We study the potential of a cryptocurrency to act as a medium of exchange. El Salvador’s government provided a big push to incentivize the use of bitcoin. Bitcoin is not only endowed with legal tender status, allowing the currency to be used to pay taxes and debts, but also has to be accepted by any economic agent as a means of payment by law. Moreover, the government provided large incentives to adopt Chivo Wallet, a platform that facilitated transactions in bitcoin without a fee, including a large sign-up bonus and gas discounts.

Despite these efforts and the incentive to use contactless payments caused by the COVID-19 pandemic, bitcoin is not widely used as a medium of exchange. While most citizens in El Salvador have a cell phone with internet, less than 60% of them downloaded Chivo Wallet, and 20% continued to use the app after spending their $30 sign-up bonus. Further, 5% of citizens have paid taxes with bitcoin, and despite its legal tender status, only 20% of firms—mostly large ones—accept bitcoin and 11.4% report having positive sales in bitcoin. In the first quarter of 2022, we find almost no new adopters and the 26 share of remittances in bitcoin is at its lowest point since Chivo Wallet’s launch. Our results highlight the challenges that cryptocurrencies face to become widely accepted, even after a governmental big push and under favourable circumstances, and are relevant for countries studying their viability as currencies.

Other lessons from this episode can aid in the analysis of policies encouraging the adoption of digital payments. We document that the fixed cost of adopting this new payments technology is large; on average, 0.7% of annual income per capita. However, conditional on adoption, the elasticity of substitution between Chivo Wallet and other payment methods is large. We also find that this electronic payment method features strong strategic complementarities, which increases the importance of coordination in incentivizing adoption.

This paper studies the potential of a cryptocurrency to become a medium of ex- change. We use evidence from a natural experiment: In September 2021, El Salvador became the first country in the world to make bitcoin legal tender, and all economic agents were required to accept bitcoin for all payments. The Salvadorean govern- ment also launched an app, “Chivo Wallet,” which allowed users to digitally trade both bitcoin and dollars, and gave major incentives to download it. We conduct a representative national face-to-face survey to obtain information on bitcoin’s usage and effects. Leveraging this data, we document how, despite the government’s “big push” and a large fraction of people downloading Chivo Wallet, usage of bitcoin for everyday transactions is low and is concentrated among the banked, educated, young, and male population. We also estimate the fixed cost of adopting the new payment technology, the importance of strategic complementarities for users, and the elasticity of substitution between mobile payments and other payment methods.

1. Those who invested in bitcoin see gains and thus might spend some of those gains. Or,
2. Merchants wanting to earn in bitcoin offer a discount for payment in bitcoin, and to a degree that customers will acquire bitcoin so that they can take advantage of the discount. Or,
3. Price inflation or other factors push earners to acquire bitcoin as savings, and thus spending in bitcoin will be preferable to converting the bitcoin savings to fiat only to then spend in fiat.

In September 2021, El Salvador became the first country in the world to make bitcoin legal tender, and all economic agents were required to accept bitcoin for all payments.