Accept Bitcoin

Article 7 in the recently passed bill is a legal tender provision indicating that merchants are “required” to accept Bitcoin as payment. The provision does not offer much more detail than this. The most straightforward interpretation of this provision suggests that merchants will be forced to accept Bitcoin at the current dollar rate of exchange. With this interpretation, merchants cannot say, “no, I will only accept USD.”  

The means exist for merchants to quickly convert Bitcoins into dollars. By using these tools, merchants do not need to hold Bitcoin or bear any risk. This provision, at best, serves no purpose. At worst, it compels businesses to do something they may not want to do: deal in a potentially volatile currency. While the cryptocurrency community is united in support of the broader law to allow bitcoin as legal tender, users who believe in the freedom of all to choose their transaction currency will condemn Article 7.


Bitcoin Price Fluctuations

Salvadorans who choose to transact in bitcoin for day-to-day purposes will expose themselves to price fluctuations as the currency changes in value. This is a problem in the short term as Bitcoin is very volatile. As years go by and global adoption accelerates, Bitcoin price fluctuations will decrease.



As someone who has traveled and seen the hardship a lot of people go through on a daily basis in countries such as El Salvador, I believe this is one of the most amazing things that could happen. For many people who live inside broken finical systems, all they could ever do is hope for a better tomorrow. Now that hope is stronger than ever, and help is on the way. 

El Salvador and its citizens are taking back control of their monetary system, promising access to the world’s financial markets. Making Bitcoin legal tender will increase financial inclusion, investment, tourism, innovation, and economic development. This is a big step in the right direction.

“This is one small step for Bitcoin as it is just another node on the blockchain, but one giant leap for humanity” – Jack Mallers.


Read More

If you are curious to learn more about bitcoin and cryptocurrency checkout our recommended posts below.

What are cryptocurrencies?

A Brief History of Blockchain

What Do You Get When You Buy a digital Art NFT?

NFTs as Financial Instruments

Related Articles