When Bitcoin Detaches from Being Legal Tender ...

AAmstg
Feb 17
16 min read

Updated: May 5

... due to its stepmother's objections!

"Unfastens, undoes, unlaces, unties, unbinds and detaches from your tender lies ..." Well, it seems I've written the initial lyrics of a jingle looking for Cole Porter's rhythms and music; meanwhile, Bitcoin appears to meet off from the Legal Tender exclusive Club for now, or maybe not?

Almost two months ago, the Wall Street Journal (WSJ) published news that went unnoticed except in specialised forums. The headline was very conclusive: El Salvador backtracks and, following the conditions set by the IMF, abandons the idea of having Bitcoin as legal tender in the country.

In its press release of August 2024, the IMF advanced this kind of pitfall regarding the negotiations with El Salvador (link to IMF Note 24/302, whose keywords were these five for action: "mitigate the risks from Bitcoin"). There will be those who consider this result a win-lose scenario in absolute, irreparable, and definitive terms, leaving the IMF alone as the winner, and there will be.

The truth is that throughout these last few weeks and with a little more temporal perspective and overcoming the emotional pothole in which the most maximalist 'bitcoiners' were immersed at Christmas, I have had some conversations about the particular but touching on aspects less clinging to the very guts of the bitcoin world and, at the same time, something more correlated with perspectives that fly over the detail of the news itself, although transcending it.

The results of this conversation connect the staging of the Bitcoin system and the adoption of the Bitcoin unit. They walk through the US and the IMF, MicroStrategy and Tesla, currencies and risk, Strategic Reserves and cryptocurrencies, geopolitics and global finance, the double standard in financing and the asymmetric economy, and what is convenient and what is appropriate in its different degrees.

Five Questions

Q1ª. | What has happened in El Salvador since last Christmas, given that Bitcoin has recently been 'abandoned' as legal tender?

Starting with the current state of affairs, although it is not entirely obvious, thanks to the press headlines, it should be said that bitcoin has NOT ceased to be 'legal tender' yet but will cease to be 'currency', remaining then as a voluntary payment instrument. Therefore, strictly speaking, El Salvador has eradicated the compulsion to accept payments, honour debts, and tribute taxes through this means. However, if both parties agree, it is still a legally appropriate way to cancel debts between private individuals only.

In its form and literalness, the Salvadoran Legislative Assembly approved the rule that modifies the "Bitcoin Law", which will not enter into force until April 1 of this year. [Therefore, between January 30 and April 1, Bitcoin is still legal tender!] For a detailed description, the following points should be taken into account for how the current standard 'status quo' was altered:

1) Article 1 of the law was amended to eliminate the word "currency" and hold that "bitcoin" will be "legal tender." It also recognises its liberating value, "with the voluntary acceptance by natural or legal persons with full private participation only, in any transaction and in any title that they require to carry out."

2) Article 3 changed from "every price must be expressed in bitcoin" to "every price can be converted into bitcoin".

3) Article 5 was reformed to clarify that bitcoin exchanges are not subject to capital gains tax.

4) Article 7 also changed, moving from establishing that "every economic agent must accept bitcoin" to "they can accept" this legal tender means of payment.

5) Article 12 states that "the monetary obligations of the state, national and external, must be paid in the contracted currencies". Therefore, the State cannot pay its Public Debt using Bitcoin.

6) Finally, the reform also repealed three articles of the Bitcoin Law, including Article 4, which said that "all tax contributions can be paid in bitcoin," but since April 1, 2025, this is no longer the case.

Several reasons for this legislative change were considered, which can be grouped into these three:

1. Pressures from the International Monetary Fund (IMF): The IMF conditioned the approval of a credit of 1.4 billion dollars, which is necessary for the country to mitigate the risks associated with using Bitcoin (sic -?).

2. Low proportion in the adoption of Bitcoin among the population: Despite government efforts, such as creating the Chivo Wallet digital wallet and installing ATMs, only a tiny fraction of the population used cryptocurrencies. 2024 was the year with the lowest use among the four years Bitcoin was in force.

