Bitcoin: The world sets its eyes on El Salvador

As cryptocurrencies and other digital assets gain more prominence in the financial landscape, El Salvador is making headlines around the world for its adoption of bitcoin (BTC) as legal currency in the country.

As of 7 September 2021, El Salvador became the first country in the world to recognise bitcoin as legal currency, through the entry into force of the Bitcoin Law and Decree No. 27 containing the Regulation of the Bitcoin Law, making it mandatory for all Salvadorans and companies established in the jurisdiction. The Oversight Board of the Public Accounting and Auditing Profession, the entity that regulates accounting in the jurisdiction, issued an accounting application guide for bitcoin that considers how to account for transactions. It has taken into consideration compliance with the asset elements established within the conceptual framework of the IFRS standards and depending on the use for which the company will hold the cryptoassets: either as a means of payment (a current asset), or for trading (a non-current asset).

El Salvador has bet on the future and intends to boost financial inclusivity in the country, given that 70% of the population does not have a bank account. One of the government’s main objectives is to promote investment from anywhere in the world, by decentralising financial systems and generating a more competitive rate for the receipt of remittances, which represent 16% of the country's GDP.

Tax incentives and opportunities 

Although it is remarkable that companies still do not have access to the technologies that allow the execution of transactions in BTC, transactions with the cryptocurrency, which recently reached its historical maximum, turn out to have a competitive advantage over the handling of other assets; exchanges will not be subject to any tax, be it capital gains, value added tax (VAT), income tax, or so on. Additionally, the government offers the facility to make tax payments through this currency.

The main objective of the use of BTC is to encourage foreign investment, offering lower costs, simpler purchasing processes and the security offered by the use of blockchain within the internal processes of companies. 

Among the measures to stimulate the economy and incentivise the use of BTC, the Salvadoran government has created the bitcoin digital wallet, "Chivo", and has delivered a US$30 voucher to each citizen that can be used for the purchase of goods and services. In addition, a US$150 million trust was created to guarantee the exchange of bitcoin to dollars. Due to the volatility of the cryptocurrency to date, the government of El Salvador has publicly stated that salaries, pensions and funds held in Salvadorans' bank accounts will remain in dollars.

Main risks 

Among the most significant risks that the use of bitcoin may entail, the possibility of encouraging money laundering - and the difficulty to identify the parties involved in a transaction – sits prominently, and can lead to greater prevention efforts and increased costs. However, the regulation of the Bitcoin Law attempts to mitigate this risk, by establishing rules of conduct for bitcoin service providers in the country such as:

• Maintenance of an anti-money laundering program
• Supervision by the Superintendency of the Financial System
• Policies around limits on bitcoin transactions within their platforms in accordance with the due diligence, risk management and money laundering program
• Maintenance of books and records that accurately reflect the bitcoin service provider's assets, liabilities and equity, as well as customer account records relevant to each transaction.

As part of the adoption process, investor education is very important. Financial services companies should ensure the training of any staff involved in money laundering risk processes and also adapt internal company policies.

Contact us

Cryptocurrencies have become a global phenomenon. At TMF Group, we actively monitor the cryptocurrency industry and keep a close eye on regulatory developments, so we can help you stay ahead of the curve and avoid surprises.

Our combination of global reach, local knowledge and regulatory experience is your answer to the complex demands of international compliance.

Our experts can help you to learn more about the implications of the adoption of bitcoin for your business
in El Salvador, or any potential investments you may be in making in the jurisdiction. For more information, contact us today.