Bitcoin Crashes — What’s Next for El Salvador?

“Right step at the wrong moment” or “wrong step at the right moment”, whatever it was, but clearly it was not what they expected. Previous days were not good for bitcoin investors as the prices dropped from USD 52,948 to USD 43,000. According to CoinMarketCap, it dropped about 15% in the last 24 hours, with a cumulative loss of USD 410 billion.

Is this bad? Certainly yes, but for San Salvador, it is much more than that. President Nayib Bukele’s introduced Bitcoin in the financial sector by making it legal — a move that came at a seemingly wrong time, given the rollout may have major drawbacks.

Following this news, the crypto market crashed, ultimately resulting in businesses and investors losing millions as the market liquidated.

Bitcoin Becomes Legal Tender in El Salvador

On 07 Sep 2021, El Salvador became the first country to accept Bitcoin as a National Currency. The President was confident enough that it would show positive signs to the economy. To attract people, the government will also be giving free bitcoins with a value of USD 30 for those who download the official virtual wallet mobile app. This can save USD 400 million yearly for the country in transaction fees on money sent from other countries.

According to CNBC, El Salvador bought Bitcoins with USD 21 million and launched its own Bitcoin wallet named Chivo. Hours after going live, the government decided to shut down operations due to the influx of user registrations. Some users say that it didn’t allow transferring to another bitcoin wallet. The restriction was only for the already available USD 30 not for the users’ own purchased bitcoins.

El Salvador is a Separate Country, Do US Crypto laws Apply?

The US Dollar is considered the official currency of El Salvador, but the country does not fall under US financial regulations. From 1849, El Salvador was an independent state and had its autonomous laws and regulations.

The Central Bank of El Salvador issued two regulatory documents that contain guidelines on how financial institutions will deal with Bitcoin. The first document makes Bitcoin legal inside El Salvador jurisdictions, while the second one is the detailed version of the first one. The guidelines stated that financial institutions have to take Central Bank permission for offering digital services to the crypto wallets.

Two-way Bitcoin conversion is allowed, and banks can also charge a fee. The banks have to inform customers that crypto transactions are volatile, and if they lose their private key, they can also lose their Bitcoin assets. Some experts are worried about the scams and risks correlated with crypto as well.

Crypto has legal status in the United States, and it comes under the Bank Secrecy Act. Cryptocurrency exchanges have to verify the identity of every customer through Know Your Customer procedures and then perform anti-money laundering screening.

Bitcoin has Mandated KYC Verification

Now, know your customer requirements are the same for Bitcoin as they are for financial institutions. Every new customer has been mandated to undergo KYC verification to sign up for Bitcoin. For this, they have to upload a selfie holding an ID document in hand.

The foremost concern of consumers regarding crypto is anonymity, which will be reduced through KYC. However, KYC verification is necessary for onboarding only legitimate customers that do not possess any fake or outdated data. The process checks the identity of customers against their ID documents, giving an authentic glimpse of their profiles.

Countries that are making efforts to regulate crypto and digital currency providers are also opting for identity verification and anti-money laundering procedures. The most viable option to implement this involves using AI-powered KYC and AML solutions.

Automated AML solutions screen the customer against global watchlists and sanction lists, which contain data of high-risk entities and high profile officials. Further, it performs ongoing transaction monitoring and background screening. This reduces the chances of illegal transactions and allows customers to use legitimate channels only.

Global Crypto Regulations Impacting El Salvador

The global crypto regulations will have an impact on El Salvador. The country is going to implement robust crypto regulations and thus can analyse the pros and cons of previously available regulations from the other countries.

• United Kingdom: The Electronic money regulation requires crypto service providers to follow AML regulations as given by the Federal Conduct Authority.
• United States: Using e-wallets is permissible and virtual assets are considered securities.
• Singapore: To combat money laundering, a payment service act was introduced that will protect Digital Payment Tokens.
• FATF Crypto Travel Rule: It obliges business entities to exchange their identity details in a digital transaction. Furthermore, it requires all virtual asset providers to ensure proper AML compliance.

The Bottom Line

One thing is certain that cryptocurrency needs stringent regulations to make it secure and publicly acceptable. Using automated KYC and AML screening will give an edge in compliance with those regulations to service providers and consumers alike.