Article republished from: Tuo Luo Finance
Globally, El Salvador may just be an obscure border country, leaving a vague impression of hot volcanic landscapes and diverse ecosystems. But in the world of cryptocurrency, El Salvador is also a resounding presence.
Going back to 2021, the global monetary environment at that time was tumultuous, with the pandemic causing a steep increase in monetary debt, leading to a global debt scale soaring to $27.5 trillion, and a new round of digital currency experiments rising globally, with Bitcoin rapidly mainstreaming, reaching $69,000.
In this environment, the newly appointed president of El Salvador, Nayib Bukele, made a rather bold decision to create a new financial system with a new currency, making Bitcoin the sovereign currency of the nation. The Congress unexpectedly supported it, ultimately passing the bill with an absolute majority vote, officially making Bitcoin the legal tender of the country, thus making El Salvador the first country in the world to grant legal status to cryptocurrency. Bukele also stated that land would be allocated to build infrastructure for living necessities, using Bitcoin as the settlement currency, to construct a complete Bitcoin city. The government even developed an electronic wallet called Chivo to promote adoption among the people.
This decision generated a global sensation, with the International Monetary Fund, global central banking institutions, and cryptocurrency industry practitioners focusing their attention on this small American country with a population of less than 7 million. Voices of opposition and applause intertwined, and the whole world hoped to see the results they desired from El Salvador's social experiment, witnessing the potential rise or fall of the vision for a "Bitcoin City."
Amidst the hype and publicity, tourists flocked to El Salvador, bringing the first wave of fresh traffic. But problems soon followed, as the high volatility of cryptocurrencies, the security of electronic wallets, and the slow and delayed transfers quickly led to public dissatisfaction with cryptocurrencies. A year later, only 20% of locals continued to use Chivo. By November 2022, the cryptocurrency world faced a heavy setback, with Bitcoin rapidly falling to $16,000, while the National Bitcoin Office of El Salvador (ONBTC) was officially established in the same month, an ill-timed misalignment casting a shadow over El Salvador's Bitcoin plans once again. Since then, Bitcoin City has gradually drifted away, and El Salvador has slowly faded from the cryptocurrency stage.
A typical example is the world’s first sovereign blockchain bond, the 'Volcano Bond,' which the Salvadoran government eagerly anticipated launching to raise funds for city development. The issuance date has been postponed repeatedly, from 2022 to 2023 and then to 2024, and the bond, originally expected to raise $1 billion, is still far from realization.
But as development has progressed, with the market warming and regulations loosening, Bitcoin is just one step away from $100,000, and global attitudes have changed significantly. The national reserve race for Bitcoin has officially begun, and multiple countries around the world are showing interest in incorporating Bitcoin into their national reserves. In addition to the ambitious statements from the United States, Switzerland has also passed a bill to include Bitcoin as part of its national bank reserve assets, while Bhutan’s Bitcoin holdings even exceed 30% of its GDP. Legislators in Venezuela, Poland, Argentina, and Germany have also proposed related initiatives.
El Salvador seems to have transformed from the delusional extremist to an innovative outlier, becoming the first to take the plunge. According to The Bitcoin Office, since March 16 of this year, El Salvador has adhered to a principle of purchasing one Bitcoin daily, and as of the time of writing, its Bitcoin holdings have reached 5,940.77 BTC, with a market value of $578,862,354. The hype of Bitcoin City is finally showing its investment value, and the city is taking shape. In August of this year, the Turkish holding company Yilport will invest $1.62 billion in two ports in El Salvador, one of which is located in "Bitcoin City." In terms of public education, El Salvador is also making great efforts to promote Bitcoin salaries among national civil servants, transitioning the salary structure from traditional currency to Bitcoin, and even launching a Bitcoin certification program to provide training and certification related to Bitcoin for 80,000 civil servants.
But the public's conservative attitude is stronger than ever. According to a new survey by the Francisco Gavidia University in San Salvador, only 7.5% of respondents in El Salvador said they use cryptocurrencies for transactions, while 92% admitted they do not use cryptocurrencies, and only 1.3% believe Bitcoin is the main direction for the country's future development.
From the data alone, El Salvador's Bitcoin vision still seems distant. Even with strong presidential support, the Bitcoin held by El Salvador accounts for only 1.5% of its GDP, and since 2022, El Salvador's cryptocurrency remittances have continued to decline, falling from $84.8 million to $57.4 million. According to data from the Central Bank of El Salvador, from January to August 2024, only 1.1% of all remittances sent to the country involved cryptocurrency. In April of this year, the first tokenized debt project initiated by Bitfinex Securities to support the construction of Hilton hotels in El Salvador even failed to attract the minimum required funding of $500,000 for continued operation, reflecting the failure of El Salvador's Bitcoin effect. In response, the president had to admit, "Bitcoin has not achieved the widespread adoption we hoped for."
