El Salvador may be just an unknown small border country in the world, leaving a vague impression of hot volcanic landforms and diverse ecosystems. But in the crypto world, El Salvador is also a well-known existence.
Back to 2021, the global monetary environment at that time could be described as turbulent. The pandemic caused a sharp increase in monetary debt, and the global debt scale soared to US$27.5 billion. A new round of digital currency experiments emerged around the world, and Bitcoin became mainstream with great momentum, reaching US$69,000.
In this environment, Nayib Bukele, the newly elected president of El Salvador, made a rather bold decision to create a new financial system with a new currency and to make Bitcoin the country's sovereign currency. Congress unexpectedly supported it and eventually passed the bill with an absolute majority vote, officially making Bitcoin the country's legal tender, making El Salvador the first country in the world to grant legal status to cryptocurrency. Bukele also stated that land would be allocated to build basic infrastructure such as food, clothing, housing and transportation, and Bitcoin would be used as the settlement currency to build a complete Bitcoin city. The government even developed an e-wallet called Chivo to promote public adoption.
This decision caused a sensation around the world. The International Monetary Fund, global central bank institutions, and crypto industry practitioners all focused their attention on this small American country with a population of less than 7 million. There were mixed voices of opposition, ridicule, and applause. The whole world hoped to see the results they wanted from El Salvador's social experiment and witness its vision of a "Bitcoin City" that might be declining or glorious.
Under the hype and publicity, tourists flocked to El Salvador, bringing the first batch of fresh traffic. But problems also followed one after another. The high volatility of cryptocurrencies, the security of e-wallets, and the slowness of transfers quickly made people dissatisfied with cryptocurrencies. A year later, only 20% of locals continued to use Chivo. In November 2022, the crypto world suffered a heavy blow, and Bitcoin quickly fell to $16,000. However, the El Salvador National Bitcoin Office (ONBTC) was officially established in the same month. The untimely dislocation once again cast a shadow on El Salvador's Bitcoin plan. Since then, the Bitcoin City has gradually faded away, and El Salvador has gradually ended from the crypto stage.
A typical example is that in order to raise money for city building, the Salvadoran government had ambitiously planned to launch the world's first sovereign blockchain bond, the "Volcano Bond". However, the issuance time has been repeatedly postponed from 2022 to 2023 and then to 2024. The bond, which was originally expected to raise US$1 billion, is still nowhere in sight.
But now, with the market recovery and the relaxation of regulation, Bitcoin is only one step away from $100,000, and the global attitude has also changed significantly. The national reserve competition for Bitcoin has officially started, and many countries around the world have begun to show interest in including Bitcoin in their national reserves. In addition to the United States, which has made bold statements, Switzerland has also passed a bill to include Bitcoin in the national bank's reserve assets. Bhutan's Bitcoin holdings even exceed 30% of the total GDP. Members of parliament in Venezuela, Poland, Argentina, and Germany have all proposed relevant proposals.
El Salvador seems to have changed from a wishful extremist to an innovator who takes a different approach, becoming the first to try it out. According to The Bitcoin Office, since March 16 this year, El Salvador has been adhering to the principle of purchasing one coin per day. As of press time, its Bitcoin holdings have reached 5940.77 BTC, with a market value of $578,862,354. The hype of Bitcoin City has finally shown its investment value, and the city has taken shape. In August this year, Turkish holding company Yilport will invest $1.62 billion in two seaports in El Salvador, one of which is located in the "Bitcoin City". In terms of public education, El Salvador has also spared no effort, focusing on promoting Bitcoin wages among civil servants nationwide, shifting the salary structure from traditional currencies to Bitcoin, and even launching a Bitcoin certification program to provide Bitcoin-related training and certification for 80,000 civil servants.
But the public's conservative attitude is also more conservative than before. According to a new survey by Francisco Gavidia University in San Salvador, in El Salvador, only 7.5% of respondents said they used cryptocurrencies for transactions, while 92% admitted that they did not use cryptocurrencies, and only 1.3% believed that Bitcoin was the main direction of development in the country in the future.
