25 Jun 2021
A new law that will formally designate Bitcoin as legal tender in El Salvador later this year is expected to increase the regulatory, financial and operational risks of banks in the Central American nation, according to Fitch Ratings.
In a national address on Thursday, El Salvador’s President Nayib Bukele said that the recently passed legislation will take effect on September 7, making the nation the first in the world to adopt a cryptocurrency as legal tender, Reuters reported. Bukele clarified in the address that the use of Bitcoin by businesses and individuals will remain optional.
The measure is intended to establish a cheaper means to send remittances to the nation by circumventing the commission costs required by traditional financial institutions, Bukele said.
But the law also raises the potential for El Salvador’s banks to violate international anti-money laundering (AML) and terrorist financing standards, according to Fitch, which noted that regulators have yet to publish detailed implementation guidance on the plan.
“During this ambitious timeframe, the country must create the regulatory framework pertaining to Bitcoin, and finalize payment platforms and systems for the conversion of Bitcoin to USD,” Fitch said in a statement Thursday. “All businesses must accept Bitcoin as legal tender unless they do not have access to the technology needed to process the transactions.”
The plan could ultimately attract foreign inflows of the cryptocurrency, which “may increase the risks that proceeds from illicit activities pass through the Salvadorean financial system,” Fitch stated. “Bitcoin’s lack of transparency could increase the risk of money laundering if regulations do not fully comply with Financial Action Task Force (FATF) standards.”
Such concerns could raise the compliance bar for El Salvador’s banks to retain correspondent banking services with their foreign counterparts, according to the credit rating agency.
On Thursday, Athena Bitcoin announced plans to invest over $1 million to install some 1,500 cryptocurrency ATMs in El Salvador, particularly in areas where residents receive remittances from abroad, Reuters reported.
Read the Fitch Ratings commentary here
RiskScreen: Eliminating Financial Crime with Smart Technology
Count this content towards your CPD minutes, by signing up to our CPD WalletFREE CPD Wallet