This will destroy the country’s competitive monetary regime and create a regulatory nightmare.
Im 2001, El Salvador shelved its national currency, the colÃ³n, and put it in a museum. El Salvador’s current monetary regime is governed by the Monetary Integration Act. This law made the US dollar legal tender and established a competitive monetary regime, under which all currency that is mutually agreed upon by the parties to a transaction is legal to use.
The system worked wonderfully. Since 2001, El Salvador’s average annual inflation rate of 2.03% has been the lowest in Latin America. 25-year mortgages have remained stable at an interest rate of around 7%. GDP per capita growth (measured in purchasing power parity) and export growth have both been higher than in most Latin American countries.
Enter Salvadoran Bitcoin Law, which was hastily passed in the middle of the night of June 8. Supporters of the law, including Salvadoran President Nayib Bukele, say it will make Bitcoin legal tender on September 7. As one of us recently wrote. in the the Wall Street newspaper, it will actually be Bitcoin strength tender. Indeed, Article 7 of the law forces Salvadorans to accept Bitcoin if offered. This will destroy El Salvador’s competitive monetary regime and deprive those who are offered Bitcoin a choice. In addition, it will create a regulatory nightmare. The Intergovernmental Financial Action Task Force (FATF) will be everywhere in Salvadoran banks, businesses and other financial institutions as a wet blanket.
The FATF is the âinternational watchdog on money laundering and terrorist financingâ. It reviews countries’ practices in the fight against money laundering and the financing of terrorism. If the FATF determines that a country is exposed to financial crime, the reported country is placed either on the list of “Jurisdictions under enhanced surveillance”, known as the “gray list”, or on the list of “Jurisdictions under enhanced surveillance”. to a call to action. Known as the blacklist. When a country is placed on the gray list, it must cooperate with increased surveillance by the FATF. When a country is blacklisted, the FATF urges its 39 member countries and more than 200 affiliate countries to apply enhanced due diligence and impose countermeasures, such as sanctions. At present, 22 offenders are on the gray list, six of them in the Latin America-Caribbean region. Iran and North Korea are the only two countries on the blacklist.
From a FATF regulatory perspective, El Salvador has been as clean as a houndstooth. This will change if the Bitcoin law is implemented on September 7th. In a Johns Hopkins Applied Economics Studies Working document, we have identified 27 FATF regulations relating to virtual asset transactions that will be almost impossible to comply with for Salvadoran banks, businesses and their clients. For example, the FATF requires parties engaging in virtual asset transactions to provide complete and sufficient KYC information. It also requires senders and recipients of virtual assets to obtain precise knowledge and information about âthe transaction, the source of funds and the relationship with the counterpartyâ. The chances of Bitcoin transactions meeting these requirements are slim to none. Other likely alarm behaviors relate to bitcoin transaction patterns, trading Bitcoin for greenbacks, and exposure to criminal activity.
If you are wondering whether the FATF will poke its nose into El Salvador’s forced Bitcoin bid on September 7, the answer is an unambiguous ‘yes’. Just look at what the US State Department did recently. On July 1, he published a list of corrupt and / or anti-democratic actors in the North Triangle of Central America (El Salvador, Guatemala and Honduras). Of the 55 Central Americans now banned from the United States, 14 are Salvadorans. El Salvador’s Thug Gallery is populated by high-level members of President Bukele’s administration, including his chief of staff, minister of labor, deputy minister of security and legal adviser. They have been nailed on a long list of charges including money laundering, accepting bribes and undermining democracy. Bukele himself has already exceeded his democratic powers, including using the military to influence congressional legislation and overthrowing five Supreme Court justices who had previously ruled against him. The Bitcoin law, which has been strongly supported and hastily passed by the Bukele government, promises to invite more sanctions.
El Salvador’s Bitcoin law will have many unintended consequences and unintended costs. It is not yet known the exact terms that will be used to implement the Bitcoin Law. Indeed, every day we learn more about the possibilities and their contradictions. For example, after the law was passed and in the face of public anger, President Bukele announced that every Salvadoran would receive a one-time grant of $ 30 to start using Bitcoin. Either way, it is highly unlikely that Salvadoran banks, businesses and their clients will be able to pass through the Financial Action Task Force’s regulatory network. And the last thing El Salvador needs is a report by the FATF.
Steve H. Hanke is Professor of Applied Economics at Johns Hopkins University in Baltimore. He is a senior fellow and director of the Troubled Currencies Project at the Cato Institute in Washington, DC. Nicholas Hanlon is the Chief of Staff at the Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise.