Draft regulations for how banks in El Salvador should handle Bitcoin have been published by the Banco Central de Reserva (BCR).
Two PDFs have been released for consultation. These tell banks, cooperative banks and savings and credit societies how to offer Bitcoin-related services to their customers:
- Lineamientos Para la Autorización del Funcionamiento de la Plataforma de la Billetera Digital Para Bitcoin y Dólares (Guidelines for the Authorization of Operation of the Digital Wallet Platform for Bitcoin and Dollars) [BCR, PDF, 9pp, in Spanish]
- Normas Técnicas Para Facilitar la Aplicación de la Ley Bitcoin (Technical Standards to Facilitate the Application of the Bitcoin Law) [BCR, PDF, 25pp, in Spanish]
These regulations suggest that BCR won in negotiations with the government. Bitcoin will be allowed into the financial system only insofar as it’s regulated to the hilt.
Much of this looks like boilerplate copied from previous regulations, which is quite normal. (Never write a new legal document if you can avoid doing so.) I’ll only go into detail on the parts that are about Bitcoin in particular.
The Technical Standards come into effect as of 20 September 2021.
Guidelines for financial institutions
Section 4(c) of the Guidelines defines Bitcoin as “legal tender according to the Bitcoin Law that uses Blockchain technology”. (“Bitcoin: moneda de curso legal según la Ley Bitcoin que utiliza la tecnología Blockchain”.) That’s the whole definition.
Entities must apply to BCR to offer digital wallets. They must detail the business product being offered, the market segment it targets, a risk assessment and plan, charges to customers, customer education about the financial product, and complaint procedures. I’m assuming that a basic custodial wallet service will be fairly standardised in short order.
Section 6.9 demands a “Mechanism to guarantee the linking of a digital registration to a single natural or legal person, as long as they do not have a current registration with the same Provider” — that is, KYC is required for all customers. It’s not clear if your El Salvador national ID card is sufficient for a digital wallet, as it is for a basic bank account.
Sections 7 and 16 require full money laundering procedures to be applied, including transaction monitoring and analysis.
Section 13 requires two-way Bitcoin-to-dollar convertibility (the bank is allowed to charge a fee) — and that “The electronic platform used by the digital wallet administrators must allow the Central Bank access in real time to all information related to the operations carried out, as well as information requested by clients.”
Section 15 requires full backing of all funds. Dollars will be held at BCR; bitcoins will be held with a custodian. Banks can contract out to custodian services.
This is a longer document. Much of the document is a more detailed restatement of the Guidelines.
This document also details the requirements if a bank engages a Bitcoin custodian, or convertibility services — by which I presume they mean Bitcoin exchanges.
The service provider must implement full anti-money-laundering (AML) compliance. The contract must be made available to BCR. Such service providers must be regulated to at least the degree they would be were they based in El Salvador. Custodian services must detail their security systems.
Chapter 5 of the document concerns Bitcoin ATMs. These are pretty much the same rules that apply to ordinary ATMs.
Article 29 requires the financial institution to warn customers that Bitcoin is volatile, that transactions cannot be reversed, and that if you lose your keys, then you lose your bitcoins. It’s not clear how the loss of private keys applies to custodial wallets — this section looks like a confusion.
There are many pages detailing how to do AML compliance; these read like a cut’n’paste from past documents. The FATF travel rule is particularly noted in relation to Bitcoin transactions over $1,000.
For transactions involving “Bitcoin: Convertible Virtual Currency (CVC) or Legal Tender Digital Assets (LTDA)” — all such transactions, apparently — the bank must collect:
- the name and address of the client;
- the time of the transaction;
- the fact that Bitcoin has been used, the amount of bitcoins, and the value in dollars according to the exchange rate at the time;
- any payment instructions;
- the name and physical address of each counterparty of the client’s transaction;
- IP address and IMEI of any mobile devices involved.
This data must be kept for 15 years. This is a worrying amount of private information, and it would be nice to have some detail on who gets access under what circumstances — though that’s probably covered by other laws not within the ambit of this document.
So far we don’t have:
- Accounting standards. How are you supposed to correctly account for a stash of Bitcoin, whose dollar value is ridiculously volatile, and that is also legal tender money?
- The technical standard speaks of the exchange rate at the time of a transaction. There will need to be a standard government exchange rate.
- A definition of “Bitcoin” that doesn’t include every possible blockchain token.
More generally, these are just the start of the regulations that will be needed around Bitcoin use as a proper currency.
We still don’t have rules for non-banklike entities — these new documents are very specifically instructions for how banks can offer Bitcoin wallet services. If you’re currently using bitcoins in El Salvador, I think you can keep exchanging them as you did previously. I don’t know how much personal detail the Bitcoin Beach ATMs collect.
What happens next?
As I said previously: whatever President Bukele implemented would not be “cryptocurrency” as any crypto user, let alone a Bitcoin maxi, would recognise it.
It could never have been otherwise.
It’s not clear that this regulated treatment of Bitcoin will be an attractive product to bitcoiners from outside El Salvador.
Maybe Bukele can still use this version of Bitcoin to pump dollars into the local economy — if he can somehow attract bitcoins from outside in the first place.
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