The enthusiasm of many around the Bitcoin Law, which gives legal tender to cryptocurrency in El Salvador, contrasts with the distrust of regulatory bodies. One of them is the Financial Action Task Force (FATF), which periodically issues recommendations to its member countries on the actions to be taken to prevent the financing of terrorism and money laundering.
CriptoNoticias has reported numerous suggestions from the FATF in relation to crypto assets. In summary, this coalition considers that, to facilitate the transmission of money outside the banking system, its use and the industry around cryptocurrencies must be under strict regulations and each participant (wallet addresses) should be able to be identified by the state authority.
That said, it is easy to understand why scholars of international law consider that the Bitcoin Law of El Salvador, will get trapped in the FATF regulation . That would make the Central American country a target of potential sanctions.
A study on the subject was carried out by economist Steve Hanke, with the collaboration of students Nicholas Hanlon and Parth Thakkar. The specialists indicate there that, “if the Bitcoin Law is really implemented, Salvadoran banks, merchants and customers will cross swords with the FATF regulators.”
Criticisms of El Salvador’s Bitcoin Law
Before referring to the FATF and its regulations, Hanke and his collaborators make their personal position clear: «The Bitcoin Law is unnecessary ». For the economist, “dollarization works like a charm.” He supports this statement with a survey by the Chamber of Commerce of El Salvador, in which 92% of 1,600 respondents said that they do not agree that the acceptance of bitcoin (BTC) is mandatory.
The economics specialist criticizes that bitcoin is of course forced because that, as he says, “will restrict the freedom of choice of Salvadorans in the use of foreign currency.”
It is worth clarifying that, as this medium has reported, the Salvadoran merchant who receives payments in BTC will be able to convert it into dollars instantly . The same will happen with the workers, who will be able to choose in which of the two currencies they wish to receive their salary.
Another criticism that Hanke makes is about the receipt of remittances , which is one of the points why President Nayib Bukele considers the Bitcoin Law important. According to World Bank data, remittance income constitutes almost 25% of Salvadoran GDP.
«The cost of sending remittances to El Salvador is one of the lowest in the world. the world and the lowest in Latin America, with an average cost of transferring remittances of 2.85% “, says the report, then adding that this amount” is much lower than the cost of receiving bitcoins. “
This research team from Johns Hopkins University, in the United States, seems to ignore the existence of the Bitcoin Lightning network, which in El Salvador is widely used for reception of remittances through the Strike application . The commissions in this second layer of Bitcoin are, sometimes, less than a penny, and much less than 2.85% of the system based on fiat money.
Bitcoin Law: possible negative consequences for El Salvador
After making clear their personal position of disapproval of the Bitcoin Law of El Salvador, the authors of the study reported here proceed to detail the possible negative consequences that the Central American nation would suffer when BTC begins to be used as legal tender.
Importantly, there will be huge unintended negative consequences associated with the implementation of the Bitcoin Law. Banks, financial institutions, Salvadoran companies and, perhaps, the government itself will be visited. They will likely receive a red flag from the Financial Action Task Force (FATF), which will likely result in sanctions.
Steve Hanke, Nicholas Hanlon, and Parth Thakkar, researchers at Johns Hopkins University.
The Latin American branch of the FATF, GAFILAT, defines itself as “a intergovernmental organization that brings together 17 countries from South America, Central America and North America ”. According to its website, “GAFILAT was created to prevent and combat money laundering, terrorist financing, and the financing of the proliferation of weapons of mass destruction.”
Add the page institutional statement that this organization “requires that all countries be aligned in the same direction”, in order for “the fight against money laundering and terrorist financing to be effective.”
Specifically on cryptocurrencies, the FATF has produced the document “Red Flag Indicators for Virtual Assets” which, together with the “FATF Recommendations Guide”, are the sources on which Hanke’s study is based.
For the researchers, the actions that result as a consequence of the Bitcoin Law in El Salvador will violate, at least, 27 FATF recommendations . Before mentioning them, Hanke and his team reiterate their misunderstanding of the foundations of this law, since, as they explain, “at present, El Salvador and its dollarized monetary regime are as clean as the teeth of a hound.”
1st red flag: non-compliance with “know your customer” policies
To facilitate In the analysis, scholars divide behaviors inconsistent with the FATF’s wishes into three areas. The first one is’ Red Flag Behaviors Related to Compliance with ‘Know Your Customer’ Policies “.
The FATF raises red flags (or” red flags “) when cryptocurrency transactions are carried out without due process KYC . This implies knowledge of the identity of each of the parties involved in the operation, which is usually demonstrated with a document issued by the State that certifies personal data.
Also, when uses bitcoin or other digital assets, the FATF establishes that it is necessary to be able to demonstrate the origin of the funds and the relationship that exists between the parties . The two requirements mentioned so far would be impractical to carry out for small transactions, such as retail trade or the transfer of BTC, for example, between relatives.