3. Concerns about financial stability: The IMF and other international organisations expressed concern about Bitcoin's volatility and its impact on economic stability and consumer protection.

As a result, in January 2025, the Salvadoran parliament approved the reform, which had already indicated that it would transform its use from mandatory to voluntary and prohibit its use for the payment of taxes. Although the Government plans to continue buying Bitcoin and promote laws to attract investments, it eliminated the official Chivo wallet. There is a mixture in all this of implementation defects and internal adoption, which accumulate with the disadvantages generated in the relationship of the Salvadoran Government with the IMF, which is the most visible face in this issue of the major actors of international finance and the economy.

Q2ª. | The question arises by itself: What specific concerns did the IMF present that led it to 'pressure' the Government of El Salvador beyond the issue of the volatility of the price of bitcoin in its exchange with currencies such as the US dollar?

Four concerns led El Salvador to reconsider its decision to adopt Bitcoin as legal tender and - let's say it this way - strengthen the regulatory framework to mitigate the risks associated with the use of Bitcoin:

1. Financial and market integrity: The IMF warned that the adoption of Bitcoin could facilitate illicit activities, such as money laundering and tax evasion, due to the anonymous and decentralised nature of cryptocurrency transactions [Note: I get out of the taxonomic problem of calling bitcoin 'cryptocurrency' so as not to blur the understanding of the scope of the debate.]

2. Consumer protection: Given the absence of clear regulations and the irreversibility of Bitcoin transactions, the lack of adequate mechanisms to protect users against possible fraud or losses was pointed out.

3. Contingent tax liabilities: The IMF expressed its concern about the chances El Salvador would have to assume unforeseen financial responsibilities arising from the fluctuation in the value of bitcoin, mainly if it were used to issue bonds or finance public projects.

4. Macroeconomic stability: The adoption of bitcoin could complicate the implementation of effective monetary and fiscal policies, affecting the country's ability to respond to economic or financial crises.

And it is now when it makes sense to consider some apparent paradoxes in the context where all of the above materialises.

Q3ª. | Why are these arguments valid to justify the exclusion of Bitcoin from a monetary system but have not prevented other market players from using it as such an asset? Market companies use Bitcoin to build value reserves to guarantee corporate debt emissions in a virtuous circuit between debt and latent capital gains.

This observation is not entirely a minor issue. The difference in the treatment of Bitcoin in these two contexts, as legal tender in a national monetary system and as a standard strategy for assets investment by private companies, is mainly due to the distinction required here between monetary sovereignty and business freedom, in addition to regulatory and risk management factors. Let's examine each matter, case by case.

1. Monetary sovereignty versus corporate strategy

When a country adopts Bitcoin as a legal tender, it delegates part of its monetary control to an asset whose supply it cannot regulate or modify. This directly affects fiscal policy and financial and macroeconomic stability. [Note: Let's not yet enter into the disparity of sizes between economies such as El Salvador compared to those with whose currency (USD) the exchange price is established.] On the other hand, a private company that uses Bitcoin as a store of value does so under its investment criteria without affecting the Government's ability to manage the economy and currency where that company mainly operates.

2. Systemic risk versus business risk

For a State, accepting Bitcoin as legal tender implies a systemic risk: volatility in the payment of taxes, public wages and sovereign debt. This could destabilise national accounts. [Note: There is even a partial assumption about the defective governance of the person responsible for that economy.] Meanwhile, in the corporate sphere, Bitcoin is just an investment strategy. If a company goes bankrupt because it has bet too much on crypto assets, there is no direct impact on the stability of the national financial system. [Note: Although this will be conditioned on the importance of that company within its national economy, it may consist of the absolute weight of said company concerning the whole or a particular sector, strategic and relevant for that economy.]

3. Double measuring rod in regulation and influences

On a global scale, organisations such as the IMF and the Federal Reserve see with evil eyes that a State uses Bitcoin as its official currency since it could erode its influence in the region and weaken the dollar as an international standard. However, when companies such as MicroStrategy or Tesla adopt Bitcoin as a store of value, they do not directly challenge the global financial system of the US dollar since they operate within such market rules when they are within the orbit of that specific monetary system.

