Draft El Salvador Bitcoin banking regulations released

The central bank of El Salvador, Banco Central de Reserva (BCR), has published draft regulations on how banks should handle Bitcoin.

Two documents were released for consultation on Aug. 17 instructing banks and financial institutions how to offer Bitcoin-related services to their customers.

The first, titled “Guidelines for the Authorization of Operation of the Digital Wallet Platform for Bitcoin and Dollars” (in Spanish), defines BTC as legal tender according to the recently drafted Bitcoin Law which was passed by El Salvador’s legislature on June 9 and will see the country formally adopt the digital asset on September 7.

The second document titled “Technical Standards to Facilitate the Application of the Bitcoin Law” is a longer and more detailed version of the first document.

Financial entities must apply to the central bank to offer digital wallets, the guidelines stated. Applications must detail the type of product being offered, and include target market details, risk assessments, charges to customers, education provisions for customers, and complaint procedures.

Know-your-customer (KYC) verification will be required for all customers though it was unclear whether the national ID card, which is used for basic bank accounts, would suffice for a crypto wallet. Full anti-money laundering (AML) procedures such as transaction monitoring and analysis would also be applied.

Two-way Bitcoin-to-dollar convertibility must be provided and the bank is allowed to charge a fee. According to a translation hosted by Attack of the 50 Foot Blockchain author David Gerard:

“The electronic platform used by the digital wallet administrators must allow the Central Bank access in real time to all information related to the operations carried out, as well as information requested by clients.”

All Bitcoin held by banks and companies must be fully backed as opposed to a fractional reserve. Dollars will be held at the central bank while BTC is held with a custodian, services for which can be contracted out.

Related: What is really behind El Salvador’s ‘Bitcoin Law’? Experts answer

Article 29 of the second document requires the bank or financial institution to warn customers that Bitcoin is volatile, transactions cannot be reversed, and that if they lose their private keys, then they lose the BTC.

There were no provisions for accounting standards or standard government exchange rates for converting Bitcoin into fiat and vice versa.

On August 16, American credit rating agency Fitch Ratings stated that the BTC adoption plan will likely be a credit negative for local insurance companies due to volatility and risk concerns.