How is the Bitcoin City in El Salvador coming along?

Written by: Tuo Luo Finance

In the world, El Salvador may just be an obscure border country, leaving a vague impression of hot volcanic landscapes and diverse ecosystems. But in the crypto world, El Salvador is a name that resonates.

Back in 2021, the global monetary environment could be described as tumultuous, with the pandemic leading to a sharp increase in monetary debt, and global debt soaring to $27.5 trillion. A new wave of digital currency experiments emerged globally, and Bitcoin's mainstream adoption surged, reaching $69,000.

In this environment, the newly inaugurated President Nayib Bukele made a rather bold decision to create a new financial system with a new currency, designating Bitcoin as the country's sovereign currency. The National Assembly unexpectedly supported this, ultimately passing the bill with an absolute majority, officially making Bitcoin the legal tender of the country, thus making El Salvador the first country in the world to grant legal status to cryptocurrency. Bukele also stated that land would be allocated to build infrastructure for living essentials, using Bitcoin as the settlement currency, and constructing a complete Bitcoin city. The government even developed an electronic wallet named Chivo to promote adoption among the populace.

This decision caused a sensation globally, with the International Monetary Fund, global central banking institutions, and crypto industry practitioners focusing their attention on the Central American nation of less than 7 million people. Voices of opposition and praise intertwined, as the world hoped to see the results it desired from El Salvador's social experiment, witnessing the vision of a "Bitcoin City" either flourish or falter.

Amidst the hype and publicity, tourists flocked to El Salvador, bringing the first wave of fresh traffic. However, problems soon followed. The high volatility of cryptocurrencies, the security of electronic wallets, and the slow and cumbersome transfer processes quickly led to public dissatisfaction with cryptocurrencies. A year later, only 20% of locals continued to use Chivo. By November 2022, the crypto world faced a severe setback, with Bitcoin rapidly falling to $16,000, while the El Salvador National Bitcoin Office (ONBTC) was officially established in the same month, an ill-timed misalignment casting a shadow over El Salvador's Bitcoin plans. Subsequently, the vision of Bitcoin City drifted further away, and El Salvador gradually faded from the crypto stage.

A typical example is the "Volcano Bond," the world's first sovereign blockchain bond that the Salvadoran government had ambitiously planned to issue to raise funds for the city. The issuance date has been repeatedly postponed, from 2022 to 2023 and now to 2024, and the bond, originally expected to raise $1 billion, remains indefinitely delayed.

However, as the market has warmed up and regulations have loosened, Bitcoin is now just a step away from $100,000, and the global attitude has changed significantly. The race for national Bitcoin reserves has officially begun, with several countries around the world showing interest in incorporating Bitcoin into their national reserves. Besides the United States, which has made bold claims, Switzerland has also passed legislation to include Bitcoin in its national bank reserve assets, while Bhutan's Bitcoin holdings even exceed 30% of its GDP. Legislators in Venezuela, Poland, Argentina, and Germany have also proposed related initiatives.

El Salvador seems to have transformed from a delusional extremist into an innovative trailblazer, becoming the first to take the plunge. According to The Bitcoin Office, since March 16 of this year, El Salvador has adhered to a principle of purchasing one Bitcoin daily, and as of the time of writing, its Bitcoin holdings have reached 5,940.77 BTC, with a market value of $578,862,354. The hype surrounding Bitcoin City has finally begun to show investment value, with the city's initial form taking shape. In August of this year, Turkish holding company Yilport announced an investment of $1.62 billion in two ports in El Salvador, one of which is located in "Bitcoin City." In terms of public education, El Salvador is also making efforts to promote Bitcoin salaries among public servants, shifting the salary structure from traditional currency to Bitcoin, and even launching a Bitcoin certification program to provide training and certification related to Bitcoin for 80,000 public employees.

However, public sentiment has become more conservative than ever. According to a new survey by the Francisco Gavidia University in San Salvador, only 7.5% of respondents indicated that they use cryptocurrencies for transactions, while 92% admitted they do not use cryptocurrencies, and only 1.3% believe Bitcoin is the main direction for the country's future development.