Regardless, since the announcement of Bitcoin as the sovereign currency, El Salvador's fate has been closely linked to Bitcoin, and the brand of "Bitcoin City" has been established. El Salvador's Bitcoin journey continues. Currently, El Salvador is planning to build a new capital market around Bitcoin and is preparing to introduce more regulatory support policies. The effects have already begun to show; just recently, Bitfinex Securities once again conducted an IPO of tokenized U.S. Treasury bonds under the legal framework of El Salvador.
In response to all of the above, Juan Carlos Reyes, president of the National Digital Asset Commission of El Salvador, accepted an exclusive interview with Coindesk to discuss the current status and future of digital assets in El Salvador in depth.
Below is the full interview with the original author Tom Carreras, translated and slightly modified by Tuo Luo Finance:
In regulating cryptocurrencies, El Salvador is ahead of most other countries. As the first country to adopt Bitcoin as legal tender, it has become a hub for many cryptocurrency companies.
"From a macro perspective, most people do not understand what we are doing in El Salvador; they can only see a corner of the whole picture," said Juan Carlos Reyes, president of the Salvadoran National Digital Asset Commission (CNAD), in an interview.
"Even those foreign companies that are regulated locally but do not have a complete office set up here do not understand the advanced level of Salvadoran regulation and the rapid pace of industry development," Reyes said. The president's initiative has forced national institutions to strive to keep up with new technologies and the impacts brought about by the close ties with digital currencies.
Therefore, El Salvador avoids granting cryptocurrency regulation and regulatory authority to traditional financial regulatory bodies—such as the Superintendence of Financial Systems (SFS)—and instead creates the CNAD from scratch, aiming to create a tailored regulatory framework for cryptocurrencies rather than trying to extend existing rules to digital assets.
"There is a method of inductive reasoning: when I see a bird that walks like a duck, swims like a duck, and quacks like a duck, I call it a duck." But in the context of assets, digital assets are completely different from traditional financial instruments.
This is also why the CNAD immediately adopted a technical approach to regulating cryptocurrencies after the heavyweight in computer science, Reyes, became the leader in September 2023. The feedback from crypto companies that obtained the Salvadoran Digital Asset Service Provider (DASP) license has been very promising.
Nick Cowan, CEO of the tokenization solutions company VLRM, said in an interview, "We were completely taken by surprise; the CNAD is not only knowledgeable and meticulous but also technically adept."
Victor Solomon, a partner at the tokenization consulting company Tokenization Expert in El Salvador, agrees with this view. "We do not want to overly praise El Salvador, but their ability to quickly grasp the core of the issue in reviewing our application is astonishing. We do not have to spend time explaining the technical foundations of our operations—they already understand the complexities of tokenization and the compliance measures that will be taken. Reyes understands the real challenges businesses face, from fundraising to navigating regulations, which makes him not just a regulator but an advocate for businesses that positively impact El Salvador's economy," Solomon added.
Reyes was born in El Salvador and moved to Canada as a child to escape the war that ravaged the country at that time. He describes himself as "accomplished," holding multiple bachelor's degrees in computer science, mathematics, and physics, as well as a master's degree in management from Harvard University. He subsequently pursued a PhD in philosophy at the People's Friendship University of Russia, but it remains unfinished due to the pandemic and the war in Ukraine.
His professional background is highly composite, and his work experience is quite extensive. After leading a consulting firm for 15 years, he developed business opportunities for the Missanabie Cree First Nation and even opened a bar on the second floor of his waterfront villa. Since 2013, he has been a believer in Bitcoin, so in 2021, he decided to move back to El Salvador to participate in the nationalization process of cryptocurrency.
The CNAD has a completely independent team of 35 employees, and Reyes provides a sample standard for the staff: each person must have a thorough understanding of the underlying technology of cryptocurrencies. In fact, currently, 20 employees are pursuing graduate studies in cryptocurrency courses at CEMA University in Argentina to enhance their expertise.
"In terms of cryptocurrency regulation, we have the highest quality and most complete team in the world," Reyes said. "If someone does not know how to trade Bitcoin, including my driver, they may not be able to work here."
