Written by: Tuo Luo Finance
Globally, El Salvador may just be an obscure border country, leaving a vague impression of its hot volcanic landscape and diverse ecosystems. But in the crypto world, El Salvador is also a household name.
Back in 2021, the global monetary environment could be described as unpredictable, with the pandemic leading to a sharp increase in monetary debt, global debt soaring to $275 billion, and a new wave of digital currency experiments emerging globally, propelling Bitcoin into the mainstream, reaching $69,000.
In this environment, the newly inaugurated President Nayib Bukele of El Salvador made a bold decision to create a new financial system with a new currency, adopting Bitcoin as the sovereign currency of the country. The National Assembly unexpectedly supported it, ultimately passing the bill by an absolute majority vote, officially making Bitcoin the legal tender of the country, making El Salvador the first country in the world to grant legal status to cryptocurrency. Bukele also stated that land would be set aside to build infrastructure for basic needs, using Bitcoin as a settlement currency to construct a complete Bitcoin city, and the government even developed an electronic wallet called Chivo to promote public adoption.
This decision has caused a sensation around the world, 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, where opposing ridicule and applause coexist. The whole world hopes to see the desired results from El Salvador's social experiment, witnessing its vision of 'Bitcoin City' either collapse or flourish.
Under the hype and promotion, tourists flocked to El Salvador, bringing the first batch of fresh traffic. But problems also followed. The high volatility of cryptocurrencies, the security of electronic wallets, and the sluggishness of transfers quickly led the public to become dissatisfied with cryptocurrencies. A year later, only 20% of locals continued to use Chivo. By November 2022, the crypto world faced a severe setback, with Bitcoin rapidly falling to $16,000, while the El Salvador National Bitcoin Office (ONBTC) was officially established in the same month, creating a misalignment that once again cast a shadow over El Salvador's Bitcoin plans. Since then, the vision of Bitcoin City has drifted further away, and El Salvador has gradually faded from the crypto stage.
A typical example is the world’s first sovereign blockchain bond 'Volcano Bond' that the Salvadoran government once ambitiously planned to issue to raise funds for city construction, which has repeatedly been delayed from 2022 to 2023 and then to 2024. The originally expected bond amount of $1 billion is still far from realization.
But as it developed, with the market warming up and regulations loosening, Bitcoin is just one step away from $100,000, and the global attitude has changed dramatically. The race for national reserves of Bitcoin has officially begun, with many countries around the world showing interest in incorporating Bitcoin into their national reserves. In addition to the grand 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; lawmakers in Venezuela, Poland, Argentina, and Germany have proposed related bills.
El Salvador seems to have transformed from a dreamer to an innovative outlier, becoming the first to eat the crab. According to The Bitcoin Office, since March 16 of this year, El Salvador has adhered to the 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, taking shape. In August this year, Turkish holding company Yilport will invest $1.62 billion in two ports in El Salvador, one of which is located in 'Bitcoin City.' In public education, El Salvador is also making great efforts, focusing on promoting Bitcoin salaries among national civil servants, shifting 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.
However, the public's conservative attitude has also become stronger than ever. According to a new survey from the Francisco Gavidia University of San Salvador, only 7.5% of respondents in El Salvador said they use cryptocurrency for transactions, while 92% admitted they do not use cryptocurrency, and only 1.3% believe Bitcoin is the main direction for the country's future development.
From the data perspective, El Salvador's Bitcoin vision is still far off. Even with strong presidential support, the Bitcoin held by El Salvador accounts for only 1.5% of its GDP, and since 2022, remittances in cryptocurrencies have continuously declined, dropping 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 cryptocurrencies. In April of this year, the first tokenized debt project initiated by Bitfinex Securities to support the construction of the Hilton hotel in El Salvador even failed to attract the minimum required funding of $500,000 for continued operation, reflecting the failure of the Bitcoin effect in El Salvador. In this regard, the president can only helplessly admit, 'Bitcoin has not achieved the widespread adoption we hoped for.'
But in any case, since the announcement of Bitcoin as a sovereign currency, El Salvador's fate has been closely tied to Bitcoin. The brand of 'Bitcoin City' has been launched, and El Salvador's journey with Bitcoin continues. Currently, El Salvador is planning to create a new capital market around Bitcoin and is preparing to introduce more regulatory support policies. The results are already showing; recently, Bitfinex Securities once again conducted the first public issuance of tokenized U.S. Treasury bonds under El Salvador's legal framework.
In response to the above, Juan Carlos Reyes, Chairman of the National Digital Assets Commission, the highest cryptocurrency regulatory body in El Salvador, accepted an exclusive interview with Coindesk, discussing the current state and future of digital assets in El Salvador.
Below is the full text of the interview by the original author Tom Carreras, translated by Tuo Luo Finance, with slight modifications and adjustments:
In regulating cryptocurrency, 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 crypto companies.
'From a macro perspective, most people will not understand what we are doing in El Salvador; they can only see a corner of the whole picture,' said Juan Carlos Reyes, Chairman of the National Digital Assets Commission of El Salvador (CNAD), in an interview.
'Even those foreign companies that are regulated locally but have not set up full offices locally do not understand the advanced level of regulation in El Salvador and the rapid pace of industry changes,' Reyes said, noting that the president's initiative has forced national institutions to work hard to deal with the impacts brought by new technologies and their close ties to digital currencies.
Thus, El Salvador avoids granting cryptocurrency regulation and oversight to traditional financial regulatory agencies—such as the Financial System Regulatory Authority (SFS)—and instead creates CNAD from scratch, with the goal of creating 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 entirely different from traditional financial instruments.
