El Salvador: a global regulatory sandbox for Bitcoin as a legal tender

Wednesday 17 November 2021

Oscar Samour
Consortium Legal, San Salvador

Annette Herrera
Consortium Legal, San Salvador

Daniel Leiva
Consortium Legal, San Salvador

On 9 June 2021, the Legislative Assembly approved The Bitcoin Law (the BTC Law),[1] which provides the first legal framework in the world to give a crypto asset legal tender status – in this case Bitcoin (BTC). On 7 September 2021, surrounded by controversy, the Bitcoin Law entered into force. This article analyses:

  • the Salvadoran regulatory framework before the BTC Law;
  • the current Salvadoran regulatory framework;
  • the practical implications and ecosystem; and
  • what’s next for El Salvador.

The regulatory framework as of June 2021

Prior to 9 June 2021, El Salvador did not explicitly regulate the use of any crypto asset. However, Salvadorans could use it as a private payment method.

Crypto assets[2] were not classified as regulated activities according to the Supervision and Regulation of the Financial System Law.[3] Additionally, the Financial Inclusion Facilitation Law expressly excludes from its regulation any type of private ecosystem that has a ledger which allows payment for products or services, if it has been agreed by both parties and is used within a limited ecosystem.[4]

The Central Bank of El Salvador (BCR) published a statement in 2017 regarding the use of crypto assets, throughout which it referred to crypto assets as high-risk assets that should be used at an individual’s own risk. It also mentioned the prohibition for any unauthorised entity or person to carry out public fundraisings. These statements led to the common interpretation of many users and crypto enthusiasts that the BCR would be vigilant over crypto activities, and even could implement a method for sanctioning illegal fundraising. This consequently alarmed users about the potential implications. During these years, crypto activities slowed down given the uncertainty that such interpretations produced in the users.

The current regulatory framework

The current regulatory framework in El Salvador consists of a law that gives BTC legal tender status, and other secondary legislation and regulation which facilitates its application.

President Nayib Bukele initially announced the adoption of BTC as legal tender in El Salvador at June 2021’s Miami Bitcoin Conference, taking Salvadorans and the world by storm with this announcement. One of Bukele’s strongest arguments was the lower transactional costs of money remittances operations from abroad to El Salvador.

Approximately 3 million Salvadorans live in the United States; in 2020, the money remittances operations totalled $5.9 billion, representing 24.1 per cent of Salvadoran GDP. This announcement turned the state engines to implement the BTC.

The BTC Law regulates the use of BTC as legal tender, providing it with unrestricted and unlimited clearance power in any transaction that natural persons, or public or private legal entities, carry out in any capacity. As of today, El Salvador has three currencies that hold legal tender status: the Salvadoran colón, the US dollar and the BTC. Payment of goods, services and obligations is allowed via any of these currencies. According to the BTC Law, every economic agent must accept BTC as a form of payment when it is offered by whoever acquires a good or service, with the exception of those economic agents that, by notorious fact and in an evident manner, do not have access to the technologies that allow executing transactions in BTC. The BTC Law bound the government to provide a platform to perform BTC transactions for Salvadorans. This platform provides automatic conversion from BTC to US dollars, and has been realised through the Chivo Wallet.

The BTC Law Regulation provides the regulatory framework for Bitcoin service providers (BSP). The Regulation creates a registry, administered by the BCR, which is mandatory for any BSP to provide services in El Salvador.

The Bitcoin Trust Law (Fidebitcoin) mandates the Ministry of Economy to constitute a trust; to appoint the Development Bank of the Republic of El Salvador (BANDESAL) as trustee; and to benefit the users of the Chivo Wallet, represented by the Republic of El Salvador, with the purpose of supporting the alternatives for BTC convertibility provided by the Salvadoran Government. The trust assets are:

  • $150m;
  • funds raised by the issuing of securities;
  • interest from investments;
  • operational profits or losses; and
  • securities.

Fidebitcoin states the possibility of appointing an administrative agent, which would be a different public entity that will administrate and manage the use of the assets according to the instruction of the settlor.

Finally, the Technical Standards to Integrate Financial Entities into the Crypto Ecosystem (NRP-29) and the Guidelines to Authorize Technological Platform of Services with Bitcoin and Dollars for Financial Entities establish the rules for traditional financial entities to provide BTC services to their users, including exchange, wallets and payment platforms.

The rules of the game have been set for Salvadorans so that the BTC can play a part in economic transactions.

Practical implications and ecosystem functionality

The implementation of BTC has been a rocky road, due to protests and the turbulent rollout of the Chivo Wallet. El Salvador has been a hot spot for crypto enthusiasts, governments and international financial institutions. It is the first country in the world to adopt BTC as legal tender – a decision both praised and criticised by the public.

The technical efforts by public and private actors have been tremendous but Salvadorans have been wary of this implementation. Banks have quickly implemented ways to receive BTC; fast food chain restaurants, coffee shops and supermarkets have also adapted to this new reality by offering their customers the option to pay with BTC (considering that the BTC Law requires everybody to accept it).

To encourage the adoption of the government’s Chivo Wallet, and therefore the use of BTC, an initial stimulus of $30 was offered to every new user. Through the Chivo Wallet, the Government has offered a commission-free and charge-free BTC environment for any transaction, including the exchange of BTC to US dollar and vice versa, remittances operations and payment platforms. Fidebitcoin will absorb the costs of the commissions and charges. Was this the best strategy to push the use of BTC? Probably not. A significant amount of identity theft has been reported, prompted by attempts to gain access to the $30 that comes with every new user account, and many new users only used the platform to cash out the money. This was directly opposite to the intent of the program, since it was intended to encourage Salvadorans to use BTC. The implementation of this wallet has also raised concerns regarding data protection and AML measures.

Although the BTC implementations to date have been somewhat abrupt, we cannot lose perspective that this is the first time that a country has adopted a cryptocurrency as legal tender, and that a lot of trial and error will occur throughout this process. Public and private actors have shown resilience considering the short adaptation time, improving services and connecting the crypto world with the traditional financial ecosystem. We are looking forward to the pending regulation and the likely economic impact for the country and each individual.

What’s next?

The answer is not entirely clear.

What will happen when El Salvador has reached maturity in the implementation of the BTC? Will El Salvador open the doors for other cryptocurrencies to become legal tender?

State agencies face a significant challenge: they need to keep up with the innovating crypto financial products, initial coin offerings and mining activities (which President Bukele has already initiated) amongst others. Along with new products, financial assets and payment methods comes a new set of regulations to ensure the safety of users and their investments. Could we be facing a financial crisis á la the 1930s?

If the goal is to develop a complete crypto ecosystem that allows decentralised financial operations, it is necessary to provide the tools to implement additional crypto financial products – either adapting the current regulation, creating new ones or facilitating regulatory sandboxes. We are certain, however, that the players will need to have a clear set of rules.


[1]  Official Gazette. (9 June 2021). See https://imprentanacional.gob.sv/servicios/archivo-digital-del-diario-oficial/.

[2] ‘Crypto assets’ refers to any kind of cryptocurrency or crypto assets created through blockchain technology which can be used as payment method, financial instrument, and other functionalities due to their nature.

[3] The Supervision and Regulation of the Financial System Law, s 7.

[4] The Financial Inclusion Facilitation Law, s 5 and s 7.