It should be noted that The Salvadoran Government offers the possibility (although not the obligation) to use an official purse: Chivo Wallet. This is a custodial bitcoin wallet (that is, it does not provide its users with private keys) that requires prior registration to use it and associates the BTC address with a specific identity .
With Chivo Wallet the State could have access to the registry of transactions of each user . This would facilitate compliance with international regulatory standards, even more than with the use of cash, a fact that is not mentioned in Hanke’s study.
In fact, a 2019 study , conducted by the Messari company, showed that fiat money was used 800 times more than cryptocurrencies to carry out money laundering.
2nd red flag: size, frequency and illicit patterns in bitcoin transactions
The second area where Steve Hanke and his team They see possible breaches of the FATF recommendations is in the rules related to “the size, frequency and other illegal patterns of transactions with virtual assets.”
CriptoNoticias published, months ago, a article entitled «If you do these things with Bitcoin and cryptocurrencies you could be a criminal, according to the FATF ». There it is mentioned that a red flag is raised when, for example, someone structures or fragments a cryptocurrency transaction into many smaller transactions .
It is also seen as something suspicious “to carry out multiple high value transactions in a short sequence, for example, within a 24 hour period.”
For any reason that is not specified, the FATF also considers suspicious the use of BTC ATMs that charge high fees. So, if any of the 1,500 ATMs that they intend to install in El Salvador asks for a high commission for their services, their users could be identified and investigated for the matter.
What would happen if Does a Salvadoran want to send all the bitcoins that he has in his Chivo Wallet to another address? According to the FATF, a red flag is raised if “a new user tries to trade the full balance of virtual assets or withdraws them and tries to send the entire balance off the platform.”
3rd red flag: exposure to criminal activities with bitcoin
The third area in which economists classify the FATF provisions related to bitcoin and applicable to El Salvador are “red flag behaviors related to exposure to criminal activities.”
Are you Salvadoran and do you receive remittances directly to your unregistered bitcoin address ? According to the FATF, you will activate a red flag due to “the use of decentralized hardware or paper wallets to transport virtual assets across borders.”
You could also be suspicious if you receive or send BTC to “unreliable IP addresses, IP addresses of sanctioned jurisdictions or IP addresses previously marked as suspicious.”
Even the age of the user is taken into account when pointing out someone as a potential criminal. The FATF notes that if “a customer significantly older than the average age of platform users opens an account and performs a large number of transactions,” that “suggests his potential role as a money mule through virtual assets or a victim financial exploitation of the elderly. ”
The provisions of the Financial Action Task Force are not normative, but rather, as said, they are recommendations. Each member state of the FATF must undertake the task of adapting them to its legislative system in order to comply with them in the best possible way. In case of non-compliance, the FATF can put the sanctioned country on a gray or black list , depending on how far it has deviated from the path set by the regulator.
Explains Steve Hanke: «The countries on the black list have significant strategic deficiencies in their regimes to counteract the money laundering and terrorist financing. ”
When a nation is blacklisted, the FATF issues a “call to action”, urging the more than 200 nations affiliated to the FATF to apply enhanced due diligence and to apply countermeasures such as sanctions. Please note that gray list member countries may be sanctioned by FATF member countries even if the FATF has not issued a call to action.
Steve Hanke, Nicholas Hanlon, and Parth Thakkar, researchers at Johns Hopkins University.
As a final observation of his report, Henke says that “El Salvador’s Bitcoin Law promises many surprises, unintended consequences and costs that have not been considered” . The economist reiterates his conviction that the law will not escape international regulations and adds that “the last thing El Salvador needs is a FATF sign.”
It must be recognized that, up to now, the Salvadoran Government has shown a willingness to dialogue with international financial organizations . In mid-June, technical assistance was requested from the World Bank for the implementation of the Law, although the request was rejected.
Also, El Salvador seems to be determined to maintain cordial treatment with the International Monetary Fund (IMF) although this body, like the Inter-American Development Bank (IDB), has expressed itself negatively about the Bitcoin Law.
The Bitcoin Law has achieved the approval of the Central American Bank for Economic Integration, although the president of this entity, the Honduran Dante Mossi, recognizes that there will be great difficulties for its implementation, especially in education.
Finally As already mentioned in this text, it should be remembered that the Government of El Salvador promotes and encourages through airdrops , commission bonus and regulatory compliance guarantee, the use of the Chivo Wallet purse .
President Bukele himself acknowledges that this purse is linked to personal identity , which will facilitate compliance with international standards. If the massive use of Chivo Wallet is achieved in El Salvador, possibly, many of the FATF recommendations would not be violated by the Salvadoran population.
The personal data requested by the wallet is already held by the Government. In the DUI (unique identity document) we have the photo, full name, age, address, telephone number, height, fingerprints, etc.
Nayib Bukele, President of El Salvador.
