Follow the Leader? Legal Uncertainties Shape the Risk Perception of El Salvador’s Adoption of Bitcoin as Legal Tender

On June 8, 2021, El Salvador’s Legislative Assembly (Asamblea Legislativa) voted to adopt Bitcoin as legal tender[1] (“Bitcoin law” or “law”), becoming the first sovereign country to formally adopt the cryptocurrency[2] and placing El Salvador at the forefront of a global discussion regarding the future of money.[3] Three months later, on September 7, 2021, Bitcoin assumed legal tender status alongside the U.S. dollar, which previously stood as El Salvador’s sole legal tender since December 2000.[4] The legal uncertainty surrounding the Bitcoin law, its regulation, and its potential impact on El Salvador’s external relationships remain significant.[5] How El Salvador addresses or attempts to resolve these uncertainties will likely influence the risk perceptions of the law and may play a key role in assessing how many, if any, countries follow in its footsteps.[6]

The legal and regulatory gaps surrounding the Bitcoin law include, but are not limited to, vague textual language, lack of transparency regarding its implementation processes, and uncertainty surrounding accountability and oversight measures in Bitcoin transactions.[7] Multiple sections in the Bitcoin law present the possibility of varied interpretations due to the law’s broad text.[8] Article 7 in the law, which requires “every economic agent” to accept Bitcoin as a form of payment when offered, initially fueled concerns that the law functioned more like a “forced-tender law” rather than a legal-tender law because it removed businesses’ freedom of choice.[9] Despite Salvadoran President Nayib Bukele’s public attempts to clarify Article 7, the text has not changed, and ambiguity surrounding whether businesses are required to accept Bitcoin as payment continues.[10] Further, there remains room to interpret whether the government can pay public sector employees and suppliers in Bitcoin or pay its obligations on treasury bills and certifications in Bitcoin.[11]

Issues related to transparency, predominantly due to the differences between Bitcoin and fiat currency,[12] persist in part because of the limited responses from the government to address them.[13] There are open questions about consumer protection and risk management against crimes involving government-created or sponsored Bitcoin mechanisms, especially with the government-funded Bitcoin wallet application, the Chivo Wallet.[14] The Bukele administration has not presented a clear process on how to hold third parties accountable for hacks in the Chivo Wallet or provided a clear response on the role, if any, of Chivo S.A. de C.V., the private company operating the Chivo network system, in handling any subsequent damages.[15] The question of which entity, or entities, would be liable for such crimes remains unanswered.[16] Relatedly, El Salvador has yet to introduce any new legislation related to personal data protection in Bitcoin transactions.[17]

Finally, there are significant gaps in El Salvador’s accountability and oversight measures for Bitcoin.[18] Per El Salvador’s exchange system, vendors can receive Bitcoin payments, convert the payments into U.S. dollars, and transfer the earnings to their accounts, bypassing the need to account for the cryptocurrency on their balance sheets.[19] The lack of a standard government exchange rate, as opposed to the current rate set by the market at the time of sale, and oversight raise concerns on the country’s risk exposure and accurate accounting of that risk.[20] Clarifying these measures will be especially important for El Salvador’s foreign relationships, particularly with the International Monetary Fund.[21] External investors and foreign regulators may also impose new requirements in the form of additional disclosures, processes, or compliance checks that may impact El Salvador.[22]

Today, the perceptions of the risks involved in El Salvador’s Bitcoin law vary.[23] Interest from other Latin American countries, particularly those with dollarized economies and those where remittances[24] play a significant role in the economy, indicates the potential for a domino effect in the region.[25] Yet, this depends largely on El Salvador’s standing with international financial organizations and trading partners and the use of such standing as a “tool of economic coercion” by other, developed countries.[26] Immediate responses to and outcomes of the Bitcoin law will continue to play a vital role in the perceptions of risk of crypto-friendly legislation and whether El Salvador will serve as a model of success or a cautionary tale for other countries.[27] To the extent that other Latin American countries adopt Bitcoin, or another cryptocurrency, as legal tender, El Salvador’s decision could impact future monetary policies in the region and enforcement mechanisms at a global level.[28]

Francisca Johanek is a staff member of Fordham International Law Journal Volume XLV.

This is a student blog post and in no way represents the views of the Fordham International Law Journal.
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[1] Legal tender can be understood as “the coin, paper money or other circulating medium that the law compels a creditor to accept in payment of a debt.” Joe Carlasare & Eric Fogel, El Salvador’s Use of Bitcoin Complicates US Commercial Law, Law360 (June 11, 2021, 3:35 PM), https://www.law360.com/articles/1393188/el-salvador-s-use-of-bitcoin-complicates-us-commercial-law.  As legal tender, Bitcoin must be accepted as a form of payment by financial entities in monetary obligations, unless the entities do not have access to the necessary technologies to process the transactions. See Tobias Adrian & Rhonda Weeks-Brown, Cryptoassets as National Currency? A Step Too Far, IMF Blog (July 26, 2021), https://blogs.imf.org/2021/07/26/cryptoassets-as-national-currency-a-step-too-far/. 

