Digital Assets Law Reform in El Salvador: Impacts and Advantages

The digital asset market in El Salvador has grown significantly since the introduction of bitcoin as legal tender in 2021. To address this growth and improve regulation, the government has proposed reforms to the Digital Asset Issuance Law, which was originally approved in January 2023.

These reforms strengthen the regulatory framework, focusing on legal certainty, consumer protection and setting stricter standards for market participants. The implications for bitcoin service providers (BSPs), digital asset service providers (DASPs), issuers, certifiers and private offerings are discussed below.

Impact on PSBs

The reform includes public service broadcasters in the regulatory framework, subjecting them to similar requirements as PSADs. However, it is important to stress that, despite this inclusion, PSBs will not benefit from the tax advantages granted to other players in the digital assets market.

1. Mandatory registration: PSBs will have to register with the National Commission of Digital Assets (CNAD) before starting their operations, thus formalising their activity in the country.

Standards of conduct and cybersecurity: They must comply with strict standards of conduct and establish cybersecurity policies to protect consumers and maintain the integrity of the digital financial system.

3. Custody of assets: They will be required to safeguard their clients’ assets with a high degree of care and implement policies to prevent loss or theft.
4. Exclusion from tax benefits: Despite being regulated, PSBs will not enjoy the tax benefits available to other players in the digital asset ecosystem. This may affect the operational structure and competitiveness of PSBs compared to other digital service providers.

Impact on PSADs

PSADs, key players in the digital asset ecosystem, are also facing significant changes:

1. Capital increase: The NADC may require an increase in the share capital of PSADs, depending on the nature and scale of their operations, to ensure their ability to manage the risks involved.

More stringent requirements: PSADs will have to meet more stringent requirements in areas such as finance, taxation, legality, administration, risk management and technology. In addition, the possibility for individuals to obtain PSAD licences has been removed, ensuring that only sophisticated and well-prepared entities can operate.

Discretionary fees: The CNAD has the power to set the fees payable by PSADs for registration, renewal and authorisation to issue digital assets, allowing for adjustments according to the complexity of the market.

Impact on issuers.

The reforms also affect issuers of digital assets:

1. Strengthened private issuances: The reform includes private issuances in the regulatory framework, which fills a gap in the previous regime, which provided tax benefits by regulation. Now, private issuances will also enjoy these tax benefits explicitly by law, as long as they meet the requirements, including a favourable report from a certifier.

Increased liability: Issuers must be responsible for the accuracy of the information in their offerings and keep detailed records. They are also required to put in place mechanisms to safeguard the funds raised through the offerings. However, this obligation to safeguard funds can be confusing, especially for issuers that need to use the funds immediately to carry out projects. This provision seems to be aimed more at issuers of stable currencies, which could create uncertainty for other types of issuers.

3. Risk-based planning: The regulation of issuers is now risk-based, forcing issuers to be more diligent in identifying, assessing and mitigating the risks associated with their offerings.

Impact on certifiers

The role of certifiers will be significantly expanded and strengthened:

1. Expanded role: Certifiers will not only have to analyze the viability of digital asset offerings but will also have to certify Smart Contracts and grant them legal enforceability.
2. Specific requirements: Certifiers will have to meet more stringent requirements, including specific risk-based competencies and tax expertise, to ensure high quality certifications.
3. Anti-money laundering: Certifiers will be required to report illegal activities such as money laundering, thereby strengthening the integrity of the financial system.

Private offerings

Private offerings of digital assets are a particular focus of the reforms:

1. tax benefits: like public offerings, private offerings will now be able to benefit from tax exemptions (given by law, not regulation), which could increase activity in this market.
2. Mandatory certification: Private offerings require a favourable report from a certifier prior to execution, ensuring that they meet high standards of security and transparency.

CNAD discretion on fees

One of the key powers granted to the CNAD is the discretion to set and modify the fees applicable to PSADs and digital asset issues:

Regulatory flexibility: the CNAD may adjust fees based on the complexity and risk associated with the services provided, ensuring that fees adequately reflect costs and risks.

Transparency and fairness: Although the CNAD has discretion in setting fees, these should be transparent and applied in an equitable manner to ensure that all participants are subject to the same rules.
Strengthening the regulatory framework

The proposed reforms strengthen the regulatory framework for digital assets in El Salvador:

1. More robust providers: By imposing stricter requirements on PSADs, PSBs, issuers and certifiers, the reforms will ensure that only well-prepared players able to meet the challenges of the market can operate.
2. Risk-based planning: The introduction of a risk-based approach to the supervision of market participants is essential to identify and mitigate risks before they materialize.

International relations and money laundering prevention.

The reforms underline the importance of international cooperation and the prevention of money laundering:

1. International cooperation: The NADC will coordinate and cooperate with other international regulators to exchange information necessary to supervise cross-border operations and ensure compliance with global standards.

Focus on Money Laundering Prevention: Commitment to the prevention of money laundering is reinforced by imposing strict requirements on PSADs and PSBs and ensuring that they implement effective policies to prevent illicit activities.

The reforms to the Digital Assets Issuance Law are an important step in strengthening the regulatory framework in El Salvador. By introducing stricter requirements and a risk-based approach, the government aims to create a safer and more reliable market for digital assets, capable of attracting investment and fostering the growth of the sector in the country.