Digital Securities Law Approved by El Salvador

El Salvador's Congress has approved a digital securities law allowing the country to raise funds through the world's first sovereign blockchain bond. The nation's legislative assembly approved the bill on Wednesday.

The law received 62 votes in favor in Congress, with only 16 against it. It will now be sent to President Nayib Bukele for signing.

“El Salvador's Legislative Assembly has just approved, by an overwhelming majority, the new Digital Securities Law! Forward, always forward,” wrote President Nayib Bukele on Twitter.

With the passing of this legislation, the small Central American nation is establishing a legal framework for all digital assets that are not Bitcoin, along with those issued on Bitcoin.

The law will basically regulate the issuance of digital assets by state-run and private entities. This new digital asset regulatory framework also paves the way for issuing its much anticipated Bitcoin-backed bonds, also known as the Volcano Bonds.

The new law will provide clarity and certainty for businesses and investors looking to participate in the country's digital economy and is a significant step forward for El Salvador in its goal to become a leading destination for blockchain innovation.

A Regulatory Framework For Digital Assets

El Salvador's digital asset securities law is a breakthrough for the “Bitcoin Country,” which allows for the issuance of digital assets. This is a historic move for El Salvador, which became the first country to adopt Bitcoin as a legal tender in September of 2021. When President Bukele introduced the bitcoin law in June 2021, the Legislative Assembly approved it in hours.

Since then, El Salvador has used Bitcoin and the US dollar, which was adopted as legal currency in 2001. And as a legal tender, governments and businesses must accept Bitcoin as payment.

Now, the new law creates a set of guidelines for issuing digital assets and the broader crypto token classification to cover altcoins and tokenized securities. This will help to reduce confusion and ambiguity surrounding the legal status of digital assets other than Bitcoin and should make it easier for businesses to comply with the law. It will also create a level playing field for businesses operating in this space.

“The purpose of this law is to establish the legal framework that grants legal certainty to transfer operations to any title of digital assets used in public issuance offers,” states the legislation.

The law further indicated that issuers might make public offerings using existing digital assets. The provisions of the law, however, do not apply to digital currencies issued by central banks, including fiat currencies and digital fiat (CBDCs), which are regulated per each country's financial guidelines. It, however, includes digital assets that are legal tender, such as bitcoin and Non-Fungible Tokens (NFTs).

This bill is designed to attract investors, both national and foreign, as well as create new financing opportunities for citizens, companies, and the government.

Under the new digital asset regulatory framework, a Bitcoin Fund Management Agency would also be established. This agency would provide oversight and administration for public offerings of digital assets issued by the country and its institutions.

Paving the Way for the Volcano Bond

The 33-page digital securities bill was first proposed a few months back in November of 2022. The bill lays down the legal groundwork to allow the nation to move forward with its Volcano Bonds.

The El Salvadoran Bitcoin Office announced that the bill had passed on January 11, tweeting to say they would start issuing bonds shortly. With the issue of the first volcano bonds, the country aims to blaze the path forward for a “new monetary revolution.”

The Volcano Bond, more accurately described as Volcano Token, is a digital token that would help this small Central American country raise capital to pay down its sovereign debt and direct funds towards the creation of Bitcoin mining infrastructure and fund the construction of “Bitcoin City.”

Salvadoran President Nayib Bukele originally announced the plans for Bitcoin City in November of 2021. At the time, he shared that the Bitcoin City would be a special economic zone built on the Gulf of Fonseca on the southern coast of El Salvador, near the Conchagua volcano. The city will offer friendly regulations and tax advantages, create mining infrastructure, and incentivize Bitcoin businesses and entrepreneurs to open offices and startups within the nation.

El Salvador's Volcano Token is looking to raise a whopping $1 billion. And it would be backed by the proceeds from its geothermal Bitcoin mining operation — which takes advantage of the energy from the nation's active volcanoes.

By utilizing El Salvador's natural resources and geothermal energy, the Bitcoin mining industry would only use renewable energy to generate new Bitcoin. This essentially makes investment in the bond appealing to both traditional and ESG investors.

Bitfinex will be providing the technology infrastructure for the nation's Volcano Token, said the cryptocurrency exchange in a statement. The bond issuance was supposed to happen in March of 2022, but because of the severe bitcoin bear market last year, it has been postponed multiple times. It is now expected to move forward now that the new regulatory framework is in place.

The New Bitcoin & Crypto Hub

With its latest crypto-friendly legislation, El Salvador is moving closer to its vision of becoming a leading financial hub for the global Bitcoin economy. This puts the country in a similar position to current leaders in legacy finance, such as Switzerland — which categorizes cryptocurrencies as assets making it one of the most bitcoin-friendly countries.

The digital asset issuance law in El Salvador comes shortly after the formation of the country's National Bitcoin Office (ONBTC). The ONBTC was created in November of 2022 to oversee the nation's domestic Bitcoin projects.

As an official government office, the ONBTC will oversee and carry out the country's planned Bitcoin projects. Additionally, the ONBTC will collaborate with other nations internationally to develop and advise on Bitcoin policy.

The Bitcoin Office took to Twitter to share that by passing this “landmark” legislation. El Salvador is building on its first-mover advantage.

“With the passing of this digital securities law, El Salvador will offer unprecedented consumer protection from bad actors in the ‘crypto' space while also firmly establishing that we are open for business to all those who wish to build the future with us on bitcoin,” said ONBTC in a tweet.

According to ONBTC of El Salvador, the new legislation will also create the National Digital Assets Commission. This regulating agency will be responsible for applying the securities law and protecting the rights of digital asset purchasers and issuers in El Salvador. Furthermore, the commission will work to deter fraudsters from operating in the country.

“El Salvador is the epicenter of Bitcoin adoption, and thus, economic freedom, financial sovereignty, censorship resistance & un-confiscatable wealth,” ONBTC tweeted.

Crypto Market Rebounds

The cryptocurrency market, which has been in a bear market ever since last year, reacted positively to El Salvador's announcement and experienced a bounce this week.

Bitcoin went past $18,000, recording an over 4% jump in the past 24 hours and nearly 8% in the past week. As of writing, BTC is trading at $18,215. However, the leading cryptocurrency is still down about 74% from its all-time high (ATH) of $69,000 hit in Nov. 2021.

Despite the downturn, President Bukele has been steadfast in his belief in Bitcoin. Just two months ago, he announced that the country would be buying 1 Bitcoin per day, for an indefinite amount of time, despite the current bear market and Bitcoin's price decline. This demonstrates the President's commitment to the Bitcoin strategy that El Salvador has adopted.

So far, the El Salvadoran government has purchased 2,381 BTC for a total amount of $107 million. But some people have pointed to El Salvador currently losing money on its Bitcoin held on the nation's balance sheet. But El Salvador hasn't sold any Bitcoin yet, and with the next Bitcoin halving approaching in early 2024, the market could see a change in direction in the near future.

For now, the crypto market is enjoying the green after months of no reprieve from bears. In 2022, the collapse of Terra/Luna, crypto lenders Celsius and BlockFi, crypto exchange FTX, and many other entities wiped out nearly $1.5 trillion from the market. The total crypto market cap is now inching closer to the $1 trillion mark yet again.