[2] Cryptocurrency refers to a group of “digital assets designed to enable purchases, sales and other financial transactions in a secure and pseudonymous matter . . . [whose] transactions are recorded on the blockchain, a form of distributed ledger technology.” See Perrie M. Weiner et al., Cryptocurrencies and ICOs: An SEC Enforcement Perspective, Practitioner Insights Commentaries, March 1, 2018, 2018 WL 1060487.

[3] See Ley No. 57, 8 June 2021, Ley Bitcoin [Bitcoin Law], Diario Oficial 110, 9 June 2021 (El Sal.); Nayib Bukele (@nayibbukele), Twitter (June 8, 2021, 9:49 PM), https://twitter.com/nayibbukele/status/1402442597235310596. 

[4] See Deric Behar et al., El Salvador Christens Bitcoin as Legal Tender, Latham & Watkins LLP: Global Fintech & Payments Blog (June 25, 2021), https://www.fintechandpayments.com/2021/06/el-salvador-christens-bitcoin-as-legal-tender/ (noting that the U.S. dollar will remain El Salvador’s reference currency for accounting purposes).

[5] See, e.g., Omkar Godbole, The 3 Reasons Behind Bitcoin-Holder El Salvador’s Deteriorating Creditworthiness, CoinDesk (Jan. 20, 2022, 7:32 AM), https://www.coindesk.com/markets/2022/01/20/the-3-reasons-behind-bitcon-holder-el-salvadors-deteriorating-creditworthyness/ (noting that El Salvador’s five-year credit default swap “has more than quadrupled to $1,800 since early September”); see generally Chris Kuiper and Jack Neureuter, Research Round-Up: 2021 Trends and Their Potential Future Impact, Fidelity: Digital Assets (Jan. 6, 2022), https://www.fidelitydigitalassets.com/articles/2021-trends-impact.

[6] See El Salvador Bank Bitcoin Risk to Depend on Adequacy of Regulation, Fitch Ratings: Fitch Wire (Nov. 11, 2021, 2:11 PM), https://www.fitchratings.com/research/banks/el-salvador-bank-bitcoin-risk-to-depend-on-adequacy-of-regulation-11-11-2021.

[7] El Salvador Marks 3-Month Anniversary of Bitcoin Usage, EFE Ingles, Dec. 7, 2021, WestLaw, No. 21-45-00.

Please note this post does not address the legal questions surrounding El Salvador’s announcement to issue bitcoin-backed bonds, the Bitcoin law’s potential impact on laws and regulations outside of El Salvador, such as whether the Law makes Bitcoin fall within the definition of “money” under the U.S.  U.C.C. § 1-201(b)(24), or any predictions related to whether the Law will advance organized crime in Latin America.

[8] See Alejandro DuranCarrete et al., El Salvador Approves Cryptocurrency Bitcoin as Legal Tender, HIS Markit (June 29, 2021), https://ihsmarkit.com/research-analysis/el-salvador-approves-cryptocurrency-bitcoin-as-legal-tender.html.

[9] See, e.g., Manuel Hinds & Steve H. Hanke, El Salvador’s Big Bitcoin Mistake, Wall St. J., June 23, 2021, at A21, ProQuest, Doc. No. 2543954997.

[10] See Daniel Stabile & Kim Prior, El Salvador’s “Bitcoin Law” Forces Governments and Businesses to Contend with Digital Assets, Glob. Banking & Fin. Rev. (Sept. 15, 2021), https://www.globalbankingandfinance.com/el-salvadors-bitcoin-law-forces-governments-and-businesses-to-contend-with-digital-assets/.

[11] See DuranCarrete, supra note 8.

[12] See Adrian & Weeks-Brown, supra note 1 (“[i]n the case of Bitcoin, recourse is difficult as there is no legal issuer”).  Fiat currency refers to “a government-issued currency that is not backed by [or redeemable for] a physical commodity” (such as gold). The value of fiat money is based on supply and demand dynamics in the jurisdiction's economy and the “stability of the issuing government,” meaning if people lose faith in the nation's currency, the money will no longer hold any value. James Chen, Fiat Money, Investopedia (Oct. 26, 2021), http://www.investopedia.com/terms/f/fiatmoney.asp (last visited Feb. 6, 2022).