4. Access to financing

The IMF imposes strict conditions on countries that apply for loans, which in the specific case allows it to require the potential debtor (El Salvador) to exclude Bitcoin in a scenario similar to that of the creditor who imposes conditions on the future debtor with whom he is negotiating a line of credit. On the other hand, listed companies have greater flexibility in their finances, provided they comply with stock market regulations. Although this is sometimes more formal than real, the regulations of some stock markets may be subject to new rules that condition credit lines already agreed upon or incidentally limit previously unconditioned access to them. A case to be pointed out as an example is the recent contracting limitations settled on States, companies or people with companies listed on the stock exchange or participating in some sector in recent years and the Western world.

But, to summarise it and focus on the subject, the difference lies in the fact that a State that adopts Bitcoin as legal tender affects monetary sovereignty and economic stability, while a company that uses it as an investment asset assumes its own risk without altering the structure of the national financial system. This explanation should be considered relevant and proportionate according to current understandings and standards. In this type of scenario, it would be somewhat shocking if it contrasts with the reality of the market. The case of MicroStrategy would be a sample to analyse.

Q4ª. | Could we discuss a double standard in the case mentioned?

MicroStrategy is a private company, and El Salvador is a State. The first is several times the economic size of El Salvador. Technically speaking, the level of theoretical risk is higher than that of the second. Micro-strategy creditors accept Bitcoin as collateral, but the IMF does not take it for its client portfolio (the States). Although the difference in treatment might be surprising, the key lies in who establishes the rules and who can impose the conditions.

Despite its size, MicroStrategy continues to operate within the financial framework of the United States. The United States is the issuer of the dollar and has a well-established regulatory infrastructure. MicroStrategy creditors can decide to accept Bitcoin as collateral because they trust in the regulatory environment of the United States and that the rules of the game will allow them to execute guarantees in case of need.

On the other hand, El Salvador is subject to its agreements with organisations such as the IMF as a debtor; the IMF evaluates a country's economic strength and has a geopolitical and financial agenda. The US dollar is the global reference currency, and the fact that a country like El Salvador has adopted Bitcoin as a legal tender questions the dominance of that monetary structure.

The difference is more political and structural than economic. The market can allow a company to use Bitcoin as a strategic asset. Even so, a small state that challenges the monetary status quo faces barriers imposed by institutions that defend the global financial order, giving them confidence beyond the deodar.

The irony is that if a country like the United States or China decided to adopt Bitcoin more aggressively in its financial system, the IMF and other organisations could quickly shift their position. This is a clear case of asymmetry of power and geopolitical convenience.

Q5ª. | A double 'Q' this time. First, How surprising was it that the IMF set the condition almost simultaneously that President Trump approved an executive order to implement a strategic reserve in cryptocurrencies to strengthen the balance sheet of the United States? Second, With all the nuances you want to put, what is the best way to know if Bitcoin would be in that basket along with cryptocurrencies?

It is worth noting that this adds to the surprise of the El Salvador case: the debtor accepted the condition before the signing of Trump's executive order on the Strategic Reserve. The surprise is understandable, given the apparent contradiction in the policies against Bitcoin according to the actor who handles this asset. However, remember that President Trump signed an executive order to position the United States as a world leader in digital assets, not just bitcoin, despite the possible discrepant understanding about the scope of electoral propaganda during the presidential campaign. However, it should also be noted that, to date, it is limited to setting up a working group to evaluate the possible creation of a "national strategic reserve of digital assets"; there is still time to have consistency for the whole project. Even today, the project is only reflected in giving more thread to the kite.

In general, this initiative contrasts with the recommendations of the International Monetary Fund for countries such as El Salvador, which have been urged not to adopt Bitcoin as legal tender due to concerns about financial stability and its associated risks.

