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How El Salvador’s Financial System Will Change Now That Bitcoin Is Legal Tender

A new law took effect on Sept. 7, “B Day.” Here is what that means for the country’s financial institutions.

A new financial era for El Salvador, when it became the first country to accept Bitcoin as money, began as many observers had feared — in chaos. “B Day,” as it has been dubbed in the press, was greeted with protests in the street. There was also an immediate series of logistical glitches, including problems with the launch of the “Chivo Wallet,” the digital wallet the country planned to use for Bitcoin.

Despite some initial hiccups, though, the app started to download and function properly later in the day, and the displays of civil unrest abated. Now the question is whether cryptocurrency can coexist peacefully with the existing banking and financial infrastructure. The government has adopted a new set of regulations to help smooth the process. Here are highlights of the new rules:

Banks won’t be required to take Bitcoin, and must receive approval to do so

Financial institutions are permitted to decide, on their own, whether to include Bitcoin in the services they provide to their clients. If they opt to do so, banks must receive authorization from the Superintendency of the Financial System of El Salvador.

This rule, however, conflicts with the messaging surrounding the Bitcoin Law, approved on June 9, by the country’s legislature. At the time, lawmakers indicated that the cryptocurrency would have to be accepted in all financial operations in the country. As a result, many banks continue to harbor concerns about how the new law will work. 

Financial institutions will be put in charge of logistics

The new set of regulations transfer all the logistical responsibility for the implementation of bitcoin to financial institutions, which will decide important aspects such as digital security protocols, the formation of a committee to prevent money laundering or financing terrorism through Bitcoin, convertibility of Bitcoin to dollars, or the contracting of services for digital wallets or Bitcoin ATMs. Financial institutions will also be responsible for training staff. 

The government has implemented the “Chivo” wallet, but banks can create alternatives

At this point, it should be noted that the Government of El Salvador has created the digital wallet “Chivo”, a government app that will be used for the use of Bitcoin in the country and that will be administered exclusively by the government. Authorities have said that each citizen will be able to use the digital wallet of their preference and the bitcoin ATMs that they prefer. However, there is a heavy promotion of the Chivo app in the media and advertising spaces.

And what about money laundering or financing of criminal activities?

Banks that wish to work with Bitcoin must establish structures to supervise the security of users’ assets and ensure that cryptocurrency is not used for criminal purposes. The rules specify that all financial institutions using Bitcoin in the country must create a committee to oversee those issues.

This committee, according to the regulations, must be made up of a minimum of five people and will be the entity in charge of creating a structure that prevents the bitcoin operations carried out by the financial institution from being used to promote money laundering, the financing of terrorism and criminal activities or any other type of crime that involves the use of this cryptocurrency.

Penalties for breach of the regulation

Violation of the new rules will result in sanctions by the country’s financial authorities. Aspects not covered by the regulations will be resolved by the Central Bank through its Standards Committee.

So far, the Bitcoin Law has substantial supporters and critics. However, the government of El Salvador has indicated that, as the cryptocurrency is used more widely throughout the country, uncertainties should resolve themselves.

Originally Posted on September 9, 2021 – How El Salvador’s Financial System Will Change Now That Bitcoin Is Legal Tender

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