El Salvador, a small Central American nation known for its stunning coastlines and rich culture, has emerged as a frontrunner in the adoption of cryptocurrency.

The pivotal moment came on June 9, 2021, when the Salvadoran parliament passed a law recognizing Bitcoin as legal tender, alongside the U.S. dollar. This groundbreaking decision has not only placed El Salvador on the global crypto map but has also fostered an environment conducive to innovation in financial technology. The government’s commitment to embracing digital assets has paved the way for various crypto-related businesses to flourish.

The Local Approach to Crypto

El Salvador’s approach to cryptocurrency is characterized by a blend of progressive regulatory frameworks and a commitment to financial inclusion. The Salvadoran government has created a regulatory environment that supports cryptocurrency transactions while ensuring businesses adhere to necessary legal requirements. This has positioned the country as a crypto-friendly jurisdiction, attracting international businesses and investors eager to explore the potential of digital assets.

The Regulation

El Salvador has crafted a dual regulatory approach for cryptocurrencies:

1. Bitcoin Law (2021): Establishes Bitcoin as legal tender alongside the U.S. dollar, setting guidelines for Bitcoin-specific activities.
2. Digital Asset Issuance Law (LEAD) – 2023: A broader regulatory framework for digital assets, excluding Bitcoin, managed by the National Commission for Digital Assets (CNAD). This law aims to regulate the issuance, trading, and custody of digital assets, ensuring compliance with international standards on AML/KYC.

BSP Activities include:

• Exchange: Converting Bitcoin to and from fiat currency or other cryptocurrencies.
• Custody: Safekeeping Bitcoin for clients.
• Payment Processing: Facilitating transactions where Bitcoin is used as a payment method.

DASP License (Digital Asset Service Provider) allows for:

• Trading: Facilitating the buying and selling of digital assets other than Bitcoin.
• Custody: Holding, storing, or managing digital assets on behalf of clients.
• Issuance: Managing the creation and distribution of new digital assets.
• Promotional Activities: Marketing or providing advice related to digital assets.

Both DASP and BSP licenses require adherence to basic regulatory standards such as AML policies and AML officers, financial records maintenance, suspicious transaction reporting obligations, cybersecurity measures, and compliance with international standards. Unlike the DASP license, which involves a full licensing process managed by CNAD, the BSP registration with the Central Reserve Bank (BCR) does not involve the issuance of a traditional license.

Companies applying for these licenses must submit detailed documentation outlining their business model, compliance policies, and operational plans.

Benefits of Establishing a VASP in El Salvador

El Salvador offers numerous advantages that appeal to both domestic and international businesses. The country’s unique political and economic climate, bolstered by government support for cryptocurrency, presents several benefits:

• Zero Capital Gains Tax: El Salvador exempts cryptocurrency businesses from capital gains tax, allowing companies to trade, invest, and sell digital assets without incurring tax liabilities. This exemption significantly enhances the profitability of crypto-related ventures.
• Exemption from Income Tax: Earnings derived from digital assets are also exempt from income tax, providing further financial relief to businesses operating in this sector.
• No Tax on Transfers: The tax on the transfer of movable goods and services does not apply to cryptocurrency transactions, simplifying the tax obligations for VASPs.

These tax incentives have positioned El Salvador as a tax haven for crypto entrepreneurs, fostering an ecosystem ripe for investment and innovation. Companies can reinvest their earnings into growth initiatives, stimulating the economy and creating jobs within the crypto sector.

• Supportive Regulatory Environment: The Salvadoran government’s commitment to promoting digital asset adoption provides an encouraging and stable regulatory framework. This support can lead to beneficial partnerships between the government and crypto companies, fostering innovation and growth.
• Potential for Regional Expansion: Operating in El Salvador grants companies a foothold in Central America, with opportunities to expand into neighboring markets. The country’s unique position as a pioneer in cryptocurrency legislation can serve as a launching pad for broader regional initiatives.

Conclusion

As the European Union prepares to implement the Markets in Crypto-Assets (MiCA) regulation, which brings comprehensive, demanding, and closely monitored requirements for VASPs, and with offshore jurisdictions also tightening their regulatory frameworks, El Salvador stands out as an attractive alternative. Its pioneering yet straightforward approach to cryptocurrency regulation—characterized by lower costs, a streamlined process, and minimal bureaucratic hurdles—offers a unique opportunity for businesses.

Porat Group is your strategic partner for business success, offering a seamless blend of legal and industry expertise. Our one-stop approach supports your venture at every stage, giving you a competitive edge in today’s fast-paced market.

When you choose Porat Group, you benefit from:

• Legal Support – From idea to execution, we guide you through licensing across multiple jurisdictions. We handle every step, including applications, communication with regulators, policy drafting, and ensuring full compliance.
• Payment Solutions – We help you set up bank accounts, connect with payment providers and crypto exchanges, and find reliable payment solutions that fit your business needs.
• Compliance Services – Stay compliant with our updates, expert advice, outsourced compliance officers, and AML solutions. We also offer compliance training and tools to ensure you meet all regulatory requirements.
• Global Professional Network – We connect you with local law firms, accountants, and service providers worldwide to ensure your business stays in good standing, wherever you operate.
• Trusted Industry Partner – Leverage our industry relationships to access the best service providers, allowing you to benefit from our network and connections.

For more information contact us and we would be happy to assist you throughout your process. 

written by

Or Reizis, adv.

Senior associate, Porat & co` Law Firm.