Judging from the data alone, El Salvador's Bitcoin vision is still far away. Even with the president's strong support, El Salvador holds only 1.5% of its GDP in Bitcoin, and since 2022, El Salvador's cryptocurrency remittances have continued to decline, 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 launched by Bitfinex Securities to support the construction of the Hilton Hotel in El Salvador was even aborted due to failure to attract the minimum $500,000 required to continue operations, reflecting the failure of the Bitcoin effect in El Salvador. In this regard, the president can only reluctantly admit that "Bitcoin has not yet been widely adopted as we hoped."
But in any case, since the announcement of Bitcoin as a sovereign currency, the fate of El Salvador has been closely linked to Bitcoin. The brand of "Bitcoin Capital" has been established, and El Salvador's Bitcoin journey is still continuing. Currently, El Salvador is planning to build a new capital market around Bitcoin and is preparing to introduce more regulatory support policies. The results have already been seen. Just recently, Bitfinex Securities once again issued tokenized U.S. Treasury bonds for the first time under the legal framework of El Salvador.
In response to the above, Juan Carlos Reyes, chairman of the National Digital Assets Commission, El Salvador’s highest cryptocurrency regulatory agency, accepted an exclusive interview with Coindesk and discussed in depth the current status and future of digital assets in El Salvador.
The following is the full interview with Tom Carreras, translated by Gyro Finance with slight changes and adjustments:
El Salvador is ahead of most other countries in regulating cryptocurrencies. As the first country to adopt Bitcoin as legal tender, it has become home to many crypto companies.
“From a macro perspective, most people don’t understand what we are doing in El Salvador, they only see a small part of the picture,” Juan Carlos Reyes, president of the El Salvador National Digital Asset Commission (CNAD), said in an interview.
“Even for foreign companies that are regulated locally but don’t have a full local office, they don’t understand how advanced regulation is in El Salvador and how fast the industry is evolving.” Reyes said the president’s initiative is forcing state agencies to grapple with the implications of new technologies and their close ties to digital currencies.
As a result, El Salvador avoided delegating crypto regulation and oversight powers to traditional financial regulators — such as the Superintendent of the Financial System (SFS) — and instead created the CNAD from scratch with the goal of creating a tailor-made regulatory framework for cryptocurrencies rather than attempting to extend existing rules to digital assets.
“There is a method of inductive reasoning: when I see a bird, it 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 completely different from traditional financial instruments.
That’s why CNAD is taking a tech-focused approach to regulating cryptocurrencies as soon as computer science heavyweight Reyes becomes its leader in September 2023. Feedback from crypto companies that have received El Salvador’s Digital Asset Service Provider (DASP) license is very promising.
“We were totally surprised by how knowledgeable, meticulous, and technically savvy CNAD was,” Nick Cowan, group CEO of tokenization solutions company VLRM, said in an interview.
Victor Solomon, partner at Tokenization Expert, a tokenization consultancy in El Salvador, agrees. "We don't want to over-praise El Salvador, but we were shocked at how quickly they got to the heart of the matter in reviewing our application. We didn't have to spend time explaining the technical basis of our operations - they already understood the complexities of tokenization and the compliance measures that would be taken, and Reyes understands the practical challenges that businesses face, from fundraising to navigating regulations, which makes him not only a regulator, but also an advocate for businesses that have a positive impact on the Salvadoran economy," Solomon added.
Reyes was born in El Salvador and moved to Canada as a child to escape the war that was raging in the country at the time. He calls himself "high achiever" and has bachelor's degrees in computer science, mathematics and physics, as well as a master's degree in management from Harvard University. He then pursued a doctorate in philosophy at the Peoples' Friendship University of Russia, but did not complete it due to the pandemic and the war in Ukraine.
His professional background is highly complex and his career experience is quite extensive. After leading a consulting company for 15 years, he developed business opportunities for the Missanabie Cree First Nation and once opened a bar on the second floor of his beach house. He has been a believer in Bitcoin since 2013, so in 2021, he decided to move back to El Salvador to participate in the nationalization of cryptocurrencies.
CNAD has 35 completely independent employees, and Reyes provides sample standards for employees: everyone is familiar with the underlying technology of cryptocurrency. In fact, 20 employees are currently taking postgraduate cryptography courses at Argentina's CEMA University to improve their expertise.
