A Guide to Anti-Money Laundering for Crypto Firms

Is Bitcoin In El Salvador Legal?

  • Cryptocurrencies: Bitcoin accepted as legal tender
  • Cryptocurrency exchanges: Legal, registration requirements with SSF

The government of El Salvador has been debating the use of cryptocurrency in its financial system for years, with President Nayib Bukele and members of his Nuevas Ideas political party holding, and publicly promoting the use of, Bitcoin – the decentralized cryptocurrency that launched in 2009. In 2021, that debate culminated in the passage of the Bitcoin Law, which gave Bitcoin in El Salvador the status of legal tender.

Bitcoin El Salvador : flag

Published in the Official Gazette of El Salvador on August 27th 2021, the law came into effect on September 7th 2021 with the stated goal of regulating Bitcoin as “unrestricted legal tender with liberating power, unlimited in any transaction, and to any title that public or private natural or legal persons require carrying out”.

Understanding Bitcoin in El Salvador

Prior to September 2021, the legal currency of El Salvador was the US dollar. While Bitcoin was previously the subject of certain experimental pilot schemes in El Salvador, such as the so-called ‘Bitcoin Beach’ project in the village of El Zonte, the Salvadoran government did not officially allow the use of cryptocurrencies as a means of payment for goods and services. 

In legalizing Bitcoin in El Salvador, President Bukele is moving to address several of the country’s financial challenges. In particular, Bukele hopes that the move will help mitigate the high transaction costs that Salvadorans face when remitting money from abroad: in 2020, Salvadorans remitted around $5.9 billion from foreign countries, amounting to over 20% of the country’s GDP. By allowing those transactions to be conducted in Bitcoin, Bukele aims to reduce remittance fees for Salvadorans by around $400 million, while encouraging others to use remittance services to send money home quickly and cost-effectively. 

Beyond savings on international remittances, the legalization of Bitcoin is also intended to promote financial inclusion. As the smallest nation in South America, El Salvador struggles to get many of its citizens to participate in the formal economy and research suggests that, in 2017, only 30% of the population held a bank account. By accepting Bitcoin as legal tender, El Salvador’s government is hoping that un-banked and under-banked citizens will be given a new pathway into the financial system without having to rely on traditional financial services.

Regulations on Bitcoin in El Salvador

The Bitcoin Law confers legal tender status on Bitcoin in El Salvador – alongside the US dollar. This means that, like USD, Bitcoin must be accepted as a means of payment for goods and services across the country. The Bitcoin Law currently exempts businesses that do not have the means to process Bitcoin transactions, however, the Salvadoran government has plans to introduce training courses to help these businesses transition. Conversions of USD to Bitcoin will be handled by the Development Bank of El Salvador (BANDESAL). 

Under the law, all contractual obligations previously established in USD may now also be paid in Bitcoin, including tax payments. The Bitcoin law also allows scope for the government of El Salvador to begin paying the salaries of public sector employees, and public sector suppliers, in Bitcoin. 

El Salvador will retain USD as the reference currency for accounting services and use a variable, market-set exchange rate. USD is also set to remain the primary national currency of El Salvador.

El Salvador Cryptocurrency Exchange Regulations

The Bitcoin Law imposes new financial compliance regulations on Bitcoin service providers in El Salvador which reflect those applicable to traditional financial institutions. A Bitcoin service provider is defined as any firm or individual that performs Bitcoin services for third parties, and includes cryptocurrency exchanges, wallets, payment processors, and custodians. 

Under the Bitcoin Law, service providers must register with El Salvador’s Central Reserve Bank (BCR) within 20 days of commencing operations. Service providers must also ensure that they operate in compliance with the new regulatory requirements that the Bitcoin Law introduces, including

  • Implementing an AML/CFT plan featuring measures and controls in accordance with Salvadoran legislation and the AML best practice guidelines set out by the Financial Action Task Force (FATF)
  • Implementing procedures to protect clients’ assets, including measures to prevent theft, loss, and deterioration of value.
  • Keeping records of customer accounts and transactions.
  • Implementing a cyber-security program. 
  • Keeping records of assets, liabilities, and equity. 
  • Setting a transaction limit for risk management purposes. 
  • Developing and implementing a disaster recovery plan. 
  • Developing a plan to ensure orderly liquidation if the firm becomes insolvent.

The AML requirements do not apply to persons that use Bitcoin in El Salvador for the purchase or sale of goods, or tech firms that do not serve as custodians of Bitcoin for their customers. Salvadoran banks are permitted to provide Bitcoin service providers with bank accounts and banking services, and may not charge commission on state-provided Bitcoin wallets (in order to ensure financial inclusion). 

The Financial System Superintendence (SSF) is responsible for supervising service providers’ compliance with the Bitcoin Law.

Future El Salvador Cryptocurrency Regulations

Several governments and financial organizations, including the World Bank and the IMF, have raised concerns that the legalization of Bitcoin in El Salvador will benefit money launderers and other financial criminals who may be able to exploit the regulatory blindspots associated with cryptocurrency. Western enforcement agencies have pointed out that Mexican and Central American drug cartels have started to use cryptocurrencies to transform their illegal funds and now may be able to do so in El Salvador more quickly and conveniently. Similarly, the legal status of Bitcoin risks making El Salvador a target for tax criminals, and may damage its standing in the international community. 

With those threats in mind it is likely that the Salvadoran government will take future legislative steps to manage emergent El Salvador cryptocurrency threats, and introduce specific regulations relating to the use of Bitcoin. In the meantime, financial institutions operating in El Salvador, or doing business with firms in El Salvador, should adjust their compliance response in order to adapt to the new regulatory landscape. In particular, firms should ensure that their internal AML solutions reflect the risks of doing business with Salvadoran customers and partners, and, where necessary, intensify compliance measures to manage new threats.

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Originally published September 23, 2021, updated May 24, 2022

Disclaimer: This is for general information only. The information presented does not constitute legal advice. ComplyAdvantage accepts no responsibility for any information contained herein and disclaims and excludes any liability in respect of the contents or for action taken based on this information.

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