From the data alone, El Salvador's Bitcoin vision still seems distant. Even with strong presidential support, the Bitcoin held by El Salvador accounts for only 1.5% of its GDP, and since 2022, remittances in cryptocurrency to El Salvador have continued to decline, dropping from $84.8 million to $57.4 million. According to data from the Central Bank of El Salvador, from January to August 2024, only 1.1% of all remittances sent to the country involved cryptocurrencies. In April of this year, the first tokenized debt project initiated by Bitfinex Securities to support the construction of the Hilton hotel in El Salvador even failed to attract the minimum required funding of $500,000 to continue operations, reflecting the failure of the Bitcoin effect in El Salvador. In response, the president could only helplessly admit, "Bitcoin has not achieved the widespread adoption we hoped for."

Nevertheless, since the announcement of Bitcoin as the sovereign currency, El Salvador's fate has been closely tied to Bitcoin. The brand of "Bitcoin City" has been established, and El Salvador's Bitcoin journey continues. Currently, El Salvador is planning to build a new capital market around Bitcoin and is preparing to launch more regulatory support policies. The effects are already showing; recently, Bitfinex Securities again conducted the first public offering of tokenized U.S. Treasury bonds under El Salvador's legal framework.

In light of all this, Juan Carlos Reyes, chairman of El Salvador's highest cryptocurrency regulatory body, the National Digital Assets Commission, accepted an exclusive interview with Coindesk to discuss the current status and future of digital assets in El Salvador.

Below is the full text of the interview by the original author Tom Carreras, translated and slightly modified by Tuo Luo Finance:

In regulating cryptocurrencies, El Salvador is ahead of most other countries. As the first country to adopt Bitcoin as legal tender, it has become a hub for many crypto companies.

"From a macro perspective, most people do not understand what we are doing in El Salvador; they can only see a corner of the whole picture," Juan Carlos Reyes, chairman of the National Digital Assets Commission (CNAD) of El Salvador, mentioned in an interview.

"Even those foreign companies that are regulated locally but do not have a full office here do not understand the advanced level of regulation in El Salvador and the rapid pace of development in the industry," Reyes stated, adding that the president's initiative has forced national institutions to grapple with new technologies and the impacts closely tied to digital currencies.

Thus, El Salvador avoided granting crypto regulation and regulatory authority to traditional financial regulatory bodies—such as the Superintendence of Financial Systems (SFS)—and instead created the CNAD from scratch, aiming to establish a tailored regulatory framework for cryptocurrencies rather than attempting to extend existing rules to digital assets.

"There is a method of inductive reasoning: when I see a bird that walks like a duck, swims like a duck, and quacks like a duck, I call it a duck." But in the context of assets, digital assets are entirely different from traditional financial instruments.

This is also why CNAD, after the appointment of Reyes, a heavyweight in computer science, in September 2023, immediately adopted a technical approach to regulate cryptocurrencies. The feedback from crypto companies that obtained El Salvador's Digital Asset Service Provider (DASP) licenses has been very positive.

Nick Cowan, CEO of tokenization solutions company VLRM, stated in an interview: "We were completely taken aback; CNAD is not only knowledgeable and meticulous but also technically proficient."

Victor Solomon, a partner at El Salvador's tokenization consulting firm Tokenization Expert, echoed this view. "We do not want to overly praise El Salvador, but their ability to quickly grasp the core issues to review our applications is astonishing. We do not have to spend time explaining the technical foundations of our operations—they already understand the complexities of tokenization and the compliance measures that will be taken. Reyes understands the real challenges businesses face, from fundraising to navigating regulations, making him not just a regulatory head but an advocate for businesses positively impacting El Salvador's economy," Solomon added.

Reyes was born in El Salvador and moved to Canada as a child to escape the war that ravaged the country at the time. He describes himself as "accomplished," holding multiple bachelor's degrees in computer science, mathematics, and physics, as well as an MBA from Harvard University. He later pursued a PhD in philosophy at the People's Friendship University of Russia but did not complete it due to the pandemic and the war in Ukraine.

His professional background is highly interdisciplinary, with a broad range of experiences. After leading a consulting firm for 15 years, he developed business opportunities for the Missanabie Cree First Nation and even opened a bar on the second floor of his beachfront villa. Since 2013, he has been a believer in Bitcoin, and in 2021, he decided to move back to El Salvador to participate in the nationalization process of cryptocurrency.

The CNAD has a fully independent team of 35 employees, and Reyes has set a standard for them: everyone must have a deep understanding of the underlying technology of cryptocurrencies. In fact, 20 employees are currently pursuing graduate studies in cryptography at CEMA University in Argentina to enhance their expertise.

"In terms of crypto asset regulation, we have the highest quality and most complete team in the world," Reyes said. "If someone does not know how to trade in Bitcoin, including my driver, they probably cannot work here."