[13] See generally Lawrence J. Trautman & Alvin C. Harrell, Bitcoin Versus Regulated Payment Systems: What Gives?, 38 Cardozo L. Rev. 1041, 1053 (2017) (“Regulators and law enforcement officials face difficult technical challenges in obtaining evidence for law enforcement purposes”); Alvaro Trigueros-Argüello & Marjorie Chorro de Trigueros, Bitcoin as Legal Tender in El Salvador: The First Fifty Days, Geo. J. of Int’l Affs. (Nov. 30, 2021), https://gjia.georgetown.edu/2021/11/30/bitcoin-as-legal-tender-in-el-salvador-the-first-fifty-days/.

[14] See El Salvador: Staff Concluding Statement of the 2021 Article IV Mission, IMF (Nov. 22, 2021), https://www.imf.org/en/News/Articles/2021/11/22/mcs-el-salvador-staff-concluding-statement-of-the-2021-article-iv-mission; see also Trigueros-Argüello & Chorro de Trigueros, supra note 13 (citing a total over 2,000 cases of identity theft via the Chivo Wallet). 

[15] See Andrés Engler, Identity Thieves Exploit El Salvador’s Chivo Bitcoin Wallet’s Setup Process, CoinDesk (Oct. 29, 2021), https://www.coindesk.com/business/2021/10/29/identity-thieves-exploit-el-salvadors-chivo-bitcoin-wallets-setup-process/.

Chivo S.A. de C.V. also presents a significant accountability gap: a private company operating a government-funded application but exempted from freedom of information laws. See David Gerard, El Salvador’s Bitcoin Law is a Farce, Foreign Policy (Sept. 17, 2021, 2:39 PM), https://foreignpolicy.com/2021/09/17/el-salvador-bitcoin-law-farce/ (noting that the director of Chivo S.A. de C.V. is also President Bukele’s Chief of Staff).

[16] See Engler, supra note 15; El Salvador: Staff Concluding Statement of the 2021 Article IV Mission, supra note 14.

[17] Trigueros-Argüello & Chorro de Trigueros, supra note 13; see also Deric Behar et al., El Salvador Christens Bitcoin as Legal Tender, Latham & Watkins LLP: Global Fintech & Payments Blog (June 25, 2021), https://www.fintechandpayments.com/2021/06/el-salvador-christens-bitcoin-as-legal-tender/ (noting that the U.S. dollar will remain El Salvador’s reference currency for accounting purposes).

[18] See Gerard, supra note 15.

[19] See Behar, supra note 17 (citing President Bukele’s explanation that financial entities “translate [any] risk [related to Bitcoin transactions] to the government”).

[20] See El Salvador: Staff Concluding Statement of the 2021 Article IV Mission, supra note 14; David Gerard, El Salvador Bitcoin Law: Draft Bank Regulations Released for Consultation, Attack of the 50 Foot Blockchain Blog (Aug. 18, 2021), https://davidgerard.co.uk/blockchain/2021/08/18/el-salvador-bitcoin-law-draft-bank-regulations-released-for-consultation/.

Javier Agueta, a legal advisor to President Bukele, claimed that if the value of Bitcoin ever collapsed, the government would be prepared to temporarily halt Bitcoin transactions in effort to minimize price fluctuations, raising the question as to the government’s preparedness if such an event occurred. See Foreign Investors Exempt from Tax on Bitcoin Profits: El Salvador, France24 (Sept. 9, 2021, 10:28 PM), https://www.france24.com/en/live-news/20210910-foreign-investors-exempt-from-tax-on-bitcoin-profits-el-salvador.

[21] See Carlasare & Fogel, supra note 1; El Salvador Bank Bitcoin Risk to Depend on Adequacy of Regulation, Fitch Ratings: Fitch Wire (Nov. 11, 2021, 2:11 PM), https://www.fitchratings.com/research/banks/el-salvador-bank-bitcoin-risk-to-depend-on-adequacy-of-regulation-11-11-2021; Press Release, IMF Executive Board Concludes 2021 Article IV Consultation with El Salvador, IMF Press Release 22/13 (Jan. 25, 2022), https://www.imf.org/en/News/Articles/2022/01/25/pr2213-el-salvador-imf-executive-board-concludes-2021-article-iv-consultation.

[22] See Bitcoin Could Increase Regulatory, AML Risks for El Salvador Banks, Fitch Ratings: Fitch Wire (June 25, 2021, 11:54 AM), https://www.fitchratings.com/research/banks/bitcoin-could-increase-regulatory-aml-risks-for-el-salvador-banks-25-06-2021.

[23] Following the announcement of the Bitcoin law in June, politicians and government officials in Latin American countries, including Argentina, Brazil, Panama and Mexico, publicly expressed interest in crypto-friendly legislation. See El Salvador’s President Proposes Using Bitcoin as Legal Tender, NPR (June 6, 2021, 10:02 AM), https://www.npr.org/2021/06/06/1003755600/bitcoin-cryptocurrency-money-el-salvador.

