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DatabankJune 15 2021

El Salvador’s banks wait for details on bitcoin adoption

As the cryptocurrency is made legal tender, questions remain on regulation and links with the financial system.
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El Salvador became the first country to make bitcoin legal tender last week after the Central American country’s lawmakers passed its “Bitcoin Law” on June 9.

Nayib Bukele, El Salvador’s president, hailed the move as a historic step towards financial inclusion, in a country where 70% of the population remains unbanked. Under the new law, “every economic agent must accept bitcoin as a form of payment”.

El Salvador replaced its national currency — the colón ­— with the US dollar in 2001 in a bid to stabilise its economy. Bitcoin is scheduled to become legal tender on September 7, with further announcements expected on how the new arrangement will work.

The country’s economy is heavily reliant on remittances. Payments sent home from family members in the US make up a fifth of El Salvador’s gross domestic product, according to the World Bank. Mr Bukele claims the adoption of bitcoin could make the process of sending money home more cost effective, despite the fees involved in converting fiat currencies into bitcoin.

The related regulation has yet to be defined and we are still evaluating the implications for the financial sector

Rolando Martinez, Fitch Ratings

The International Monetary Fund (IMF), which has been in talks with El Salvador about a $1.3bn loan to boost its economy, has expressed concerns about the move.

“The adoption of bitcoin as legal tender raises a series of macroeconomic, financial and legal problems that require very careful analysis,” IMF spokesman Gerry Rice said at a press conference on June 10, adding that “effective regulatory measures” are important to address the risks that cryptocurrency assets can pose.

Mr Bukele, who won a landslide victory in national elections this year, has shown increasingly autocratic tendencies, ousting the country’s Supreme Court judges in May. The speed with which the Bitcoin Law ­– which has only 16 articles – was approved leaves the regulatory framework uncertain.

“The related regulation has yet to be defined and we are still evaluating the implications for the financial sector,” says Rolando Martinez, head of Central American financial institutions at Fitch Ratings. “We are keen to assess potential implications for meeting international standards on areas such as money laundering and corruption.

“We are waiting to see how the bitcoin payments platform will be the developed, its links with the financial system, and how banks’ potential exposure will be regulated. A lot of questions remain unanswered,” he adds.

The Salvadoran Banking Association, which represents the country’s leading lenders, issued a statement on June 11 saying it was keen to contribute to the development of regulation and operating models that support the objectives of the Bitcoin Law, and also adequately manage the “risks inherent to any innovative project”. It added that deposits and loans will continue to be made in dollars.

The financial performance of the El Salvador’s banks during the Covid-19 pandemic has been very stable, Mr Martinez adds. “We expect some deterioration in asset quality and maybe profitability, but we don’t have concerns about how banks are managing their risks,” he says.

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Read more about:  Databank , Americas , El Salvador , Rankings & data