This elite team has undoubtedly left a deep impression on companies seeking to obtain operating licenses in El Salvador.

"Reyes is a technical expert," Cowan, whose company has worked with dozens of other regulatory bodies worldwide, told CoinDesk. "In other jurisdictions, regulators understand regulations and investor protection, which is certainly critical, but they do not necessarily understand the technology, which can sometimes make your work quite burdensome."

"This is a very detailed and complex process. We submitted a 700-page application, but the decision-making process after submission was much faster than in other countries… The process is consistent with any other regulatory procedures we have previously experienced; it is not a different path, just faster," Cowan stated.

For Reyes, the agency's knowledge of crypto means it can adhere to one of the most important philosophical tenets in the field—"Don't trust, verify"—and check the blockchain every time it interacts with a new company applying for a license. The team does not rely on documents provided by compliance officers because such documents are often found to mislead regulators.

Reyes likes to use an analogy to explain why cryptocurrencies need dedicated regulatory bodies. "If you buy an electric car and it breaks down, you take it to a mechanic with 20 years of experience, but when he opens the hood, he finds no engine, only a battery, and he doesn't know how to deal with it."

This is also the different feeling that cryptocurrencies and traditional financial assets give Reyes. They may appear similar on the surface, but upon deeper examination, they are entirely different. This is also one of the reasons why global jurisdictions have made slow progress in implementing regulatory frameworks for digital assets.

However, El Salvador is a small country. With a GDP of only $35 billion, it ranks 17th among Latin American countries and 103rd in the world. This country has no currency of its own, no strong financial institutions, and not even an existing developer ecosystem. But precisely because of this, in regulating cryptocurrencies, all these factors have proven to be favorable, as El Salvador "starts from a blank slate."

Returning to the analogy of electric vehicles, El Salvador can immediately focus on fixing the battery and motor without having to transform its existing infrastructure into a garage capable of repairing Teslas.

"In other countries, many new technologies are created by rational people who try to push the crypto ecosystem forward, but they do not consider how the technology might be abused and become a tool for money laundering," Reyes said. "Regulators find it difficult to know the extent of regulatory relaxation."

"We are able to make the CNAD the single entry point for all digital assets in this country; any entity that has not received permission from the commission is acting illegally."

Another fact is that financial institutions in Western countries are the creators of existing rules, so overturning existing regulations has broader and more severe implications than in Latin American countries. "Traditional finance has lobbying organizations that have been fighting against crypto, such as implementing Operation Chokepoint 2.0 (referring to U.S. regulators restricting crypto companies from obtaining banking services). They will do everything possible to ensure that this industry does not thrive," Reyes said, recalling how he had his Canadian bank account frozen due to his involvement in cryptocurrency activities. "But countries like El Salvador, if they can act quickly and seize the opportunities presented by cryptocurrencies, will reap significant benefits."

But what kind of regulatory environment does El Salvador want to create?

Reyes stated that in terms of financial instruments, Bitcoin is "more than sufficient," but beyond that, the CNAD is agnostic to technology. Most of the companies under its regulation operate on Ethereum. The sizes of regulated companies vary widely: there are global heavyweights like Tether and Bitfinex Securities, as well as small local businesses in El Salvador, which, according to Reyes, "start from $2,000."

Consumer safety and financial security are top priorities. For example, this means requiring exchanges to use multi-signature wallets to ensure that another FTX incident does not occur or requiring companies' private blockchains to adhere to certain security standards. Identification of every customer is also mandatory.

"It is important to emphasize that our country has suffered from gang intimidation for many years. Therefore, we place great importance on financial transparency, money laundering, and financial terrorism issues, which have been strongly incorporated into regulation." He believes that if a crypto company is regulated in El Salvador, it can obtain licenses anywhere in the world.

Reyes is particularly enthusiastic about one area: real-world assets (RWA). In his view, attempts like those of VLRM and Tokenization Expert will expand investment opportunities for retail investors. "Before Robinhood emerged, most young people in the U.S. could not buy stocks in Tesla or Nvidia. Robinhood democratized all these different stocks that only super elites could purchase. This is precisely the role of tokenization. In the coming years, Salvadorans are expected to access regulated products that cannot be bought in other jurisdictions."

Reyes emphasized, "This is the first time in modern history that a developing country can lead a financial revolution rather than being left behind, only able to pick up the scraps. We are trying to encourage other countries to pay attention to El Salvador and learn how to apply our model to other nations."