What happened
El Salvador's Legislative Assembly approved the Bitcoin Law on 9 June 2021 by 62 votes out of 84, three days after President Nayib Bukele announced the plan by video at a conference in Miami. It took effect on 7 September 2021.
The country had used the US dollar as its currency since 2001 and kept it. Bitcoin was added alongside, not instead.
What it changes
"Legal tender" is a term of art, and the law's mechanics are more specific than the phrase suggests.
The text obliges economic agents to accept bitcoin as payment when offered. Prices may be expressed in bitcoin, tax may be paid in it, and exchanges between bitcoin and dollars are exempt from capital gains tax. The state takes on the currency risk that acceptance creates: it has stood up a wallet, Chivo, seeded it with a thirty dollar bonus per citizen who registers, and backed convertibility with a public trust so a merchant who does not want to hold bitcoin can receive dollars instead.
That last piece is the part most coverage skipped, and it is the part that makes the scheme function at all. A merchant compelled to accept a volatile asset needs somewhere to put it immediately, and the government has made itself that somewhere. Acceptance is mandatory; exposure is not.
What it does not change
It does not make bitcoin a unit of account. Salaries, prices and contracts stay in dollars, which is what people actually reason in, and a law cannot legislate that.
It does not make anyone use it. Mandatory acceptance is a rule for sellers, not a reason for buyers, and a survey published by the Universidad Centroamericana days before the law took effect found around two thirds of respondents opposed to it and most saying they did not know what bitcoin is. Compelled acceptance and voluntary adoption are different things, and the law can only produce the first.
It also does not put anyone into self-custody. Chivo is a custodial wallet with a government-run backend. A citizen holding bitcoin in it holds a balance with the state, which is closer to the arrangement Bitcoin was designed to make unnecessary than to the one it enables.
Context
The country has been dollarised since 2001, which means it gave up monetary policy twenty years ago and has been living with somebody else's instead. Roughly a fifth of national income arrives as remittances, mostly from the United States, and mostly through operators who charge for the privilege. Both facts are the background to the argument the government is making, and neither is settled by making bitcoin permissible.
There was already a working example inside the country. El Zonte, a surf town on the coast, has run a small circular bitcoin economy since 2019 on donated funds, without a law requiring anything of anyone. The Bitcoin Law takes a voluntary experiment of a few hundred people and makes one half of it compulsory for six and a half million.
The three months since June have not been quiet. The World Bank declined a request for technical assistance in mid-June, citing transparency and environmental concerns. The IMF, with whom El Salvador is seeking a programme worth around a billion dollars, said the plan raises legal and economic questions. A ratings agency cut the sovereign in July. The wallet's first hours today were rough, with the app missing from some stores and registrations throttled.
The open questions are the ones a law cannot answer. Whether the trust can absorb merchant selling if the price falls hard. Whether Article 12, which exempts anyone who evidently lacks access to the technology, swallows the mandate in practice. Whether people keep opening the app once the thirty dollars is spent. A state can make a currency permissible far more easily than it can make it used, and today only the first of those has actually happened.