The Role of Cryptoassets as Legal Tender: The Example of El Salvador

Abstract

On 7 September 2021, El Salvador became the first jurisdiction to adopt bitcoin as legal tender. This initiative has raised as much enthusiasm as it has scepticism and potentially opens the door for other countries to follow suit. The initiative is underpinned by a law passed by the Legislative Assembly, with the more functional aspects left to a series of technical standards drawn up by the Central Bank of El Salvador. To facilitate its operational roll-out, the Government has opted to provide Salvadorans with a digital wallet and has also launched an ambitious educational programme aimed at the population as a whole. International organisations consider that this proposal poses significant risks to the overall economy, potentially compromising the Salvadoran monetary system and the integrity of its financial sector, and undermining the State’s revenue-raising capacity. Many questions remain over the final outcome, which will largely depend on the country’s ability to overcome not only the difficulties evidenced in the initiative’s launch, but also other pre-existing structural shortcomings.

Keywords: cryptoassets, bitcoin, monetary policy, monetary system, legal tender

JEL Classification: E42, E44, E52, E62, O10, O33