El Salvador and the Bitcoin bank proposal

El Salvador's Bitcoin journey

Similar to any new technology, it is often considered that crypto adoption is moving slowly. You may be surprised as it is faster than you think- at least when it comes to Latin America.  

If you are a frequent reader, you probably remember that we started talking about El Salvador and its Bitcoin adoption in 2021 discussing whether El Salvador was the first domino in the global adoption. 

2021 was an important year for El Salvador; President Bukele announced that Bitcoin would become legal tender in the country in a pre-recorded video reproduced at the Miami Bitcoin Conference. This event confused citizens while opening the door for a much faster crypto adoption. 

Only 2 years later, El Salvador’s government passed another piece of legislation announcing the issuance of Bitcoin bonds, also known as Volcano bonds. The main objective of this legislation was to launch a Bitcoin mining industry that depends on the country’s renewable energy. 

If you are interested in learning more about the mining plan for El Salvador, why not read this article: Bitcoin bonds: 'El Salvador set to launch Bitcoin bonds in 2024'.

Bitcoin adoption is now reaching another level as the country’s pro-Bitcoin president Nayib Bukele proposed the establishment of private investment banks that will offer Bitcoin.  

Milena Mayorga, El Salvador’s ambassador to the United States, explained that the Bank for Private Investment proposal is part of the economic plan for El Salvador to diversify the financing options to potential investors.

To fully understand how cryptocurrency can help a country develop and provide more financing options, you should be knowledgeable of the crypto sphere. If you are a newcomer, we suggest checking out available courses at our Learn Crypto Academy.

What is the Bitcoin bank proposal?

Let’s start with the definition of investment banking- it refers to a specific division of banking related to creating capital for governments and other companies. Investment banks engage in divergent financial activities such as underwriting new debt and equity securities, helping to facilitate mergers, acquisitions, and reorganisations, brokering trades, and providing guidance to institutional investors. 

To find more about crypto changing the way traditional banks operate, we suggest reading this article: 'Why cryptocurrency is shaking up the traditional banking system',

It is not a secret that the government wants to increase El Salvador’s GDP over the next five years and aims to do so by attracting foreign investment.  

To further integrate Bitcoin into El Salvador’s financial system, the new proposal wants to create a private investment bank that can conduct financial operations in Bitcoin and the U.S. dollar.  

The launch of a Bank for Private Investment could create a flow of financial resources to government projects and other business endeavours. 

If this reform is adopted, new private investment banks would be able to make loans, accept deposits, and provide other financial services using the U.S. dollar and Bitcoin. Additionally, private investment banks would be enabled to seek authorisation for digital asset services. In other words, they could become Bitcoin service providers.

At the time of writing, the proposal is still under review by the Technology, Tourism and Investment Commission and has not yet been approved.

Key requirements for a private investment bank

To create a bank for private investment, one needs to lay down a minimum capital of $50 million. At least two shareholders are required which can be foreign investors as well.  

According to the proposed reform of El Salvador’s banking sector, the Bitcoin bank would be able to raise funds from so-called sophisticated investors defined by the reform bill as those who have investment experience, along with freely available assets worth between $250,000 and $500,000.

More flexibility for private investment banks

Compared to traditional banks, private investment banks have more flexibility and fewer restrictions such as lifting the ban on foreign-related contracts with affiliated legal entities or eliminating loan restrictions. They are not subject to the same stringent laws as traditional banks.

Therefore, the Bitcoin bank would be free to engage with foreign banks or finance companies. New investment banks would also avoid being subject to the prohibition of granting credit or assuming risks for more than 25% of the Asset Fund concerning the same person.

Can the Bitcoin bank enhance private investment?

Several research papers over the years suggested that economic growth presents a key determinant of investors' aim to invest in infrastructure projects as well as the development of the country’ financial sector and governance quality. 

When it comes to developing economies, public investment is one of the main elements to foster economic growth since it plays a significant role in developing infrastructure and addressing market failure in areas where the private sector may hesitate to invest due to higher risks. 

On the other hand, private investment assumes an important role in the development of financial markets as well as creating employment opportunities and increasing incomes.  

El Salvador’s government has been making important moves since 2021 and now it thinks that private investment banks that provide cryptocurrency services are vital for the success of the country’s economic plan. These financial institutions seem to be the key that could unlock further opportunities and boost the country’s financial system.  

Since the law is not yet enacted, it might be too early to state whether it could enhance El Salvador’s financial landscape. However, the introduction of this reform expresses once again the country’s commitment to using Bitcoin for economic development and attracting foreign investment. Some forecasts even say that El Salvador's real GDP could scale 10-fold during the next five years.

The potential launch of a Bitcoin Bank has the purpose to bring over sophisticated investors and link resources into projects that create jobs, raise incomes and overall drive economic growth. If this proposal works out, it could positively impact El Salvador’s economic status.