From fiat to Bitcoin: The financial experiment pioneered by El Salvador

In June 2021, the Central American country El Salvador officially approved a groundbreaking bill, becoming the world’s first country to recognize Bitcoin as legal tender. This decision broke the traditional model of fiat currency being determined unilaterally by governments for decades and created ripple effects across the global financial system.

What is fiat currency? Why is El Salvador urgently seeking a breakthrough

Fiat currency refers to money issued by the government that has mandatory circulation power and is the foundation of economic operations. Traditionally, fiat currency is controlled by the central bank, and its value is backed by national credit. The US dollar, which El Salvador has used in the past, is a typical foreign fiat currency — after the 2001 economic crisis, the country abandoned its own currency, the colón, and fully adopted the US dollar.

However, reliance on the dollar has brought new difficulties. Over 70% of El Salvador’s population still do not have bank accounts, and the large diaspora remits over 20% of the country’s GDP annually. But traditional remittance channels are costly and slow. Against this background, President Nayib Bukele proposed a bold idea: why not incorporate Bitcoin into the fiat currency system?

Bitcoin becomes legal tender: from voting to implementation

On June 9, 2021, El Salvador’s Congress passed the “Bitcoin Law” with 62 votes in favor and 22 against. Nayib Bukele declared on social media that this was a “historic moment.” The law took effect within 90 days, officially granting Bitcoin the same legal status as the US dollar.

What does this mean? Specifically:

• Any goods or services can be priced in Bitcoin
• Taxes can be paid in Bitcoin
• Capital gains tax is not levied on Bitcoin exchanges
• The exchange rate between Bitcoin and USD is determined freely by the market
• Citizens can choose freely to use Bitcoin or USD, both coexist

The government also introduced supporting measures, granting permanent residency to foreign nationals who invest in 3 Bitcoins, and planned to provide Bitcoin education and training to help the public better understand this new form of legal tender.

Strategic layout to break through financial difficulties

The true significance of Bitcoin’s legalization lies in solving El Salvador’s financial inclusion issues. The country’s large number of overseas workers send back over 2 million remittances annually, which are vital to the national economy. Using Bitcoin as legal tender can significantly reduce remittance costs and time, allowing distant relatives to support their families more cheaply and quickly — this is the core goal of Bukele’s policy promotion.

This move also lays the foundation for future digital financial infrastructure. El Salvador has established cooperation with payment company Strike, utilizing Bitcoin technology to upgrade the national financial system. Recognizing Bitcoin as legal tender opens a trial for the integration of traditional finance and digital assets, providing a reference model for other countries facing similar difficulties.

Although this policy remains controversial, El Salvador has taken an important step — transforming Bitcoin from a digital asset into a legally recognized currency, rewriting the global financial landscape.