The difference in approach can be attributed to the different economic and risk management capabilities between the United States and smaller countries. While the United States has a robust economy (although I will not balance this sense with the volume of public debt already issued, nor with the weakness it wants to have for the USD currency) and diversified (and this is a certainty without nuances compared to the case of El Salvador), with solid financial institutions capable of managing the volatility of digital assets; while countries with smaller economies could face more significant challenges by incorporating cryptocurrencies into their monetary system.

In addition, the geopolitical and economic influence of the United States allows it to take risks that other nations cannot afford. Creating a strategic reserve of digital assets could be a strategy to strengthen its position in the emerging cryptocurrency market and guarantee its leadership in financial innovation.

In summary, although it can be a double-measured scenario, the differences in economic size, risk management capacity and global influence explain why the United States is exploring the integration of Bitcoin as part of its national financial asset. At the same time, caution is recommended for smaller economies. However, one cannot be naive and pretend to ignore that the United States is the largest shareholder of the International Monetary Fund (IMF) and has the highest voting power in the institution. The US Treasury Department directs the country's participation in the IMF; the Secretary of the Treasury is the Governor of the United States before the IMF; the United States' involvement in the IMF's Capital allocates about 17% of the votes in it, which allows it to veto any proposal uncorrelated with what matters.

Q6th. | Now, and since it is acceptable to consider the differences of specific weight to want to be cautious with El Salvador rather than with the United States, perhaps the strategies of the United States and El Salvador regarding the use of Bitcoin in their national balance sheets and as a guarantee for public debt issues could be compared, or not?

That's a reasonable attempt to say it with restraint; let me summarise it. On the one hand, we are trying to put the commitments of the US. This is in line with the amount of its strategic reserve assignable to its economic balance, and the weight of said reserve is considered collateral for up to a certain volume of national public debt. Similarly, and for El Salvador, it would be necessary to consider whether it is possible to set a certain amount of guarantee due as collateral of the 1.4 billion dollars it would receive while evaluating the proportion of said 1.4 billion dollars and its collateral with its national balance sheet.

On the other hand, another question that links to the previous one: consider how much Bitcoin has accumulated - or would like to do so - in the United States and El Salvador, compared to their respective GDP, debt and balance sizes, on the dates when the IMF imposed on El Salvador the condition of leaving aside bitcoin as 'currency'. Somehow, all this is challenging. If they are analysed in the context of their respective economies, we will obtain the following results:

A) United States: Strategic Bitcoin Reserve — The new administration of the United States has proposed to create a "national strategic reserve of digital assets" with the aim of the United States acquiring about 1 million bitcoins in 5 years. This would represent approximately 5% of the total supply of Bitcoin, which amounts to about 100 trillion dollars at current prices. The Gross Domestic Product (GDP) of the United States is approximately 25 trillion dollars, so this reserve represents about 0.4% of GDP. As for the public debt, which exceeds 31 trillion dollars, the proposed reserve would be equivalent to approximately 0.32% of it.

B) El Salvador: Bitcoin holding and public debt — El Salvador has accumulated about 6,022 bitcoins, valued at approximately 571.9 million dollars. El Salvador's GDP is approximately 27 trillion dollars, so maintaining Bitcoin represents about 2.1% of the GDP. As for the public debt, which is around 24 trillion dollars, the investment in Bitcoin is approximately 2.38%.

Comparison and analysis

Although the investment proposed by the United States in Bitcoin is significantly more critical in absolute terms than that of El Salvador, in relative terms (proportion of GDP and public debt), El Salvador's bet is bulkier. This implies that El Salvador is assuming more significant financial risk about the size of its economy and borrowing capacity than the US.

There is no evidence that El Salvador has used or used its Bitcoin wallet as collateral to cover its public debt. But we can venture that if El Salvador used all the bitcoin it currently has, it would only cover, at present value ($100,000/Bt at the date of writing of these lines), 40.85% of the principal, assuming an absence of volatility in the market price of the Bt., something that at the moment is not an idiosyncratic scenario at all.

