Prior to conducting an analysis of the Bitcoin Law (hereinafter “BTC Law”), it is important to clarify two fundamental concepts regarding this type of digital assets:
– What is bitcoin?
A bitcoin is a decentralized digital asset created in 2009 by one or more people under the pseudonym of Satoshi Nakamoto, with the mission of being a virtual currency or an instrument of electronic exchange to acquire products and services. Cryptographic tools (Blockchain) are used to carry out transactions of this asset, which offer a high security standard. The characteristic of decentralization (i.e., without the participation of intermediaries) is materialized by the fact that there is no authority or governmental control entity responsible for its issuance, control, valuation and registration of its movements. Currently, there is a preset limit of 21 million bitcoins, which register their movements within a “Peer-to-Peer” network for their transactions, which are validated within a distributed database and stored in the form of blocks.
– Whatisthe Blockchain?
The Blockchain is the cryptographic technological platform that contains a single consensual and distributed registry through several nodes within a network that allows recording all transactions accurately in the form of blocks of information and therefore offers a high standard of security in transactions. The particularity of the Blockchain lies in its distributed structure throughout the network, which requires that the elements within the network validate the transactions that occur in it. Once a transaction is validated and incorporated into the Blockchain, it is unalterable and irreversible.
Approval of the regulation:
At 6:51 p.m., on June 8 of the current year, the Legislative Assembly received an official request sent by the Minister of Economy María Luisa Hayem Brevé, which contained a draft of the legislative decree of 16 articles called “Bitcoin Law”.
In the ordinary session No. 7 of the Legislative Assembly held on the same day, said bill was received and sent to the financial commission. During the session, the financial commission was convened and issued the favorable opinion number 3 on the referred law. At 9:34 p.m., Deputy Diana González requested to modify the agenda of the session to incorporate said favorable opinion to the session.
Once the proposed BTC Law was incorporated, it was approved at 00:01 a.m. on June 9, with 62 votes in favor. This regulatory framework constitutes the first legal regulation in the world that enable to use bitcoin (hereinafter “BTC”) as legal tender with clearance power within a national territory.
Relevant aspects of the regulations:
The purpose of the law is to regulate the use of BTC as legal tender, providing it with unrestricted and unlimited clearance power in any transactions that natural persons, public or private legal entities carry out in any capacity; without prejudice to the application of the Law of Monetary Integration that allows the use of Salvadoran Colones or United States Dollars.
The above mentioned implies that from the entering into force of the BTC Law, El Salvador will have 3 currencies as legal tender, which will be the Salvadoran Colón, the US Dollar and the BTC, making possible the payment of goods, services and obligations through any of said currencies.
- Relationship of BTC to the U.S. Dollar.
The BTC will have an exchange rate with respect to the U.S. Dollar freely determined by the market; the U.S. Dollar will be used as a reference for accounting purposes. Likewise, any price may be expressed in BTC and any monetary obligation expressed in Dollars, existing prior to the effective date of the BTC Law, may be paid in BTC.
Since there is no fixed exchange rate, the exchange rate will be determined under an official index that will fluctuate in real time and must be consulted at the time of the transaction. The BTC Law does not refer to the manner of determining such exchange rate, therefore, it is expected that this will be regulated in the additional regulations to be issued for such purpose.
- Obligation for Economic Agents and exceptions.
According to the BTC Law, every economic agent must accept BTC as a form of payment when it is offered by whoever acquires a good or service, with the exception of those economic agents that by notorious fact and in an evident manner do not have access to the technologies that allow executing transactions in BTC. It is important to indicate that the BTC Law does not provide a definition of economic agent, however, using an holistic approach of the Salvadoran legal framework the Competition Law, in its article 2, third paragraph, defines economic agents as “Any natural or legal person, public or private, directly or indirectly engaged in a lucrative or not lucrative economic activity”. Such definition generally encompasses any actor participating in any way or in any part of an economic activity. In other words, any person who participates in the economy.
This entitles the person acquiring the good or service, or the debtor of the obligation, to decide which legal tender to use, and the economic agent is obliged to accept such payments in the chosen currency. Exceptions with respect to access to technologies are regulated in an indeterminate manner, such as “by notary fact and evidently do not have access”, therefore, it is expected that these will be clearly determined in the regulations to be issued for such purpose.
According to the BTC Law the Salvadoran Government shall:
– Accept payment of “tax contributions” in BTC;
– Provide alternatives that allow the user to carry out transactions in BTC, as well as to have automatic and instantaneous convertibility of BTC to Dollar, promoting training and mechanisms necessary for the population to have access to these transactions;
– To issue the Regulations of the Law, specifying the alternatives of automatic and instantaneous conversion of BTC to Dollar. Also creating the necessary institutional structure for the application of the Law;
– To issue, through the Central Reserve Bank and the Superintendence of the Financial System, the corresponding technical regulations at the time of entry into force;
– The Government, before the entry into force of the LB, shall create a Trust in the Development Bank of El Salvador (BANDESAL), to guarantee the automatic and instantaneous convertibility of the BTC to Dollar.
These obligations constitute the fundamental pillar for the circulation of BTCs to materialize, since both the tool for automatic convertibility and the technical requirements that have not been regulated by the Law. Such tool and technical requirements will allow the currency to operate in regular transactions.
The tax regulations rigged to the use of BTC are as follows:
– Tax obligations may be payable with BTC, so it will be necessary to wait for the issuance of the technical regulations by the Tax Authority to be able to effectively make tax payments with BTC.
– Exchanges of BTC will not generate Income Tax, as Capital Gains taxed at 10%, since according to the present law, BTC is a legal tender, and therefore, we would not be in the presence of non-habitual transfers of goods or transfer or assignment of securities.
- Entry into force of the LB.
Once the respective Legislative Decree has been approved, it must be sent to the Executive Branch for it to veto, sanction or observe it. Due to the current circumstances between the Legislative and Executive Branch, there is a high probability that said Decree will be sanctioned and published in the Official Gazette. Once the BTC Law is published, it would become effective 90 days after its publication date.