New Technologies and Innovation in the Finance Area in the Heart of Central America

The banking and financial sector has been the object of constant analysis and improvement in El Salvador, since it is a crucial factor in the energising of economies that are facing severe crises, such as the COVID-19 pandemic. In addition, in emerging economies, this sector ensures a more inclusive allocation of resources to the population, enables the formation of new business models related to financial technology (fintech), which improves the procedures through which agents of the community operate with their resources, and facilitates investments in local and international markets.

Since the middle of the past decade, public policies have been developed in El Salvador that seek to facilitate the inclusion of new business models and innovative forms of operation in banking, its users and clients. These bold initiatives have made it possible for El Salvador to distinguish itself as having unique opportunities and challenges that are being presented due to the new regulations of fintech institutions.

An Unprecedented Decision by the State of El Salvador Regarding Digital Currencies

In the last couple of months, El Salvador became the first country in the world to accept Bitcoin, a type of cryptocurrency, as legal tender. Currently, Bitcoin can be used in all types of legal business as repayment and must be accepted by all kinds of merchants, thus promoting innovation in the finance and banking sector and advancing the search for a reduction in the tax burden due to the decentralisation of this digital asset. Likewise, the state has facilitated tax benefits and a more friendly and attractive business climate for investors interested in the fintech sector.

The purpose of the Bitcoin Law is to regulate the Bitcoin as unrestricted legal tender with unlimited use in any transaction that people or companies require to carry out, whether they are public or private.

The Bitcoin Law allows the following:

• all tax contributions can be paid in Bitcoin;
• exchanges in Bitcoin will not be subject to capital gains tax, just like any legal tender;
• all economic agents must accept Bitcoin as a form of payment when offered by a person acquiring a good or service, apart from those who obviously and evidently do not have access to the technologies that allow them to execute transactions in Bitcoin; and
• all monetary obligations that are expressed in dollars and existed prior to the effective date of the Bitcoin Law may be paid in Bitcoin.

Currently, there are great challenges for the state and the private sector that, if properly analysed and worked on, will generate a significant advance in the modus operandi of the financial sector, as well as the enhancement of economic development in the region. If the use of these assets is not properly executed, the Salvadoran economy could be destabilised, leading to greater vulnerability for the population. For instance, public-private projects where the finance sector merges with technological start-ups have attracted the attention of investors and business developers in the region. There are other projects that are looking to get into the business of mining Bitcoins with sustainable energy.

In addition, the Financial System Inclusion Law has recently been developed in El Salvador, implementing innovative fintech policies and fostering a friendlier business climate for entities operating in this line of work. The purpose of this law, which came into force on 15 November 2016, is to establish the conditions for the development of electronic money and deposits in savings accounts with simplified requirements. Currently, due to this law, there are benefits that allow other technological businesses to operate easily in the financial sector without further authorisation of the Superintendency of the Financial System, which has permitted outstanding finance projects to take place.

A further purpose of the Financial System Inclusion Law is to promote an integral model in which banks, savings and credit companies, co-operative banks and electronic money providers can compete in the provision of financial services related to payments and money transfers. The Law regulates the following elements, among others:

• the requirements for incorporation, authorisation, operation, capital and guarantees, and the grounds for the revocation of electronic money providers;
• the requirements with which banks, co-operative banks and savings and loan companies must comply when providing electronic money and the legal consequences of not complying with them;
• electronic money, its generation, its use and the entities that can provide it;
• the contracting of savings deposits and the opening of the respective account by means of simplified contracting procedures, in order to promote banking penetration in the country among people with lower incomes or those whose domicile is far from the traditional financial service points of banks, co-operative banks, and savings and loan societies;
• the amount of electronic money managed by the electronic platform; and
• the basis for the formulation of public policies to promote financial inclusion.

In addition, the Financial System Inclusion Law regulates data protection for customers and users in this sector, due to the fact that the information from clients and their operations is confidential and shall be disclosed only to the owner, the Central Bank of El Salvador, the Superintendency and the Directorate General of Internal Taxes of El Salvador when they require it for the exercise of their control or supervision functions, and to the respective authorities for the clarification of crimes.

In conclusion, El Salvador has an ecosystem where different actors in society are looking towards improving the financial sector. There is no doubt this will create determinant changes in the operations of every area. In order to take advantage of these unique scenarios, there is a need to act efficiently, with continuous collaboration between the private and public sectors in order to ensure a positive impact in society through the innovation of procedures in the finance sector.