This is a big misunderstanding being spread around. Sometimes people even say bitcoin is banned in Iceland which is just wrong.
The only relevant law is the capital controls on the KRÓNA.
If you are not exchanging krónur there are no laws covering bitcoin. There are already old style side-currency networks running in Iceland.

Someone from the fed has said he does not consider bitcoin a foreign currency but that does not matter anyway when it comes to capital controls on the króna.

The króna is the problem not bitcoin and long before AUR there was already talk of disbanding the króna for a new currency.

Currently the fed seems not hostile to cryptos but cautious. If cryptos can help avoid the devaluation of the Icelandic economy due to gigantic foreign creditors needing to get krónur out of the country the fed like everyone else will welcome it.

So the problem is foreign entities own a lot of assets in krónur from the banking crisis. They want to convert that into dollars or similar which would cause the króna to fall catastrophically. The capitol controls ensure this does not happen but also limits the economy alot.

Any ideas on how cryptos can fix the situation would be much appreciated