“We have the best-educated and most complete team in the world when it comes to crypto asset regulation,” Reyes said. “If someone doesn’t know how to transact in Bitcoin, including my driver, they probably can’t work here.”
This crack team certainly makes a lasting impression on companies seeking to obtain a license to operate in El Salvador.
“Reyes is a technologist,” Cowan, whose firm has worked with dozens of other regulators around the world, told CoinDesk. “In other jurisdictions, regulators understand regulation and investor protection, which is critical, but they don’t necessarily understand the technology, which can make your job quite onerous at times.”
"It was a very detailed and complex process. We submitted a 700-page application, but once we submitted it, the decision process was much faster than in other countries... The process was consistent with any other regulatory process we have had to go through before. It's not that we took a different route, it's just faster," Cowan said.
For Reyes, the agency’s crypto know-how means it can adhere to one of the field’s most important philosophical tenets — don’t trust, verify — and check the blockchain every time it interacts with a new company applying for a license. The team doesn’t rely on documents provided by compliance officers, which are often found to provide regulators with false information.
Reyes likes to use an analogy to explain why cryptocurrencies need their own regulators: "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 find a battery, and he won't know what to do with it."
This is how Reyes feels about cryptocurrencies and traditional financial assets. They look similar on the surface, but dig deeper and they are very different. This is one of the reasons why jurisdictions around the world have been slow to implement 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. The country does not have its own currency, strong financial institutions, or even an existing developer ecosystem. But it is precisely here that all these things prove to be positive when it comes to regulating cryptocurrencies, because El Salvador “starts with a blank sheet of paper.”
Going back to the electric car analogy, El Salvador was able to focus immediately on repairing batteries and motors, rather than having to convert its existing infrastructure into garages that could repair Teslas.
“In other countries, a lot of new technology is created by rational people who are trying to move the crypto ecosystem forward, but they don’t think about how the technology can be abused and used as a tool for money laundering,” Reyes said. “It’s hard for regulators to know how far to relax regulations.”
“We are able to make CNAD the single entry point for all digital assets in this country, and any entity that does not have permission from the commission will be breaking the law.”
There’s also the fact that financial institutions in Western countries are the ones who make the existing rules, so overturning existing regulations would have a wider and more severe impact than in Latin American countries. “Traditional finance has a lobby that has been fighting crypto, such as implementing Operation Chokepoint 2.0 (referring to the actions of US regulators to restrict cryptocurrency companies’ access to banking services). They will do everything to ensure that this industry does not flourish,” said Reyes, who once had a Canadian bank account frozen for his cryptocurrency activities. “But countries like El Salvador will benefit greatly if they act quickly and seize the opportunities that cryptocurrencies bring.”
But what kind of regulatory environment does El Salvador want to create?
Reyes said that Bitcoin is “more than enough” in terms of financial instruments, but beyond that, the CNAD is agnostic about the technology. Most of the companies regulated by the agency run on Ethereum. The size of the regulated companies varies greatly: there are global heavyweights such as Tether and Bitfinex Securities, as well as small local businesses in El Salvador, which, according to Reyes, “start with $2,000.”
Consumer safety and financial security are top priorities. For example, this means requiring exchanges to use multi-signature wallets to ensure that another FTX incident does not occur, or requiring companies' private blockchains to follow certain security standards. The identification of each customer is also mandatory.
“It’s important to emphasize that our country has been terrorized by gangs for many years. Therefore, we attach great importance to financial transparency, money laundering and financial terrorism, which have been effectively incorporated into regulation.” He believes that if a crypto company is regulated in El Salvador, it can obtain a license anywhere in the world.
Reyes is particularly enthusiastic about one area: real-world assets (RWAs). In his view, efforts like VLRM and Tokenization Expert will expand the range of investment opportunities for retail investors. "Before Robinhood, it was impossible for most young people in the United States to buy Tesla or Nvidia [stock]. Robinhood democratized all these different stocks that only the super elite could buy. This is where tokenization comes in. In the coming years, Salvadorans will hopefully have access to regulated products that are not available in other jurisdictions."
“For the first time in modern history, a developing country can lead a financial revolution, rather than being left behind and picking up scraps,” Reyes stressed. “We are trying to encourage other countries to look at El Salvador and learn how to apply our model to other countries.”
