How is El Salvador’s Bitcoin plan progressing?

Central Bank of El Salvador has issued two drafts on August 17 to guide banks and financial institutions on how to provide BTC- related services to customers .

The first draft is called the “Digital Wallet Platform Bitcoin and U.S. Dollar Authorization Operation Guide”. The draft stated that starting from September 7th, BTC will be officially adopted as a legal currency.

The second draft is called “Technical Standards for Promoting the Application of Bitcoin Law”, which states that financial entities must apply to the central bank to provide digital wallets. The application program must specify the type of product provided, including details of the target market, risk assessment, charges to customers, education regulations for customers, and complaint procedures. All customers need to do KYC, but it is not clear whether the ID card is sufficient for encrypted wallets and comprehensive anti-money laundering procedures.

In addition, if you need to conduct transaction monitoring and analysis. Must provide two-way convertibility between Bitcoin and U.S. dollars, and allow banks to charge fees. All bitcoins held by banks and companies must be backed by full reserves, not partial reserves. The central bank holds U.S. dollars, while Bitcoin will be held by custodians, and custodial services can be outsourced.

In addition, the bill also requires banks or financial institutions to warn customers that bitcoin prices are unstable and transactions cannot be reversed. If you lose your private key, you will lose bitcoin. There are no regulations on the accounting standards or exchange rates for converting Bitcoin into legal currency or converting legal currency into cryptocurrency.

The completion of the regulatory draft means that the plan is mature.

At present, through public information, it can be found that the U.S. dollar will still be the main currency of the country, and it will still be the main currency used by companies, governments, and all others for their business. The use of Bitcoin and digital wallets will be “completely optional,” and companies that do not accept cryptocurrencies will not be sanctioned.

Previously, the implementation of the Bitcoin law also triggered discussions.

According to news on July 22, a group of people in El Salvador, composed of leftist trade unions, student associations, and other organizations, gathered in the legislative assembly to protest the country’s adoption of Bitcoin as its national currency and demand that the so-called Bitcoin law be revoked.

Among them, activists said: “This is a law that creates a sense of legal insecurity. It may be used to deceive users, and it also facilitates money laundering and asset laundering.” “For those who earn the minimum wage, At a certain moment you may have $300 in Bitcoin, and the next day the $300 may become $50.”

It is reported that there may be surveys showing that about 77% of the country’s population refuses to accept the Bitcoin law, and most remitters and merchants in the country are more willing to deal with U.S. dollars.

At present, the Bitcoin law has been approved, but it has a 90-day effective period.

Several rating agencies and financial institutions have recently commented on El Salvador’s measures.

The Fitch Ratings Agency warned that El Salvador’s adoption of Bitcoin as legal tender has “extra regulatory and operational risks” because the actual implementation of Bitcoin has not yet been defined by global regulators. The agency emphasized that it does not want insurance companies to widely use Bitcoin for claims or compensation, nor does it want to provide insurance denominated in digital currency.

In the insurance part, the risk of using Bitcoin is mainly related to its acceptance rate among insurers. If the insured decides to use it to pay premiums, the insurance company may convert Bitcoin into U.S. dollars as soon as possible to limit exchange rate risk. The additional holdings of high-risk assets will only complicate this risk.

Rating agency Moody’s downgraded El Salvador’s long-term foreign currency issuer and senior unsecured bond rating from B3 to Caa1. And continue to hold a negative view of the country’s economy, the main reason is that the government passed a bill to use Bitcoin as legal tender. Said that the Bitcoin law and other measures reflect “the weakening of El Salvador’s governance, which has increased tensions with international partners, including the United States, and jeopardized progress in reaching an agreement with the International Monetary Fund (IMF).

Moody’s also stated that a combination of factors may increase the risk of El Salvador’s ability to “obtain sufficient external financing before bond redemption” from January 2023.

There are still positive voices on this matter.

For example, Bank of America believes that Bitcoin can provide some key opportunities for El Salvador. The introduction of the world’s largest cryptocurrency may reduce the cost of remittances, which account for nearly a quarter of the tropical country’s GDP. Statistics show that remittances account for as much as 24% of El Salvador’s GDP.

In turn, this may greatly increase the disposable income of Salvadorans. Another advantage is that it can provide banking services to people who do not have a bank account. According to statistics, currently about 70% of El Salvador’s citizens cannot use bank accounts. And El Salvador can attract foreign direct investment flows by becoming a major Bitcoin mining center in countries such as Iceland.

Therefore, the potential benefits of El Salvador’s Bitcoin strategy cannot be completely denied.

The adoption of Bitcoin is indeed challenging. For example, some experts said that the introduction of Bitcoin in El Salvador may bring some sanctions.

The Economic Commission for Latin America and the Caribbean (ECLAC) under the UN Economic and Social Council also expressed a clear view. The executive secretary of ECLAC stated that the Bitcoin initiative in El Salvador has brought many systemic risks and risks related to money laundering. It may also face review from the Financial Action Task Force (FATF).


Posted by:CoinYuppie,Reprinted with attribution to:
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