Though El Salvador only recently hit headlines with its adoption of Bitcoin, it has had regulations that provide guidelines on the digitisation of financial services and fintech since 2015. The guidelines intend to incorporate as many users as possible and to push the banking sector forward.
The guidelines have two primary aims. The first, to integrate the unbanked section of the population into a more accessible financial system, is widely accepted at the international level and allows more people to creditworthy and enjoy a subsequent improval in their quality of life. The second is to establish additional guidelines regarding cryptocurrencies and the minimum requirements to be met by companies interested in participating as suppliers within the financial system.
Fintech for the Unbanked
While the “Law to Facilitate Financial Inclusion” and its additional implementing regulations dictated by the Superintendent for the Financial System, mark an important step in supporting the unbanked population, expanding e-money systems and providing additional regulation for fintech, it is necessary for this regulation to cover more areas in order to create new business opportunities in a healthy, orderly way for users.
The guidelines can integrate the unbanked section of the population into a more accessible financial system
Why? Because fintechs are much more than a product or traditional “banking” service provider. Fintechs also provide B2B services and, importantly, cheaper transactions through multiple platforms. They could be used to develop safer transactions by establishing minimum requirements on, for example, data encryption (even through Blockchain) and by integration into the existing digital regulation (the “Electronic Signature Act and Electronic Commerce Act”). To do this, we believe it would be valuable to develop broader regulation covering more general aspects of the industry while taking care to avoid falling into overregulation, which in practice will make technological developments impossible.
Some examples of this could be to support or encourage making transactions with existing cryptocurrencies, like Bitcoin, greater regulation of capital raising mechanisms (such as Crowdfunding) as an alternative way of financing, and even the creation of regulatory sandboxes as temporary spaces to carry out pilot tests of new regulation to measure its advantages, disadvantages and inconveniences in a defined space where its effects are controlled, before moving into use within the general application.
Examples to Work From
Examples of this are already in play in other areas of Latin America. Mexico’s “Law to Regulate Financial Technology Institutions”, popularly known as the Fintech Law, addresses these and other aspects related to financial regulation. These including the handling of information flowing through fintech services and its classification as “open data” (data that does not contain confidential information), “aggregate data” (statistical information of transactions at a group level, without the ability to identify individuals) and “transactional data” (related to the use of a product or service). These supplementary regulations are accompanied by authorisation stages in which users must grant permission for their data to be shared.
The relevance of these types of change would allow El Salvador to put itself on the global map for progressive technology use and, very importantly, facilitate the participation of more financial actors to provide a greater array of products and services to sections of society who have historically not had access to banking.
We consider El Salvador to have two key factors for the successful adoption of cryptocurrencies. The first is that nearly a quarter of the Salvadoran population receives remittances that are currently expensive to send. The cost of this vital financial source could be be significantly reduced with the implementation of cryptocurrencies as legal tender, allowing payments to go through digital wallets instead of sending remittances via financial institutions.
Secondly, experiments of this type of economic dynamics have been carried out in Playa El Zonte, where its residents have made a gradual transition of their economy to cryptocurrency. This move has been viable when the population is duly informed regarding the use of said financial assets.
We consider that this is a good time to broadly analyze the phenomenon of fintech and take the opportunity to generate a regulation that not only covers points already contemplated in other countries, but also establishes the most advanced policies possible for the healthy growth and development of this industry in our country.
Fernando Argumedo