The FCA announced on 3rd June 2021 that they were extending the end date of the Temporary Registrations Regime (“TRR”) for existing cryptoasset businesses from 9th June 2021 to 31st March 2022.
On 8th June 2021, El Salvador President Nayib Bukele’s proposal to make bitcoin legal tender was approved by El Salvador’s Congress. Bitcoin will become legal tender in the country, alongside the US dollar, in 90 days’ time. Under the law, bitcoin can be used for purchases or tax payments, and bitcoin exchanges will not be subject to capital gains tax. The government guarantees convertibility to US dollars at the time of the transaction through a trust set up at the Development Bank of El Salvador, with the bitcoin-dollar exchange rate set by the market.
The reasoning behind the move is to make it easier for Salvadorans living abroad to send money home. El Salvador is highly reliant on remittances, or money sent home from abroad. More than two million Salvadorans live outside the country and send back more than $4bn (£2.9bn) each year, an amount which makes up around 20% of the country’s GDP. It is also hoped that the legalisation of bitcoin as tender will open up financial services to the 70% of El Salvador who do not have access to traditional bank accounts.
This is the first time that a country has elevated the status of a cryptocurrency to legal tender, and as such this move could act as a catalyst for other countries to follow suit. Central banks of various nations will, no doubt, be considering the pros and cons of cryptocurrency versus central bank digital currencies (“CBDCs”) and watching the El Salvador experience closely. On the one hand it could be said that the perceived benefits of cryptocurrencies that El Salvador is seeking to harness could be achieved by CBDCs, but on the other hand CBDCs require significantly enhanced central bank infrastructure, as opposed to simply designating an existing cryptocurrency as legal tender.
Politicians in several other Latin American countries are reported to have recently argued for the adoption of cryptocurrencies as legal tender and this first move by El Salvador appears to have emboldened them. It will be interesting to see if other countries follow suit.
El Salvador’s move has potentially interesting implications on the legal status of cryptocurrencies, including whether they are to be treated as “money” or other types of “assets”.
The current trend in common law jurisdictions has been to accept that cryptocurrencies are property (either a commodity or a type of intangible asset - please click here for our previous coverage on this). The status of cryptocurrencies as property could have significant ramifications, particularly around financial regulation, issues of ownership and seeking legal assistance to recover lost or stolen cryptocurrencies. Please click here for our previous coverage on some of the English cases on injunctive relief for cryptocurrencies.
There may also be questions that arise on whether the status of bitcoin as legal tender will attach personal or proprietary rights. This could have an impact on the remedies available from the Courts. Related to that is the weighty question about whether bitcoin (or other cryptocurrencies) should be treated as money, which has significant implications for contractual and regulatory outcomes. We are not aware of the English Courts and Courts of other common law jurisdictions having to deal with the recognition of bitcoin as money (as opposed to property) thus far, but they do have a convention to treat foreign currencies as money. It will be interesting to see whether bitcoin’s designation as legal tender in El Salvador will encourage its treatment as money in the future.
There is also the added complication of what happens if various holders of cryptocurrencies decide to go to El Salvador to “cash in” their bitcoins. This could lead to a significant depletion of El Salvador’s US dollar accounts and in turn lead to a reduction in the value of the cryptocurrencies in El Salvador, leading to price arbitrage.
Impact on value?
Cryptocurrency is volatile; at the time of writing, bitcoin has declined roughly 50% from the April 2021 high of nearly $65,000. This can happen following a short tweet by someone influential. Second, original bitcoin has already forked twice and there is no way of stopping another fork – although the Salvadoran legislation refers only to “bitcoin” (by which we assume it refers only to BTC and not BSV or BCH), it is not clear how El Salvador will treat new cryptocurrencies that come to “market” (in particular, further bitcoin forks). The value of each cryptocurrency differs. Although El Salvador is seeking to rely on the “market” price for the cryptocurrency – there is no central bank that regulates the price of cryptocurrencies. In an extreme example, El Salvador could be exposed to a significant depletion in its US dollar reserves in return for cryptocurrencies. The cryptocurrencies in El Salvador’s reserves could then lose their market price because, for example, they are declared illegal in other major economies. Whilst extreme in example, it demonstrates the vulnerability of the position – El Salvador could try to limit the cryptocurrencies in circulation in its economy, but it is not clear how this could be achieved in circumstances where cryptocurrencies have been declared legal tender in El Salvador – it’s a chain reaction that has been started with potentially unpredictable and uncontrollable lifecycles.
What’s happening elsewhere in the world on the Crypto front?
This development occurs alongside other significant developments in views on cryptocurrencies around the world.
The legalisation of bitcoin in El Salvador happened on the same day that the former US President, Donald Trump, said that he saw bitcoin as a “scam” which is competing with the dollar to be the currency of the world. However, Hester Pierce, a senior US financial regulator, has spoken out against attempts to strictly regulate cryptocurrencies, warning that doing so runs the risk of discouraging investors. The US Treasury department announced last month that it would require cryptocurrency transfers worth $10,000 or more to be reported to the US tax authorities. Officials from the country’s three leading federal bank regulators — the Controller of the Currency, the Federal Reserve and the Federal Deposit Insurance Corporation — have begun discussing how best to regulate the market.
Meanwhile, in the UK, the FCA announced on 3rd June 2021 that they were extending the end date of the Temporary Registrations Regime (“TRR”) for existing cryptoasset businesses from 9th June 2021 to 31st March 2022. The TRR was established last year to allow existing cryptoasset firms that were in business immediately before 10th January 2020 and that applied for registration before 16th December 2020, and whose applications were still being assessed, to continue trading. Currently, a significantly high number of businesses are not meeting the required standards under the Money Laundering Regulations. The extended date allows cryptoasset firms to continue to carry on business while the FCA continues with its robust assessment of a cryptoasset firm’s eligibility for registration with the FCA.
This is an unprecedented time for crypto. All eyes will be on El Salvador, but the reaction of different markets, economies and legal systems around the world will be just as significant. Watch this space – we certainly will be!
Co-authored by Georgina Morris, Trainee Solicitor.