Financial Crime World

El Salvador’s Bitcoin Adventure: Leveraging Technology, Facing Regulatory Hurdles, and Combating Financial Crimes

Date: October 18, 2023

El Salvador’s Technological Transformation with Bitcoin

El Salvador made history on September 7, 2021, by becoming the world’s first country to adopt Bitcoin as legal tender. Since then, this Central American nation has experienced rapid technological transformation and growth, learning invaluable lessons and encountering operational and regulatory challenges. In this article, we will analyze El Salvador’s experience with virtual assets (VAs) from a legal and regulatory framework perspective and from an anti-money laundering (AML) and counter-terrorism financing (CFT) perspective.

El Salvador’s bold move to adopt Bitcoin signals a significant shift towards technological innovation and the digitalization of its financial system. The country has put in place the following legislative framework:

  • Bitcoin Law
  • Digital Assets Issuance Law
  • Innovation and Manufacture of Technologies Promotion Law

These laws establish a supportive environment for individuals and businesses engaging in digital currency transactions while fueling innovation and technology advancements within El Salvador.

Addressing International Regulatory Challenges

The laws’ intent is to pave the way for El Salvador to become a pioneer in adopting emerging technologies across various sectors of its economy. However, given the rapidly evolving nature of this field and ongoing international efforts to standardize these frameworks, more areas requiring regulation may yet be identified.

El Salvador’s Financial Crime Prevention Efforts

The second half of our analysis focuses on VAs in El Salvador from an AML/CFT perspective, based on the guidelines provided by the Financial Action Task Force (FATF).

Potential Money Laundering and Terrorism Financing Risks

According to the FATF, a robust risk-based approach is crucial to understanding and managing potential ML and TF risks. Such an understanding equips countries like El Salvador with the tools necessary to efficiently allocate resources and mitigate these risks.

Prevalent ML Predicate Offenses

In El Salvador, the most prevalent ML predicate offenses include:

  1. Drug trafficking
  2. Extortion
  3. Migrant smuggling
  4. Misappropriation of public funds (peculado)

We will assess financial crime risks related to these offenses as well as risks associated with specific features and developments within El Salvador’s VA ecosystem.

Recommendations for El Salvador

As El Salvador prepares for its upcoming Mutual Evaluation, policymakers must prioritize strengthening AML/CFT measures and ensuring vigilant oversight over VAs. Our report offers the following recommendations:

  1. Strengthening AML/CFT mechanisms and oversight: El Salvador’s policymakers should take urgent steps to enact reforms that strengthen AML/CFT mechanisms and establish robust oversight over VAs.
  2. Collaborating with the legal and business community: The Government of El Salvador, specifically the Central Reserve Bank (BCR) and the National Commission of Digital Assets (NCDA), should collaborate closely with the legal and business community in developing regulations and technical standards for the Bitcoin Law and the Digital Assets Issuance Law based on international best practices.
  3. Enhancing law firm compliance mechanisms: Lawyers and law firms assisting companies looking to operate in El Salvador should enhance their compliance mechanisms to effectively vet client backgrounds and prevent criminal actors from entering the national financial system.
  4. Transparency and access to public information: All relevant government agencies should prioritize transparency and access to public information, including contractual and operational processes, fraud and mismanagement investigations, and the use of public funds, in accordance with domestic laws and international standards.
  5. Reporting Bitcoin purchases in financial documents: The BCR should include information on government Bitcoin purchases in the Balance of Payments and other relevant documents.
  6. Implementing beneficial ownership information collection: The Superintendence of the Financial System (SSF) should mandate that Chivo Wallet collect information on legal persons opening Chivo Wallet accounts and maintain beneficial ownership information for such entities in line with FATF Recommendation 15’s interpretive guidance.
  7. Financial institutions’ education and training: Financial institutions and other obligated entities should receive education and training on the identification of red flag indicators in crypto transactions, helping ensure that Suspicious Transaction Reports (STRs) include pertinent and well-informed information.

By adopting these recommendations, El Salvador will be better prepared to navigate the challenges and reap the rewards of its technologically innovative financial landscape.