El Salvador has passed a new groundbreaking banking law allowing licensed investment banks to hold Bitcoin on their balance sheets and offer crypto services to professional investors. This development means institutional clients and high-net-worth individuals can now hold digital assets in investment banks and access crypto services, marking a watershed moment for crypto users.
The new law will aim to foster crypto adoption in the country, which has been relatively low since El Salvador made Bitcoin legal tender. However, the new banking law applies to investment banks, and not commercial banks.
What Does the Law Mean for Investment Banks?
The law distinguishes investment banks from traditional commercial banks and imposes high entry thresholds, including a minimum of $50 million in registered capital and $250,000 in disposable funds. This means only financial institutions with at least $50 million in capital can qualify as an investment bank under the new legislation. To further clarify, only those with at least $250,000 in liquid assets can access crypto services.
Investment banks, upon meeting the criteria, can now apply for a Digital Asset Service Provider license (PSAD), allowing them to operate as a full-scale digital asset service bank. Head of the Commission of Digital Assets Juan Carlos Reyes said licensed banks can operate entirely in Bitcoin under the new banking framework. The new law will attract foreign investments in El Salvador, positioning it as a major financial hub.
From Retail to Institutional Offerings
The new legislation is focused on institutional offerings, rather than retail. Institutional investors have been the major driver of crypto adoption in El Salvador since the country’s major pivot to cryptocurrencies in 2021. BTC adoption in the country has been relatively slow, with only 2 out of every 10 Salvadorians claiming they have adopted digital assets. Despite a widespread public-sector push, El Salvador failed to spur mass adoption of crypto.
Although El Salvador has walked back on some crypto policies, such as stopping the accumulation of Bitcoin, to secure a $1.4 billion loan facility from the IMF, the latest move highlights President Nayib Bukele’s intentions to still push for BTC adoption. Critics argue that Bitcoin adoption only benefits the government and large businesses. When you critically analyze the situation, they might not be far from the truth. The new banking law further reinforces this sentiment by favoring exclusivity over accessibility.
The average Salvadorian will no longer be the primary stakeholder of digital asset services via banks. However, those retail consumers using Chivo are unaffected by the new development.
Broader Implications for the Crypto Ecosystem
The new banking law legitimizes institutional holding and management of Bitcoin. El Salvador finally aligns its crypto space with traditional finance, which will pave the way for more adoption. Investment Banks might soon offer tokenized products and asset-backed loans.
El Salvador declared Bitcoin as legal tender in 2021. Back then, mass adoption was heavily promoted, but now, the focus is on institutions. This aligns with the IMF’s suggestions in light of the $1.4 billion loan facility, in which it recommended that the public sector minimize risk exposure to crypto involvement.
El Salvador Forges International Collaborations for Crypto Growth
In July, President Nayib Bukele met with Pakistan’s state minister of crypto and blockchain, Bilal Bin Saqib, to discuss opportunities in blockchain and how to drive growth through crypto mining and Bitcoin adoption. Both countries are emerging economies under the IMF, and their meeting was purely based on leveraging Blockchain technology for national growth.
A few weeks later, Bolivia signed an MoU with El Salvador to promote the use of digital assets as an alternative to Fiat. This comes before the report that Bolivia’s inflation had hit 25%, the worst in over three decades. Currency crisis, scarcity of U.S. dollars, and a volatile economy also worsened, prompting Bolivians to pivot to cryptocurrencies.
El Salvador’s new banking law suggests a strategic recalibration. It’s now focused on institutional engagement, selectively building infrastructure for the banking system. However, this move means embracing institutional confidence at the expense of broad or retail adoption. Whether it will encourage financial innovation or favor the interests of the elite is unknown. El Salvador’s next moves will give a clearer picture.
