El Salvador’s Bitcoin initiative faces difficulties, with 89% of crypto service providers inactive. A report reveals that only 20 out of 181 firms comply with regulations. While the government backs the Chivo Wallet, concerns over compliance, infrastructure, and IMF warnings about financial risks create challenges. Despite a commitment to Bitcoin, a vibrant crypto ecosystem remains elusive as most providers fall short of operational standards.
El Salvador’s ambitious endeavour to adopt Bitcoin has encountered significant challenges, as nearly 90% of registered crypto service providers are inactive. A recent report from El Mundo, based on data from the Central Reserve Bank, reveals that out of 181 Bitcoin firms, 161 are non-operational, leaving only 20 active businesses, including the government-backed Chivo Wallet.
The lack of compliance is noteworthy; at least 22 inactive providers appear not to meet the regulatory standards stipulated in Article 4 of the Bitcoin Law Regulation. This legislation mandates that crypto businesses maintain high integrity levels, implement anti-money laundering protocols, maintain clear records of assets and liabilities, and deploy industry-specific cybersecurity measures. The ongoing compliance status of the remaining providers remains ambiguous.
El Salvador made a historic move by declaring Bitcoin legal tender in 2021, aiming to stimulate tech investments and serve unbanked populations. Despite initial enthusiasm revolving around the Bitcoin Law, significant obstacles emerged, including technical failures with the Chivo wallet and limited adoptions, with many residents reportedly ceasing its use within a year.
Hon Ng, chief legal officer at cryptocurrency exchange Bitget, highlighted the investigation’s findings as indicative of deeper structural challenges in the execution of the Bitcoin Law. The prevalence of inactive firms indicates pressing infrastructural and regulatory gaps that need addressing to cultivate an effective local crypto environment.
The International Monetary Fund (IMF) raised concerns regarding El Salvador’s Bitcoin Law during discussions for a $1.3 billion support package. The IMF cautioned about potential financial stability risks and urged for the revocation of Bitcoin’s legal tender status. Following these discussions, adjustments were made to the law, reducing the government’s obligation to engage in Bitcoin transactions and letting businesses decide whether to accept BTC.
Despite these setbacks, President Bukele has maintained a positive outlook on Bitcoin investments, asserting that the country holds over 6,100 coins, valued at around $500 million. However, the origins of necessary funding for these purchases are unclear, leading to worries about the potential misuse of public funds.
The inactive status of most Bitcoin providers raises questions about the crypto infrastructure’s viability in El Salvador. The registry’s data does not clarify the reasons behind the drop in active firms. As Hon Ng noted, the significant gap between the Bitcoin Law’s requirements and the realities faced by financial service startups in El Salvador can hamper operational viability.
Furthermore, the mandated cybersecurity measures in the Bitcoin Law can be a daunting hurdle for smaller firms lacking sufficient resources, compounded by regulatory uncertainties and minimal user adoption. As a result, businesses that entered the market with optimism may succumb to inactivity as they encounter these real-world challenges.
While the El Salvador government continues to promote Bitcoin initiatives, including plans for delayed Volcano Bonds linked to Tether, outside of Chivo and a few platforms, a thriving crypto ecosystem appears absent. The future of El Salvador’s Bitcoin journey remains uncertain, particularly with only 20 active service providers amid growing regulatory pressures.
