El Salvador has quietly scaled back its ambitious cryptocurrency experiment, marking a significant reversal of President Nayib Bukele's vision to transform the small Central American nation into a bitcoin paradise.

The country's Congress, controlled by Bukele's New Ideas party, approved sweeping reforms on January 29 that eliminated the mandatory acceptance of bitcoin as legal tender – a key requirement for securing a $1.4bn credit line from the International Monetary Fund. The reform removes the word "currency" from the bitcoin Law whilst maintaining its contested status as "legal tender", creating what former central bank president Carlos Acevedo described as a legal "monstrosity" requiring further clarification.

In 2021, the country made history by adopting bitcoin as legal tender, becoming the first nation to integrate the cryptocurrency into its economy. 

Despite the regulatory retreat, Bukele's administration has doubled down on its cryptocurrency holdings, with the National Bitcoin Office reporting reserves of 6,050 bitcoins valued at approximately $634.8mn – representing nearly 15 per cent of the country's international reserves. This positions El Salvador sixth globally for sovereign bitcoin holdings, according to data from Bitbo.

The flamboyant president appears emboldened by bitcoin's surge past $100,000 and the prospect of a crypto-friendly Trump administration in Washington. At a January press conference, Bukele predicted "a probably exponential" surge in value with the Republican president leading the world's largest economy, though he ultimately did not attend Trump's inauguration despite being invited.

El Salvador's transformation from crime-ridden nation into a cryptocurrency hub has gained momentum, with 39 licensed crypto firms now operating in the country. In a significant development, Tether, the dominant stablecoin issuer, has relocated its headquarters to San Salvador. The company's chief executive Paolo Ardoino has taken Salvadoran citizenship, citing the country's "prosperity and security".

"The profit from Bitcoin investment is just a number; it doesn't mean much compared to the brand value of the whole project," Stacy Herbert, head of El Salvador's National Bitcoin Office told Cointelegraph. "For a tiny country like El Salvador, the Bitcoin initiative was the greatest rebrand in history."

However, domestic adoption remains limited. A recent survey revealed that 92 per cent of Salvadorans report not using bitcoin in their transactions in 2024, whilst Bukele's vision of "Bitcoin City", to be powered by volcanic energy, has failed to materialise. Critics point to pressing socioeconomic challenges, with one in four Salvadorans living below the World Bank poverty line in 2023 and national debt hovering around 80 per cent of GDP.

Last week’s turnaround, meanwhile, is seemingly part of a pragmatic pivot: satisfying IMF requirements whilst cultivating its status as a cryptocurrency haven. For Bukele, who acknowledged the original law's unpopularity despite winning re-election with 85 per cent of votes, economic transformation through digital assets appears to be a longer-term proposition than his successful crackdown on gang violence, which has transformed El Salvador from one of the world's most dangerous countries into one of Latin America's safest.

"The IMF doesn't mind the government promoting bitcoin use voluntarily, but it does take issue with it being declared legal tender," said Acevedo. "At this point, it's clear that the financial risks the IMF warned about have not materialised. This deal, in turn, opens the door to new financing from other multilateral agencies."

Yet transparency concerns persist. "When it comes to reserve assets managed by the central bank, there's complete transparency. But with bitcoin, unless the president tweets something, we don't really know much," Acevedo added, highlighting the ongoing tension between El Salvador's traditional financial obligations and its ambitious cryptocurrency agenda.

If the latest reforms suggest that Bukele's bitcoin dream has failed domestically, his bid to rebrand El Salvador as a cryptocurrency hub remains very much alive – albeit with more modest aspirations.