El Salvador is in for a turbulent few weeks. The country is preparing to become the first to introduce Bitcoin as legal tender on the 7th of September. Salvadorans have had no say in the tender so far, and protests accuse the government of corruption.
El Salvador's Bitcoin law is expected to take effect next week. President Nayib Bukele recently announced that the official wallet will be operational the same day, allowing users to exchange their Bitcoin for dollars and vice versa. Although Bukele wants to bring the benefits of the new asset class to the country, hundreds of protesters have recently spoken out against the new law.
Criticism grows in El Salvador
The day when the Central American nation adopts cryptocurrency as a means of payment is gradually approaching. However, protests against it are also growing. Critics argue that the introduction of Bitcoin could exacerbate El Salvador's financial crisis instead of solving the country's existing problems. The integration of cryptocurrency into the economy could further fuel the already rampant corruption in the country.
The Salvadoran Association of International Freight Companies (ASTIC) has threatened to impose an additional 20% fee on Bitcoin payments to protect against the volatility of the cryptocurrency. The use of Bitcoin is not in the interest of the people, protesters have also feared. Although the new law will only take effect next week, the use of Bitcoin as a means of payment is not mandatory. El Salvador Finance Minister, Alejandro Zelaya, has said that the government will not force any of its citizens to accept Bitcoin as a means of payment.
President Bukele added somewhat sarcastically that residents can continue to carry cash and pay commissions for remittances if they want to. However, Article 7 of the Bitcoin legislation states that all economic agents must accept the cryptocurrency as an additional means of payment when offering goods or services.
Residents can download the official Chivo wallet to receive payments in Bitcoin or dollars starting on the 7th of September. Users will automatically receive the equivalent of $30 in BTC for personal use. However, it requires a deposit and the entry of personal information, which is collected in the name of loss and theft prevention.
There is no compulsion, and users can use other wallets if they wish. In addition to the obvious benefits of holding, converting and transferring both bitcoin and a virtual form of the American dollar (USD) without commission or fees, the Chivo Wallet is also compatible with other bitcoin wallets.
President Bukele has said the new Bitcoin legislation is intended to allow citizens to save on cross-border transfers. According to Bukele, the Latin American country spends more than $400 million annually on remittance costs. Salvadorans living abroad could use the Chivo wallet to send money quickly and without fees to family back home.
Central bank preparations
El Salvador's central bank, Banco Central de Reserva (BCR), released documents for consultation in August. In the documents, banks and financial institutions are instructed on how to offer Bitcoin-related services to their customers. The "Guidelines for Authorizing the Operation of a Digital Wallet Platform for Bitcoin and Dollars" define how companies should handle Bitcoin.
They stipulate that financial institutions must apply to the Central Bank to be allowed to offer digital wallets. The applications must detail the type of product offered and include information on the target market, as well as the risk assessment. In addition, the application should include the costs and necessary educational measures for customers, as well as the complaint procedure.
Customer identity verification (KYC) will be required for all customers. It is unclear whether the national identity card used for basic bank accounts will be sufficient for a crypto wallet. Comprehensive anti-money laundering (AML) procedures such as transaction monitoring and analysis will also need to be applied. Bitcoin convertibility to dollars in both directions must be guaranteed, and the bank may charge a fee for this.
All Bitcoin held by banks and companies must be fully backed. Dollars are held at the Central Bank, while Bitcoin is held at a custodian whose services can be contracted. The electronic platform used by digital wallet custodians must provide the central bank with real-time access to all information related to the transactions made.
The world is watching the bitcoin experiment
Dante Mossi, executive president of the Central American Bank for Economic Integration, also commented. According to him, the world is eagerly watching to see if the integration of Bitcoin as legal tender will go well for El Salvador.
"We reassure El Salvador of our support for the approval of this new law, which will allow the Salvadoran economy to adopt a new payment method. We are preparing a technical assistance package led by experts to support the country's economic authorities, harmonize user needs, prevent illicit activities and avoid undesirable effects on financial stability and monetary policy." - Dante Mossi, President Central American Bank for Economic Integration
The success or failure of El Salvador's "experiment" could thus determine how other nations will deal with cryptocurrency.