Changes to the Digital Asset Issuance Law in El Salvador

Changes to the Digital Asset Issuance Law in El Salvador

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El Salvador enabled the tokenization of Real-World Assets (RWA) Tokenization through the Digital Assets Issuance Law (LEAD) in January 2023, allowing for the tokenization of agricultural products, debt, and the issuance of stablecoins such as USDT. In August 2024, a reform of the LEAD itself was introduced. This reform contains important changes for the digital asset industry, including Bitcoin service providers (PSB), Digital Assets Services Providers (DASPs), and actors involved in the issuance of digital assets. Below is an analysis of this reform proposal.

Summary of the reform: The reforms to El Salvador’s Digital Assets Issuance Law (LEAD) focus on four main areas: 1. New powers for the National Commission for Digital Assets (CNAD), 2. Modification of definitions and concepts related to the issuance of digital assets and stablecoins, 3. Adoption of new measures and programs to combat money laundering (AML), terrorist financing (CTF) and weapons of mass destruction proliferation (CPWMD) by Digital Assets Services Providers (DASPs) and Bitcoin Services Providers (BSPs), and 4. Transparency in the development of digital asset regulations.

1. New powers for the CNAD

In El Salvador, Bitcoin is considered a digital or virtual asset, similar to the regulations in Argentina and Brazil. However, due to the Bitcoin Act of 2021, which recognizes it as legal tender, there is a dual regulatory framework: one for Bitcoin and another for other digital assets under LEAD (2023).

Article 1 of the Bitcoin Law states that Bitcoin is recognized as legal tender with unlimited liberatory power, allowing it to be used without restriction in any transaction by individuals or entities, public or private. The reforms implemented in the LEAD on August 16, 2024, would expand the powers of the CNAD, making it the sole institution responsible for regulating, supervising, and sanctioning the digital asset industry, including tokens and stablecoins. This expansion excludes the Central Reserve Bank (BCR) and the Superintendency of the Financial System (SSF) from their current roles in these areas. Notably, the reform does not mention Bitcoin, which would remain legal tender.

In addition to implementing the Bitcoin Law and its associated regulations, the CNAD could require DASPs and BSPs to increase their social capital to mitigate the associated risks. The CNAD could also enter into confidential agreements with international regulatory bodies. For example, the CNAD has signed a memorandum of understanding with its counterpart in Kazakhstan, for information exchange. The following chart shows how the regulatory, supervisory, and sanctioning institutions for digital assets (AD) and Bitcoin in El Salvador would be restructured with the reform:

2. Amendment of definitions and concepts related to the issuance of digital assets and stablecoins

The proposed LEAD reforms introduce significant changes to the definition of stablecoins, giving them a central role. Stablecoins are now defined as “a type of digital asset designed to maintain a stable value, referenced or backed by one or more fiat currencies or other low-volatility underlying assets.” This new definition emphasizes stability and low volatility, which differs from the previous definition, which did not necessarily consider volatility as a determining factor. Examples of stablecoins include USDT (Tether), backed by the US dollar and widely used in Latin America and the United States, and USDC, issued by Circle, which is mainly used in Europe. Other stablecoins such as EURS, EURC, EURT and EURA operate in the European market.

The reform introduces the concept of a “public offering of stablecoins”, defined as a technical or commercial proposal that is communicated en masse to the general public and provides sufficient information on the terms of the offer to market or sell stablecoins. This type of issuance can only be carried out through a public offering. A clear example is the issuance of the stablecoin aUSD₮ (Tethered Asset), backed by Tether Gold (XAU₮), authorized by the CNAD in El Salvador and available on the following web page: alloy.tether.to

3. Adoption of new AML/CTF/CPWMD measures

New legal obligations and the principle of territoriality: The reforms stipulate that PSB and PSAD must be legal entities registered in the Commercial Register, either as foreign establishments or limited companies, excluding other types of companies, such as simplified joint-stock companies (SAS). In terms of territoriality, the registration of DASP will allow them to offer services only within the jurisdiction of El Salvador, meaning that any expansion to other jurisdictions will depend on the regulations of those jurisdictions.

Implementation of an AML/CTF/CPWMD program: BSPs must develop AML programs according to FATF standards. They must also maintain accurate records of assets, liabilities, equity and customer data, along with relevant information on transactions requested by customers, executed or not (KYT). BSPs must also establish transaction limit policies, with a recommended limit of USD US$1,000 for digital asset transactions, according to GAFILAT.

Implementation of information security: BSPs are required to protect customer assets with a high degree of care by implementing policies and procedures designed to prevent loss, theft or degradation of digital assets and maintaining a cybersecurity program that is appropriate for the nature of the services offered. There are various digital solutions available for protecting digital assets, such as cold wallet access keys, which provide an additional layer of security.

Customer Service Mechanisms: BSPs must maintain a register of complaints, including personal details and information about the complaint. They must also publish on their website and display in their terms of use the contact details of the CNAD, together with a notice that the CNAD can be contacted to report unresolved complaints against a PSB.

Freezing of digital assets: The reform promotes the freezing of digital assets if requested by the competent authority during an investigation, when the VASP operates in Salvadoran territory without the authorization of the National Commission for Digital Assets (CNAD).

4. Transparency in the development of digital asset regulations

The reform excludes the application of transparency measures and public consultation by interested sectors and the public when approving any regulation issued by the CNAD. However, it notes that the principles of regulatory improvement will be taken into account in order to create better quality provisions. More than 21 regulations relating to digital assets have been issued since June 2021, and none have been published for public scrutiny. With this new reform, the CNAD will be responsible for the application of the following regulations on digital assets:

It is worth noting that none of the regulations in the table have been published for public consultation under the principles and mechanisms of the Regulatory Improvement Law, and it is unknown whether the various interested sectors have been included in their approval process. The current reform under discussion has not been published for public consultation under the principles of regulatory improvement.

Conclusions

• The approval of the reform would mean a change in the entity responsible for registration, regulation, supervision and sanctions. The Central Reserve Bank and Financial System Supervision will be replaced by the National Digital Assets Commission. This commission will now oversee the registration, regulation, supervision and sanctions of Bitcoin service providers.
• By changing the definitions of stablecoins and digital asset issuance, and the parties involved, the regulator clarifies the role of each party. This makes the requirements for each issuance more understandable and creates more regulatory transparency for potential customers and investors within the ecosystem.
• By including new measures and strengthening the AML/CFT/CPWMD programmes, the reform is in line with the FATF recommendations regarding virtual assets, in particular as regards setting transaction limits, information security measures and the protection of digital assets, as well as other aspects aimed at protecting consumer rights.
• Excluding the application of the Improvement of Regulation Act is a setback for the transparency and integrity of public administration, as it limits the mechanisms for citizen participation and supervision and thus directly conflicts with the right of access to public information.