In contrast, on July 26, 2021, via a blog post, the IMF raised concerns about countries “adopting cryptoassets as national currencies,” viewing the decision as an “inadvisable shortcut” with significant risk to macroeconomic stability and financial integrity. See Adrian & Weeks-Brown, supra note 1. Months later, on January 25, 2022, the IMF’s Executive Board published an official report following its bilateral consultation with El Salvador noting that the Bitcoin law “entails large risks for financial and market integrity, financial stability, and consumer protection.” See IMF Executive Board Concludes 2021 Article IV Consultation with El Salvador, supra note 21.

[24] Remittances refer to money transfers from one person working abroad to another person, play a significant role in the country’s economy. See Dilip Ratha, What Are Remittances?, Finance & Development, Dec. 2005, https://www.imf.org/external/Pubs/FT/fandd/basics/76-remittances.htm.

In 2020, personal remittances received from foreign countries represented 24.1% of El Salvador’s Gross Domestic Product (GDP), 23.6% of Honduras’ GDP, 14.7% of Nicaragua’s GDP, and 2.4% of the Latin American and Caribbean region’s GDP. See Personal Remittances, Received (% of GDP), World Bank, https://data.worldbank.org/indicator/BX.TRF.PWKR.DT.GD.ZS?locations=SV (last visited Feb. 22, 2022).

[25] See Enrique Dans, Bitcoin and Latin American Economies: Danger or Opportunity?, Forbes (June 14, 2021, 7:01 AM), https://www.forbes.com/sites/enriquedans/2021/06/14/bitcoin-and-latin-american-economies-danger-or-opportunity/?sh=11ca03eb5bfe (arguing that a decision to adopt cryptocurrency could increase a politician’s popularity in a Latin American country by earning them “a reputation as a pioneer” and “distract[ing] from the many other problems facing them.”).

[26] See David Z. Morris, The Node: The Dawn of Bitcoin Geopolitics, CoinDesk (June 11, 2021, 11:58 AM), https://www.coindesk.com/policy/2021/06/11/the-node-the-dawn-...mail&utm_campaign=NODE%20JAN%2014%202022&utm_term=The%20Node; see also Lisa Shuchman, Lawyers Are Gearing Up for More Action After El Salvador’s Bitcoin Gambits, Law.Com (Oct. 26, 2021, 4:55 PM), https://www-law-com.fls.idm.oclc.org/2021/10/26/el-salvadors-bitcoin-gambit-may-be-just-the-beginning-lawyers-are-getting-ready-292-98847/.

Due to language in the International Bank for Reconstruction and Development’s Articles of Agreement, the World Bank may also be required to accept “notes or similar obligations” backed by Bitcoin from El Salvador or to pay distributions to El Salvador when Bitcoin fluctuates in value. See Articles of Agreement of the International Bank for Reconstruction and Development (IBRD) art. 5, § 12, as amended June 27, 2012, available at https://thedocs.worldbank.org/en/doc/722361541184234501-0330022018/original/IBRDArticlesOfAgreementEnglish.pdf (last visited Dec. 13, 2021); Stabile & Prior, supra note 10. Additionally, the IMF, explained that legal tender status may require creditors to accept Bitcoin in payments of  notes from the Central Reserve Bank of El Salvador (Banco Central de El Salvador). See Adrian & Weeks-Brown, supra note 1.

[27] See Avik Roy, El Salvador to Make Bitcoin Legal Tender: A Milestone in Monetary History, Forbes (June 7, 2021, 9:16 AM), https://www.forbes.com/sites/theapothecary/2021/06/07/el-salvador-to-make-bitcoin-legal-tender-a-milestone-in-monetary-history/?sh=65e6908d75b9 (noting that the “transformation by El Salvador of bitcoin into legal tender” could “dramatically increase the utility of bitcoin for corporate treasury management”); Sherlock Communications, Blockchain LatAm Report 2021: Updates on Regulation, Adoption and Ecosystem From Key Latin American Countries 14 (2021) (stating that “close attention should be paid to what is happening in El Salvador since it is likely to reverberate across other Latin American countries”).

[28] See Shuchman, supra note 26; see also Roger Huang, An Economic History of El Salvador’s Adoption of Bitcoin, Forbes (June 27, 2021, 4:06 PM), https://www.forbes.com/sites/rogerhuang/2021/06/27/an-economic-history-of-el-salvadors-adoption-of-bitcoin/?sh=68d77e5193fd (“El Salvador’s adoption of bitcoin shows the intersect of economics and politics . . . and how Latin America has started to chip away at a financial system that doesn’t work well for the region”).