This is also why, after Reyes, a heavyweight in computer science, became the leader of CNAD in September 2023, the agency immediately adopted a technical approach to regulating cryptocurrencies. Feedback from crypto companies obtaining Digital Asset Service Provider (DASP) licenses in El Salvador has been very positive.
Nick Cowan, CEO of tokenization solutions company VLRM, stated in an interview: 'We were completely unexpected; CNAD is not only knowledgeable and meticulous but also proficient in technology.'
Victor Solomon, a partner at El Salvador's tokenization consulting firm Tokenization Expert, agrees with this view. 'We do not want to overly praise El Salvador, but they are able to grasp the core issue so quickly to review our applications, which is shocking. We do not have to spend time explaining the technical basis 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 only a head of a regulatory agency but also an advocate for businesses that positively impact the Salvadoran 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 an MBA from Harvard University. He later pursued a PhD in philosophy at the People's Friendship University of Russia, but did not complete it due to the pandemic and the war in Ukraine.
His professional background is highly complex, with a wide range of work experiences. After leading a consulting company for 15 years, he developed business opportunities for the Missanabie Cree First Nation and even opened a bar on the second floor of his seaside villa. He has been a believer in Bitcoin since 2013, and in 2021, he decided to move back to El Salvador to participate in the nationalization process of cryptocurrency.
CNAD has 35 completely independent employees, and Reyes provides sample standards for staff: everyone must be well-versed in the underlying technology of cryptocurrencies. In fact, currently, 20 employees are pursuing postgraduate encryption courses at CEMA University in Argentina to enhance their expertise.
'In terms of cryptocurrency asset regulation, we have the highest and most comprehensive quality team in the world,' Reyes said. 'If someone doesn't know how to trade Bitcoin, including my driver, they may not be able to work here.'
This elite team has undoubtedly left a deep impression on companies seeking to obtain licenses to operate in El Salvador.
'Reyes is a technology expert,' Cowan's company has worked with dozens of other global regulatory agencies, 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 after submitting the application, the decision-making process is much faster than in other countries... The process is consistent with any other regulatory procedure we have had to go through before, not taking a different path, just faster,' Cowan said.
For Reyes, the agency's crypto knowledge reserve means it can adhere to one of the most important philosophical tenets in the field—do not trust, verify—and check the blockchain every time it interacts with new companies applying for licenses. The team does not rely on documents provided by compliance officers, as such documents are often found to provide misinformation to regulators.
Reyes likes to use an analogy to explain why cryptocurrency needs a dedicated regulatory body. 'If you buy an electric car, and it breaks down, you give it to a mechanic with 20 years of experience, but when he opens the hood, he won't find an engine; he'll only find a battery, and he won't know how to deal with it.'
This is also the different feeling that cryptocurrencies and traditional financial assets give Reyes. They may look similar on the surface, but digging deeper, the two are entirely different. This is also one of the reasons why global jurisdictions have made slow progress in implementing regulatory frameworks for digital assets.
However, El Salvador is a small country. With a GDP of only $35 billion, it ranks 17th among Latin American countries and 103rd in the world. This country has no currency of its own, no strong financial institutions, and no existing developer ecosystem. But precisely because of this, in regulating cryptocurrency, all these factors have proven to be a blessing, as El Salvador 'started from a blank slate.'
Returning to the analogy of electric cars, El Salvador can immediately focus on repairing batteries and motors without having to transform its existing infrastructure into a garage that can repair Teslas.
'In other countries, many new technologies are created by rational people who try to push the crypto ecosystem forward, but they do not consider how the technology will be abused and become a tool for money laundering,' Reyes said. 'Regulators find it challenging to know the extent of regulatory relaxation.'
'We are able to make CNAD the single entry point for all digital assets in this country; anyone without the committee's permission is illegal.'
Another fact is that financial institutions in Western countries are the makers of the existing rules, so overturning existing regulations will have a broader and more severe impact than in Latin American countries. 'Traditional finance has lobbying groups that have been fighting against cryptocurrency, for example, implementing Operation Chokepoint 2.0 (which refers 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 once had a Canadian bank account frozen due to engaging in cryptocurrency activities. 'But countries like El Salvador, if they can act quickly to seize the opportunities brought by cryptocurrency, will reap significant 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 to technology. Most of the companies regulated by the agency operate on Ethereum. The size of the regulated companies varies greatly: from global heavyweights like Tether and Bitfinex Securities to small local businesses in El Salvador, which, according to Reyes, 'start at $2,000.'
Consumer safety and financial security are top priorities. For example, this means requiring exchanges to use multi-signature wallets to prevent another FTX incident or requiring companies' private blockchains to adhere to certain security standards. Mandatory identity verification is also required for every customer.
'It should be emphasized that our country has suffered from gang intimidation for many years. Therefore, we place great importance on financial transparency, money laundering, and financial terrorism issues, which have been strongly incorporated into regulation.' He believes that if a crypto company is regulated in El Salvador, it can obtain licenses anywhere in the world.
Reyes is particularly enthusiastic about one area: real-world assets (RWA). In his view, attempts like those of VLRM and Tokenization Expert will expand the investment opportunities for retail investors. 'Before the emergence of Robinhood, most young Americans could not buy stocks in Tesla or Nvidia. 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 emphasizes, 'This is the first time in modern history that developing countries can lead a financial revolution rather than being left behind, only able to pick up scraps. We are trying to encourage other countries to pay attention to El Salvador and learn how to apply our model to other nations.'
