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:
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:
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.