On 11 January 2023, the legislative assembly of El Salvador enacted the Digital Asset Issuance Law. The Law establishes a bespoke regime for the issuance of digital assets and other digital asset services such as trading platforms, custodians and brokers. It sets out to encourage economic development, ensure market integrity and create safeguards for investors in digital assets. It also offers certain flexible, novel features that have the potential to create regulatory and market efficiencies well suited to the fast-paced and rapidly evolving digital asset market. The jurisdictions' investor protection mandate is also well served by robust market participant obligations and regulatory sanctioning powers. The Law will likely reinforce El Salvador’s reputation as a jurisdiction supportive of digital assets.
Scope of Application
The Digital Asset Issuance Law applies comprehensively to the issuance and trading of digital assets and digital asset derivatives and importantly distinguishes this asset class from the application of securities law. This approach is an efficient solution to many of the product characterization issues faced by jurisdictions attempting to regulate digital assets through existing securities or derivative legislation.
A focal point of the Law is the creation of a framework for the public issuance of digital assets. The Law recognizes a variety of issuance types including debt, equity, stablecoins and other tokens. The framework’s contemplation of debt and equity digital assets issuances indicates that the jurisdiction may be well positioned to facilitate tokenized securities issuances. The issuance requirements in the Law do not apply to private offerings (i.e., proposals that are not available to the public) and non-fungible tokens (NFTs).
In addition to creating a framework for public issuance activity, the Law also establishes a framework for digital asset service providers including trading platforms, custodians and brokers. The framework also applies to a new class of entities referred to as “certifiers” that participate in public offerings of digital assets by reviewing the terms of the offering including its public disclosure document. Further elaboration on the Law’s framework for the regulation of digital assets will be included in future regulations.
The Law mandates the creation of a National Digital Asset Commission (NCC) with broad authorization and supervisory powers. This approach demonstrates the jurisdiction’s commitment to the industry. These dedicated resources should increase regulatory efficiency and build strong expertise in the oversight framework. Of note, the NCC is subject to prompt timeframes including, for example, a twenty-business day period to approve the registration of digital asset service providers which offers rapid speed to market for entities seeking to be regulated in El Salvador.
The Law also mandates the creation of a Bitcoin Fund Management Agency (BFMA) responsible for the administration, protection and investment of funds from public offerings of digital assets carried out by the state of El Salvador. The proceeds of such offerings are to be used to fund investments in public works and projects. The Law contains several important obligations to ensure that the BFMA manages funds responsibly and transparently.
Obligations for Digital Asset Service Providers
The Law creates flexible but robust regulatory obligations for digital asset service providers (trading platforms, custodians, brokers).
Digital asset service providers are required to:
- be registered,
- behave honestly and with integrity when dealing with clients,
- maintain adequate financial resources, and
- have appropriate custody and cybersecurity arrangements in place.
Importantly, the Law adopts a proactive approach to investor protection by requiring competitive pricing and transparency on fees charged in the provision of services. Further requirements for service providers are to be included in subsequent regulations.
Obligations for Digital Asset Issuers
As indicated by the Law’s title, a major focus is the development of a regime for public digital asset issuances. The framework represents an approach that is more flexible for the digital asset market than securities law-based issuance regimes.
An issuer will be considered to fall within the scope of the Law if it:
- is domiciled in El Salvador;
- uses an exchange or trading platform domiciled in El Salvador; or
- promotes or carries out a public offering to potential purchasers in El Salvador (unless done on a reverse solicitation basis).
Foreign issuers who wish to conduct an issuance under the Law may consider establishing an entity domiciled in El Salvador. There is no obligation under the Law for an issuer domiciled in the country to have local representatives in El Salvador.
Digital asset issuers are required to, among other things:
- safeguard client funds and digital assets,
- have anti-money laundering safeguards in place,
- abide by honest dealing requirements, and
- comply with record keeping requirements.
The fees associated with an issuance will be 0.01% of the amount of the public offering, which is significantly lower than other regulatory fees for traditional securities issuances in jurisdictions with active crypto markets.
Importantly, the Law anticipates significant disclosure requirements to be included in a Relevant Information Document and further issuance procedures, the details of which will be included in forthcoming regulations.
Obligation of Certifiers
An interesting and novel element of the Law’s issuance regime is the use of private-sector certifiers to evaluate and certify public offerings. This approach leverages private sector expertise and may significantly enhance the expediency of the public issuance process. As gatekeepers in the issuance process, certifiers must demonstrate relevant expertise and integrity and be registered with the NCC.
Digital asset certifiers are required to, among other things:
- register with NCC and have minimum five years of relevant experience,
- evaluate public offerings and submit a report on viability to NCC,
- certify a relevant information document,
- adhere to a timeline of 20 business days for the approval or rejection of an application,
- evaluate the feasibility of proposed offerings, and
- inform the Attorney General’s Office of possible illegal activity.
As the final arbiter of a public issuance, NCC approval is required, but certifiers should play a significant role in the process. There may be additional procedural obligations on certifiers issued through forthcoming regulations or technical standards.
Sanctions and Enforcement
Reinforcing its progressive and flexible approach for digital asset issuers and other service providers, the Law will protect investors and market integrity with robust requirements and standards. It contains comprehensive sanctioning and enforcement powers, including detailed market abuse prohibitions, penalties for inadequate disclosure and unauthorized digital asset market activities. Clearly, the Law has put an emphasis on the development of a framework that will protect investors.
If you would like to discuss anything mentioned in this article, or otherwise related to El Salvador’s Digital Asset Issuance Law, feel free to contact Juan Manuel Garrido at email@example.com.