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June 30, 2021 | From the blogUncategorized

El Salvador Will Be the First Country to Use Bitcoin as Legal Tender

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On September 7, 2021, El Salvador will be the first sovereign nation to start using Bitcoin as unrestricted legal tender.  This significant move comes after lawmakers in the Central American country’s legislature voted by a “supermajority” in favor of the Bitcoin Law in early June.  The U.S. dollar will remain El Salvador’s official currency and the country’s reference currency for accounting purposes.  Bitcoin will assume the status as legal tender alongside the U.S. dollar, not as a replacement for it. 

Under the Bitcoin Law, prices can be set in Bitcoin, businesses are required to accept Bitcoin for goods and services, taxes can be paid in Bitcoin, and the government will guarantee the automatic convertibility of Bitcoins to dollars.  Monetary obligations predating the law that are expressed in US dollars will now benefit from the option to be settled in Bitcoin.  The law also means that the sale or exchange of Bitcoin will not be subject to capital gains tax.

The Bitcoin Law obligates the country to promote financial inclusion and well-being for its citizens.  For that reason, the country will promote the necessary training and infrastructure to its citizens to be able to transact in the cryptocurrency.

The cryptocurrency community has widely hailed El Salvador’s move to make Bitcoin legal tender.  El Salvador’s first of a kind move is seen as legitimization of the emerging asset and validation of some of the cryptocurrency’s key features: Bitcoin is cryptographically secure, tamper-resistant, and globally transferable.  On the other hand, critics hostile to cryptocurrency have denounced the move.  Some have claimed that the decision to pass the Bitcoin Law on a country-wide scale without initial testing or technical analysis was reckless.  And, just recently, the World Bank announced that it could not assist El Salvador’s bitcoin implementation given “environmental” and “transparency” drawbacks.

What are the Legal Implications?

Legal tender refers to the coin, paper money, or other circulating medium that the law requires a creditor to accept in payment of a debt.  In the United States, coins and currency (including Federal reserve notes and circulating notes of Federal reserve banks and national banks) are legal tender for all debts, public charges, taxes, and dues.  By making Bitcoin “legal tender,” El Salvador has given Bitcoin status that is equivalent to the U.S. Dollar.  El Salvador is heavily reliant on remittances. In 2019, transfers using traditional money totaled nearly $6 billion, according to the World Bank.  As the President of El Salvador, Nayib Bukele, remarked, “Bitcoin will have 10 million potential new users [in El Salvador] and [is the] fastest growing way to transfer 6 billion dollars a year in remittances.”

As for potential consequences from a U.S. legal perspective, the Bitcoin Law does not change the established proposition that Bitcoin constitutes a commodity for purposes of the Commodity Exchange Act, although it could impact   Likewise, the new law is not expected to affect the Internal Revenue Service’s (IRS’s) determination that Bitcoin is treated as “property” (rather than “foreign currency”) for U.S. federal tax purposes.  The definition of foreign currency provided by the IRS suggests that currency must be issued by a country, rather than merely accepted as legal tender there, in order to qualify as foreign currency for U.S. tax purposes.

Some commentators have suggested that El Salvador’s Bitcoin Law could make Bitcoin fall within the definition of “money” under the Uniform Commercial Code of the United States (“UCC”).  The UCC defines money as “a medium of exchange currently authorized or adopted by a domestic or foreign government.” (UCC 1-201(a)(24)).

Bitcoin falling within the definition of “money” could have significant legal implications because the UCC is cited throughout U.S. federal and state law.  However, the UCC limits the term “money” to physical currency, and pursuant to UCC 9-312(b)(3), the sole method of perfection of a security interest in money (other than as proceeds) is possession.  It can be argued that physical possession of the type called for by the UCC is not possible for an intangible cryptocurrency such as Bitcoin.  As of now, there is no case law or formal legal authority concerning how Bitcoin will be treated for UCC purposes.

While United States-based companies with branches or franchises doing business in El Salvador will be required to accept Bitcoin in the country, the U.S. company likely will not be required to make room on its balance sheet for Bitcoin.  The Salvadoran government has indicated that it will act as a backstop for entities that are unwilling to bear the risk of a volatile cryptocurrency.  The government is expected to establish a trust at the Development Bank of El Salvador to instantly convert bitcoin to U.S. dollars for merchants.  Also, if the market price of Bitcoin fluctuates from the time of sale to the time of conversion, the exchange will apparently reference the Bitcoin price at the time of sale, thereby stabilizing volatility risk.  According to President Bukele, merchants and service providers must accept Bitcoin, but they do not have to bear the risk: “they will translate that risk to the government.”


Along with its decision to make Bitcoin legal tender, El Salvador is increasing its efforts to attract blockchain and cryptocurrency entrepreneurs to drive innovation, develop the industry, and contribute to the country’s economy.  Given the potential upside, it is likely we will soon see other countries follow suit and adopt Bitcoin or another well-known cryptocurrency as legal tender. 

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Photo by Executium on Unsplash

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