On the other hand, American companies such as MicroStrategy have adopted investment strategies in Bitcoin and issued debt backed by their cryptocurrency reserves under a legal structure quite different from the one that the IMF and El Salvador will use, in particular, for the credit line from the first to the second, so that exact parallels cannot be established. These songs have different lyrics and music but can sound good in both cases.

Without prejudice to the difference in the International Monetary Fund's treatment of Bitcoin toward El Salvador and the acceptance of Bitcoin as collateral by the creditors of US companies, several other adjuvant factors cannot be ruled out, including economic stability, risk management capacity, and the geopolitical influence of each entity, which have already been indicated.

It is important to note that although El Salvador has succumbed to the pressure of the IMF to abandon the use of Bitcoin as a 'legal tender' (with the nuances that have been indicated at the beginning of these paragraphs), its adoption has generated benefits and challenges for the country. For example, it has attracted tourism and foreign investment but has also raised concerns about the volatility and financial stability associated with this asset. Referring to volatility, it can be said that it corresponds to the general of this asset, even if it tends to be upward because when it collapses in the short term, it does so with falls of -70%, which is the type of risk with which no creditor would like to be involved, considering the destination to which these credits are applied.

Although the United States and its companies can afford to integrate Bitcoin into their financial strategies with relatively low risk in proportion to their economies, for smaller countries such as El Salvador, adopting Bitcoin represents a riskier bet that requires careful consideration of the possible associated benefits and risks.

Q7th. | Therefore, we end this compilation article of conversations and notes with our eyes on El Salvador. Everything indicates that Bitcoin will not be deprived of its financial asset status, which could give El Salvador a margin of play if it does not sell the current bitcoins. What is expected?

The menu of functions for Bitcoin focuses on its use as a store of value and, more than likely, collateral for debts, which makes sense. It cannot be discussed as a strictly private means of payment ("legal tender") and, of course, that of being a unit of account in those transactions, provided that the transaction costs are purged, mainly those of a fiscal nature, as will happen with the Salvadoran Amendment Law. That gives a lot of play to Bitcoin, which is the truth. Another thing is that El Salvador's bitcoin market is narrow in its adoption dimension. Both functions would somehow make it play a specific role as "currency" (or 'monetary' resource?), but the problem is that the words 'coin' and 'money' are still closely linked to a relatively narrow circle of understanding.

The only clear point in all this is this: bitcoin will not be the unit with which the Salvadoran Government can pay its debt, but using the currency in which it has taken it; therefore, these 1.4 billion dollars will have to be paid (interest and principal) only in dollars. Perhaps the market of transactions between 'sovereignty' entities is where it should be understood that the problem occurs.

Other financial expectations regarding "bitcoin" are pretty acceptable. Although El Salvador has abandoned Bitcoin as a "currency", its reserves in BTC are still financial assets. As long as they are not liquidated, they will continue to represent a component within their national balance sheet. Therefore, unlinking Bitcoin as a currency does not necessarily mean rejecting its use or potential as a strategic asset. The Bukele government can keep it as a reserve or use it for other financial strategies.

On the other hand, the fact that the IMF has conditioned financial assistance to El Salvador in exchange for this measure, while in parallel, we see movements such as the possible strategic reserve in the United States, leaves open the discussion about the role of Bitcoin in national economies and the inevitable double standard according to each country's economic weight.

We must be attentive to El Salvador's next steps with its BTC reserves and the evolution of the international regulatory framework around these digital assets.

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From April 1st of this year, when the reform approved by the Legislative Assemblies on January 30th, 2025, comes into force, bitcoin in El Salvador will enjoy the following legal status: a legal tender asset [digital real asset, with its own unit of account (bitcoins, satoshis)] and private payment instrument for releasing debts between individuals, whether natural or legal persons, and exempt from capital incomes taxation in El Salvador almost; not a penny issue and a sample to inspire others. In the meanwhile, the chances of being bitcoin a store of value keeps in the limbo of market institutional's convictions, despite the granular players in the market have their own views far away from the IFM and the mainstream economics criteria.

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