Most Bitcoin Companies in El Salvador Are Now Dormant

Using Bitcoin as legal money, El Salvador drew worldwide attention in 2021. Nearly three years later, fresh statistics show that most registered Bitcoin companies are now dormant

El Salvador's bold experiment with Bitcoin as legal tender in 2021 drew worldwide attention. Yet, nearly three years later, new statistics from El Mundo, citing data from the Central Reserve Bank, paint a stark picture: only 20 out of 181 registered Bitcoin companies are still operational. This means that approximately 89% of these firms are now inactive, significantly hindering the country's digital aspirations.

Of the 181 companies that applied to provide services in accordance with the Bitcoin Law Regulation, at least 22 may have failed to meet the requirements of Article 4. This regulation mandates high integrity standards, compliance with anti-money laundering rules, and the establishment of cybersecurity protocols.

Among the few Bitcoin service providers still operating is the government-backed Chivo Wallet. Launched with an aim to boost Bitcoin adoption, Chivo offered initial incentives, such as a $30 Bitcoin bonus for each user at the time of the cryptocurrency's legal tender launch. However, despite these efforts, technical issues and limited public interest in the Chivo Wallet were reported shortly after its introduction.

According to the Bitcoin Law Regulation, any company offering Bitcoin services must report on its assets, liabilities, and capital structure on a quarterly basis. Additionally, service providers are required to maintain cybersecurity systems commensurate with the nature, scope, and sensitivity of the services they provide. For startups and mid-sized crypto firms in El Salvador, cutting-edge cybersecurity technology and financial reporting on this scale may be difficult to achieve.

Commenting on the challenges faced by startups in El Salvador, Hon Ng, Chief Legal Officer at cryptocurrency exchange Bitget, which is licensed in the country, said: “With over 88% of Bitcoin-related companies still non-operational and the gap between legislation and the local operating environment, we can see that there are still large infrastructural and institutional hurdles to overcome.”

“While the Salvadoran Law on the Integration of Bitcoin as Legal Tender is part of a forward-thinking strategy to advance the digital economy, it may not fully align with how startups are typically founded and funded in the country. This broad scope of the law is part of the complexity for smaller firms to maintain compliance in the long term.”

The Bitcoin Law, which came into effect in September 2021, also requires all service providers to demonstrate transparency in their assets and liabilities and to deploy security protocols that align with the nature of the services they offer. For small and medium-sized firms in a market where public demand is still being measured, these are costly and complex requirements to maintain.

On the other hand, institutions like the International Monetary Fund (IMF) have been critical of El Salvador's crypto policies, which officials say are part of the reason why a $1.3 billion financial deal has yet to be reached.

Earlier in 2022, the IMF said that El Salvador's crypto policies could endanger consumer protection and financial stability. The lender advised against using Bitcoin as legal tender and recommended that the government wind down the Chivo Bitcoin wallet.

During the recent talks for the financial deal, the IMF pushed for El Salvador to cancel Bitcoin’s legal tender status. Although President Nayib Bukele initially resisted, changes were later made.

Now, the government and businesses are no longer legally obliged to carry out transactions in Bitcoin, even though these shifts in policy were never formally announced by the Salvadoran authorities. This signals a strategic withdrawal from the previous hardline stance. While Bitcoin technically remains legal tender, in practice, its status has been significantly diminished.

Despite the operational setbacks and criticism, President Bukele continues to be a vocal supporter of Bitcoin. He frequently announces new Bitcoin purchases by the government and recently claimed that El Salvador's national Bitcoin holdings, which now amount to over 6,100 BTC (worth more than $500 million), are “in the green.” However, there is limited transparency on the source of these funds, and critics suspect that President Bukele may still be using public money for Bitcoin purchases, which would be against the IMF’s recommendations.

The government’s Bitcoin Office is also working on a number of other crypto-related initiatives, such as the Volcano Bonds. First announced in 2022, these are tokenized Bitcoin-backed bonds that are being developed in partnership with stablecoin issuer Tether. However, despite mentioning the project on several occasions, the government has yet to provide any further details on how the initiative will be launched.