This elite team undoubtedly leaves a deep impression on companies seeking to obtain operating licenses in El Salvador.
"Reyes is a technical expert," Cowan's company has worked with dozens of other regulators globally, and he told CoinDesk. "In other jurisdictions, regulators understand regulations and investor protection, which is certainly critical, but they do not necessarily understand technology, which can sometimes make your job quite cumbersome."
"This is a very detailed and complex process. We submitted a 700-page application, but the decision-making process after submitting the application has been much faster than in other countries... The process is consistent with any other regulatory procedures we have had to undergo before; it is not a different path, just faster," Cowan said.
For Reyes, the agency's knowledge reservoir in cryptocurrency means it can adhere to one of the most important philosophical tenets in the field—do not trust, verify—and check the blockchain with each new company applying for a license. The team does not rely on documents provided by compliance officers because such documents are often found to mislead regulators.
Reyes likes to use an analogy to explain why cryptocurrencies need a dedicated regulatory agency. "If you buy an electric vehicle and it breaks down, you take it to a mechanic with 20 years of experience, but when he opens the hood, he finds no engine, only a battery, and he doesn’t know how to handle it."
This is also the different feeling that cryptocurrencies and traditional financial assets give to Reyes. They may appear similar on the surface, but upon deeper digging, the two are completely different. This is also one of the reasons why global jurisdictions are slow to advance in implementing regulatory frameworks for digital assets.
However, El Salvador is a small country. Its GDP is only $35 billion, ranking 17th among Latin American countries and 103rd in the world. This country does not have its own currency, nor does it have strong financial institutions, and there is not even an existing developer ecosystem. But precisely because of this, in regulating cryptocurrencies, all these factors have proven to be beneficial, as El Salvador 'started from a blank slate.'
Returning to the analogy of electric vehicles, El Salvador can immediately focus on repairing batteries and motors without having to transform its existing infrastructure into a garage capable of servicing Teslas.
"In other countries, many new technologies are created by rational individuals who try to push the cryptocurrency ecosystem forward, but they do not consider how the technology can be abused and become a tool for money laundering," Reyes said. "Regulators find it difficult to know the extent of regulatory relaxation."
"We can make the CNAD the single entry point for all digital assets in this country; any entity without permission from the committee is acting illegally."
Another fact is that financial institutions in Western countries are the rule-makers of existing regulations, so overturning existing regulations will have broader and more severe implications than for Latin American countries. "Traditional finance has lobbying organizations, and they have been fighting against cryptocurrency, such as implementing Operation Chokepoint 2.0 (referring to U.S. regulators restricting cryptocurrency companies from obtaining banking services). They will do everything possible to ensure that this industry does not thrive," Reyes said, who once had a Canadian bank account frozen due to his involvement in cryptocurrency activities. "But countries like El Salvador, if they can act quickly and seize the opportunities brought by cryptocurrencies, will reap substantial benefits."
But what kind of regulatory environment does El Salvador want to create?
Reyes stated that, in terms of financial instruments, Bitcoin is "more than enough," but beyond that, the CNAD is agnostic towards technology. Most companies regulated by the agency operate on Ethereum. The sizes of the regulated companies vary significantly: some are global heavyweights like Tether and Bitfinex Securities, while others are small local businesses in El Salvador, which, according to Reyes, "start from $2,000."
Consumer safety and financial security are of utmost importance. For example, this means requiring exchanges to use multi-signature wallets to ensure that another FTX incident does not occur, or requiring the company's private blockchain to adhere to certain security standards. Mandatory identification for each customer is also required.
"It is important to emphasize that our country has suffered from gang intimidation for many years. Therefore, we take issues of financial transparency, money laundering, and financial terrorism very seriously, and these issues have been strongly integrated into regulation." He believes that if a cryptocurrency company is regulated in El Salvador, it can obtain a license anywhere in the world.
Reyes is particularly keen on one area: real-world assets (RWA). In his view, attempts like VLRM and Tokenization Expert will expand retail investors' investment opportunities. "Before the emergence of Robinhood, most young people in the U.S. would not have been able to buy Tesla or Nvidia (stocks). Robinhood democratized all these different stocks that only super elites could buy. This is precisely the role of tokenization. In the coming years, Salvadorans are expected to access regulated products that cannot be purchased in other jurisdictions."
Reyes emphasized, "This is the first time in modern history that developing countries can lead a financial revolution instead of being left behind and only picking up the scraps. We are trying to encourage other countries to pay attention to El Salvador and learn how to apply our model to other nations."
