🩻 El Salvador’s Crypto Failure

A real-life case study on volatility and state-wide gambling

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What Happened, With Sources:

El Salvador’s March 2025 IMF bailout is closely linked to its cryptocurrency policies.

In December 2024, the country secured a $1.4 billion IMF loan that came with strict conditions aimed at reducing the financial risks associated with Bitcoin’s volatility. The bailout agreement required the government to scale back many of its crypto initiatives, including:

• Adjusting Business Practices: Businesses are no longer required to accept Bitcoin, shifting it from mandatory to voluntary.

• Limiting Public Sector Use: The government had to restrict its own participation in Bitcoin-related activities.

• Tax Policy Changes: Bitcoin was to be phased out as a means for paying taxes.

• Reforming the Chivo Wallet: There was a plan to gradually unwind the involvement of the state-run Chivo digital wallet.​

El Salvador's adoption of Bitcoin as legal tender in 2021 introduced significant financial risks due to the cryptocurrency's volatility.

This move led to concerns from international financial institutions, including the International Monetary Fund (IMF).

In December 2024, the IMF and El Salvador reached a staff-level agreement for a $1.4 billion loan under the Extended Fund Facility (EFF).

As part of this agreement, El Salvador committed to mitigating Bitcoin-related risks by making its acceptance voluntary in the private sector and limiting public sector involvement in Bitcoin activities. ​

While El Salvador's cryptocurrency policies did not solely cause the IMF loan, the country's adoption of Bitcoin and associated financial risks were significant factors influencing the terms of the agreement.

Below is a list of reputable sources that provide an explanation of the situation:

• IMF Executive Board Approves New 40-month US$1.4 billion Arrangement for El Salvador

• El Salvador Made Bitcoin an Official Currency. Now It's Backtracking for IMF Loan

• El Salvador Announces More Bitcoin Purchases, Gives IMF Assurances

• El Salvador's Bitcoin Wallet to Be Sold or Discontinued After Deal with IMF, Official Says

• IMF 1 - El Bitcoin 0

• El Salvador Bought 13 BTC in March Despite IMF Agreement

The Longer Story:

Bitcoin as Legal Tender

El Salvador gained global attention in 2021 by becoming the first country to officially adopt bitcoin as legal tender. Initially praised as innovative, this policy has largely been unsuccessful. A recent $1.4 billion bailout from the International Monetary Fund (IMF) underscores a return to conventional financial strategies and signals the end of this cryptocurrency experiment.

Early Ambitions and Bukele’s Vision

President Nayib Bukele envisioned bitcoin as a way to revolutionize El Salvador’s economy. His ambitious strategy included blockchain-based bond issuance, building a geothermal-powered "Bitcoin City," and introducing the Chivo digital wallet to simplify remittance transactions. Bukele’s enthusiasm for bitcoin appears rooted in Austrian economic principles, skepticism toward global financial institutions, and concern about inflation due to reliance on the U.S. dollar.

In June 2021, Bukele introduced a legislative bill making bitcoin legal tender, highlighting job creation, financial inclusion, and attracting crypto entrepreneurs. The proposal quickly passed, and by September 2021, bitcoin became legal tender. Bukele hoped this would significantly reduce remittance costs, valued at roughly $6 billion annually, and improve financial access for Salvadorans lacking formal banking services.

Economic Challenges and Reality Check

Despite initial optimism, the bitcoin initiative faced immediate economic difficulties. Investors' skepticism led to a steep decline in Salvadoran government bond prices, at one point trading below 30 cents on the dollar. Bitcoin’s volatility compounded these problems, depleting cash reserves and causing delays in public sector wage payments. These financial challenges eventually forced El Salvador to reconsider its crypto-focused policies.

IMF Intervention and Policy Changes

The IMF bailout required substantial policy changes, reducing bitcoin’s official status. Taxes are no longer payable in bitcoin, and acceptance by businesses is now voluntary. These changes aimed to restore economic stability, regain investor confidence, and manage risk, crucial given El Salvador's reliance on the U.S. dollar.

Limited Adoption and High Costs

Despite Bukele's efforts, bitcoin adoption remained minimal. Surveys revealed that approximately 86% of Salvadoran businesses never conducted a bitcoin transaction, and only about 20% accepted the cryptocurrency. Just 1.9% of remittances were processed in bitcoin between September 2021 and April 2022. A survey by the University of Central America found that 88% of Salvadorans did not use bitcoin at all in 2023, and only 1% of remittances used the currency.

The costs of the crypto experiment were substantial, estimated by Moody’s at around $375 million for launching the Chivo wallet, subsidizing transaction fees, and installing bitcoin ATMs. These costs far exceeded gains from bitcoin appreciation and delayed critical IMF support, worsening the country's financial pressures.

Volatile Bitcoin Investments

Bukele’s administration also made speculative bitcoin purchases, initially facing significant losses as bitcoin prices dropped shortly after adoption. The Salvadoran government invested around $121 million, accumulating approximately 2,845 bitcoins. Although these investments eventually turned profitable when bitcoin prices recovered in late 2023, the volatility of these reserves highlights the risk associated with cryptocurrencies as national assets.

Ambitious but Unrealized Bitcoin City

In November 2021, Bukele announced the ambitious "Bitcoin City," planned near La Union, featuring geothermal energy-powered bitcoin mining, tax incentives, and infrastructure financed by a $1 billion bond. However, the project's details remain scarce, and minimal progress has been reported since the announcement, suggesting it may remain an unfulfilled vision.

Financial Recovery Efforts

Despite crypto-related setbacks, El Salvador exhibited resilience. Bukele prioritized debt repayment, returning bond prices to normal levels through strategic bond repurchases at discounted prices. Disciplined budgeting reduced the budget deficit from a pandemic peak of 10% of GDP to around 2-3%, supported by improved tax collection, stable remittance inflows, and economic recovery.

Political Popularity Amid Economic Troubles

President Bukele remains popular domestically, primarily due to his aggressive crime-reduction measures rather than his economic policies. Nevertheless, the bitcoin experiment underscores the risks of combining technological optimism with fundamental economic policymaking.

Lessons Learned

Ultimately, El Salvador’s bitcoin journey highlights critical lessons: genuine financial innovation must prioritize stability and reliability. The country's experience illustrates the necessity of sound economic management over speculative ventures, reinforcing that enduring economic improvements arise from conventional, stable financial practices rather than uncertain technological experiments.

With every good wish, I remain
Yours sincerely in Christ,
Rev. Jack Roshi
Applied Mathematics Department, MIT
Lead Quant and Board Member, Sabre Capital Group
Opinions are my own