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.