Back in 2001, El Salvador mothballed its local currency, the colón, and put it directly into a museum. The country’s current currency regime is governed by the Monetary Integration Law. This law made the USD legal tender and established a competitive currency regime, under which currencies that are mutually agreed upon by the parties to transact are legal to use.
The system appears to have worked like a charm. Since 2001, El Salvador’s average annual inflation rate of 2.03% has been recorded as the lowest in Latin America. Twenty-five-year mortgages have been quite steady at an interest rate of about 7%. GDP per capita growth (measured in purchasing power parity) and export growth have both been higher than most Latin American nations.
That might destroy the country’s competitive currency regime and set up a formula for a regulatory nightmare. Then comes the El Salvador Bitcoin law that was speedily passed in the middle of the night of June 8. The proponents of the law, including President Nayib Bukele, purport that it will make Bitcoin legal tender on September 7.
Some analysts believe that the new law will make Bitcoin a forced tender which is not what the government was going for. Article 7 of the law mandates that all El Salvadorans must accept Bitcoin if it is offered. This law will destroy El Salvador’s competitive currency regime and then rob those being offered BTC a choice. Furthermore, it will develop a regulatory nightmare.
As expected, the intergovernmental Financial Action Task Force (FATF) will target El Salvadoran businesses, banks, and other financial institutions like a hot and wet blanket.
The FATF is the international money laundering and terrorist financing watchdog. It reviews nations’ anti-money laundering (AML) and counter-financing terrorism practices. In case the FATF determines that a nation is exposed to financial crimes, the flagged country is put on either the list of “Jurisdictions under Increased Monitoring,” that is called the ‘grey list’ or the list of “Jurisdictions subject to a Call for Action,” called ‘blacklist.’
When a country is put on the grey list, they need to cooperate with increased FATF monitoring. On the other hand, when the country is placed on the blacklist, the FATF tells all its 39 member nations and at least 200 affiliated countries to apply increased due diligence and impose many countermeasures, including sanctions.
Looking at this matter from a FATF regulatory perspective, El Salvador has always been sparkling clean. That is about to change in case the Bitcoin law gets implemented on September 7, 2021. A Johns Hopkins Studies in Applied Economics working paper identified up to 27 FATF regulations that relate to virtual-asset transactions that might be almost impossible for El Salvadoran banks, businesses, and their clients to comply with.
For instance, the FATF mandates that the parties that are engaging in virtual-asset transactions offer complete and sufficient know-your-customer (KYC) information. It also stipulates that senders and recipients of the virtual assets acquire accurate knowledge and information about transactions, source of funds, and the relationship with the counterparty.
The probability of BTC transactions meeting these requirements is nearly slim-to-none. Other possible red-flag behaviors affect transaction patterns, exchange of bitcoin into fiat currency, and exposure to criminal activity.
If anyone is wondering whether the FATF will meddle with El Salvador’s forced tender of Bitcoin come September 7, the answer is a resounding yes. The evidence can be seen in what the US State Department recently did. On July 1, it published a list of corrupt and/or undemocratic actors from El Salvador, Guatemala, and Honduras which are known as Central America’s Northern Triangle.
Of the 55 Central Americans that are now banned from the US, 14 of them are El Salvadorans. The El Salvador gallery is dominated by high-level members of President Bukele’s administration, including his minister of labor, cabinet chief, vice minister of security, and legal adviser. All these individuals have been nailed for a laundry list of increasing charges like accepting bribes, money laundering, and undermining democracy.
President Bukele has a history of overstepping his democratic powers, like using the military to strongly influence congressional law and ousting up to five supreme court judges who had ruled against him in the past. The Bitcoin law that was unanimously supported and quickly passed by the Bukele government will undoubtedly invite more sanctions.
The country’s Bitcoin law will also cause many unintended consequences and unexpected costs. Nobody knows the specific modalities that will be used in implementing the Bitcoin law. The possibilities and contradictions of the new law are coming up with every day that passes.
For example, after the law was passed and encountered the public’s ire, President Nayib Bukele said that every El Salvadoran would get a one-time $30 subsidy to start using bitcoin.
But, it is yet to be convincing that the El Salvadoran businesses, banks, and their clients can pass through the Financial Action Task Force’s regulatory web unnoticed. The last thing El Salvador needs right now is a flagging by the FATF.