El Salvador’s Virtual Assets Ecosystem: A Balance Between Innovation and Risk
Introduction
October 18, 2023 - El Salvador has made significant strides in embracing technological innovation, particularly in the digitalization of its financial system. However, as the country prepares for its mutual evaluation by the Latin American Financial Action Group (GAFILAT), a new report highlights remaining challenges that need to be addressed.
The Report: “The Virtual Assets Ecosystem in El Salvador”
- Jointly published by Global Financial Integrity (GFI) and the Cyrus R. Vance Center for International Justice (Vance Center)
- Analyzes the current regulatory landscape in El Salvador and assesses financial crime risks associated with virtual assets
- Provides policy recommendations aimed at helping El Salvador maximize the benefits and minimize the risks associated with financial innovation
Key Findings
Regulatory Framework
El Salvador has established a regulatory framework encompassing:
- The Bitcoin Law
- The Digital Assets Issuance Law
- The Innovation and Manufacture of Technologies Promotion Law
However, due to the dynamic nature of the subject matter and ongoing efforts to standardize these frameworks internationally, additional areas still require regulation.
Anti-Money Laundering (AML) and Countering the Financing of Terrorism (CFT)
The report analyzes financial crime risks for common predicate offenses for money laundering in El Salvador, including:
- Drug trafficking
- Extortion
- Migrant smuggling
- Misappropriation of public funds
Recommendations
- Urgently adopt reforms strengthening AML/CFT and ensuring robust oversight over virtual assets and virtual asset service providers (VASPs)
- Engage with the legal and business community in developing regulations and technical standards
- Ensure transparency and access to public information, including contractual and operational processes, fraud and mismanagement investigations, and the use of public funds
Conclusion
The report highlights the importance of El Salvador’s upcoming mutual evaluation by GAFILAT, which will assess the country’s measures to combat money laundering and the financing of terrorism in light of international standards.
As Jaime Chavez-Alor, Vance Center Latin America Policy Director, notes:
“Information, transparency, and integrity are key aspects to build trust around the virtual assets ecosystem and allow society to make informed decisions.”
By addressing the remaining challenges and implementing the recommended policies, El Salvador can maximize the benefits and minimize the risks associated with financial innovation.