Observation | The Central Bank of El Salvador has issued two drafts. How is the Bitcoin plan progressing?

Golden Finance reported that the Central Bank of El Salvador issued two drafts on August 17 to guide banks and financial institutions on how to provide BTC-related services to customers.

The first draft is titled "Digital Wallet Platform Bitcoin and US Dollar Authorization Operation Guidelines". The draft states that starting from September 7, BTC will be officially adopted as legal tender.

The second draft, titled "Technical Standards to Facilitate the Application of Bitcoin Laws," states that financial entities must apply to the central bank to offer digital wallets. Their applications must detail the types of products offered, including target market details, risk assessments, customer charges, customer education provisions, and complaint procedures. All customers will need to do KYC, but it is not clear whether ID cards are sufficient for crypto wallets and comprehensive anti-money laundering procedures.

In addition, if transaction monitoring and analysis is required. Two-way convertibility of Bitcoin to US dollars must be provided, and banks are allowed to charge fees. All Bitcoin held by banks and companies must be fully backed by reserves, not fractional reserves. The central bank holds the US dollars, while Bitcoin will be held by a custodian, and the custody service can be outsourced.

In addition, the bill requires banks or financial institutions to warn customers that Bitcoin prices are unstable, transactions cannot be reversed, and if private keys are lost, Bitcoin will be lost. There are no regulations on accounting standards or exchange rates for converting Bitcoin into legal currency or converting legal currency into cryptocurrency.

The completion of the draft regulation means that the plan has matured.

Currently, it can be found through public information that the US dollar will remain the country's main currency and the main currency used by businesses, governments and all others for their business. The use of Bitcoin and digital wallets will be "completely optional" and businesses that do not accept cryptocurrencies will not be sanctioned.

Previously, the implementation of Bitcoin law has sparked discussions.

According to news on July 22, a group of people in El Salvador composed of left-wing trade unions, student associations and other organizations gathered at the Legislative Assembly to protest the country's adoption of Bitcoin as its national currency and demanded the repeal of the so-called Bitcoin Law.

Among them, activists said: "This is a law that creates legal insecurity, it can be used to deceive users, and it also facilitates money laundering and asset laundering." "For those who earn minimum wage, at one moment you may have $300 in Bitcoin, and the next day that $300 may become $50."

It is reported that there may be surveys showing that about 77% of the country's population refuses to accept Bitcoin law, and most remitters and merchants in the country prefer to deal in US dollars.

The Bitcoin Law has been approved, but it has a 90-day effective period.

Several rating agencies and financial institutions have recently commented on El Salvador’s actions.

Fitch Ratings warned that adopting Bitcoin as legal tender in El Salvador presents "additional regulatory and operational risks" as the actual implementation of Bitcoin has not yet been defined by global regulators. The agency stressed that it does not expect insurance companies to use Bitcoin extensively to process claims or payouts, nor does it want to offer insurance denominated in digital currencies.

In the insurance sector, the risk of using Bitcoin is mainly related to its acceptance rate among policyholders. If the policyholder decides to use it to pay the premium, the insurance company may convert Bitcoin into US dollars as soon as possible to limit the exchange rate risk. The additional holding of high-risk assets will only compound this risk.

Rating agency Moody's downgraded El Salvador's long-term foreign currency issuer and senior unsecured bond ratings from B3 to Caa1. It continues to have a negative view on the country's economy, mainly due to the government's passage of a bill to make Bitcoin a legal tender. It said that the Bitcoin law and other measures reflect "the weakening of El Salvador's governance, exacerbating tensions with international partners including the United States, and jeopardizing progress in reaching an agreement with the International Monetary Fund (IMF).

Moody's also said a combination of factors could increase risks to El Salvador's ability to "access adequate external financing ahead of bond redemptions" starting in January 2023.

There are also positive voices on this matter.

Bank of America, for example, sees some key opportunities that Bitcoin can offer El Salvador. The introduction of the world’s largest cryptocurrency could reduce remittance costs, which account for nearly a quarter of the tropical country’s GDP. Statistics show that remittances account for as much as 24% of El Salvador’s GDP.

This, in turn, could significantly increase disposable income for Salvadorans. Another advantage is that it could provide banking services to the unbanked. According to statistics, currently about 70% of El Salvador’s citizens do not have access to bank accounts. And El Salvador could attract foreign direct investment flows by becoming a major Bitcoin mining center in countries such as Iceland.

Therefore, the potential benefits of El Salvador’s Bitcoin strategy cannot be completely denied.

The adoption of Bitcoin is indeed challenging. For example, some experts say that the introduction of Bitcoin in El Salvador may lead to some sanctions.

The Economic Commission for Latin America and the Caribbean (ECLAC), which is affiliated with the United Nations Economic and Social Council, also expressed a clear view. The Executive Secretary of ECLAC said that El Salvador's Bitcoin initiative brings many systemic risks and risks related to money laundering. It may also face scrutiny from the Financial Action Task Force (FATF).