El Salvador’s Adoption of Bitcoin as Legal Tender Raises ML/TF Risks

El Salvador has become the first country to accept Bitcoin as a legal tender. 

On 8 June 2021, El Salvador’s President Nayib Bukele sent the Bitcoin Law to Congress for a vote.  According to this proposal, the purpose of the Bitcoin Law is “to regulate bitcoin as unrestricted legal tender with liberating power, unlimited in any transaction, and to any title that public or private natural or legal persons require carrying out”.

As of 7 September 2021, Bitcoin has been granted legal status, since 62 out of 84 members at the Congress voted in favour of the proposal. Shortly after the vote, Bitcoin price spiked by 5%, reaching USD 24,239.17. 

Prices of goods and services can now be offered in bitcoin, tax contributions can be paid with the digital currency, and exchanges in bitcoin will not be subject to capital gains tax.

Bitcoin prices are known for their volatility, and critics suggest it might damage the financial stability of the country. However, the law provides a counter-argument that states 70% of El Salvador does not have access to traditional financial services at present, thus Bitcoin will encourage financial inclusion. 

Reaction to El Salvador’s Adoption of Bitcoin 

While the official currency of El Salvador is the US dollar, monetary policies set by the US Federal Reserve do not cater to El Salvador’s fiscal needs. The new law has particularly been unpopular among the masses due to the high money laundering and terrorism financing (ML/TF) risks associated with cryptocurrencies. The International Monetary Fund (IMF), of which El Salvador is a member state, criticized the move, calling it “an inadvisable shortcut”. The World Bank also warned El Salvador that the adoption of Bitcoin as legal tender could imperil the financial stability of the country.