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El Salvador passed a law adopting Bitcoin as legal tender on June 9, and reactions already range from excitement among crypto evangelists in El Salvador to financial risk warnings from the International Monetary Fund to critical analysis of the authoritarian politics behind. movement. The future impact on transnational financial crime issues involving El Salvador is another issue to watch out for, as this first-ever domestic adoption of Bitcoin grows. Multiple potential problem areas are readily apparent.
Tax evasion. In addition to pushing the adoption of Bitcoin as legal tender, the President of El Salvador welcomes foreign crypto entrepreneurs to El Salvador with promises of immediate permanent residence and without taxation. At the same time, the Internal Revenue Service is investigating cryptocurrency tax evaders, and the Biden administration is starting to prioritize the enforcement of the international cryptocurrency tax. The IRS and tax authorities in other countries may see significant amounts of tax evasion in the movement of people and their Bitcoins to El Salvador.
Cross-border trafficking in human beings. El Salvador accounts for about 30% of migrants who attempt to cross the border from Mexico, according to a 2019 study by the Department of Homeland Security. In the same study, DHS estimated that human traffickers took a median payment of around $ 4,000 from every Salvadoran migrant. Bitcoin’s usefulness for international remittances makes it likely to become an important means of receiving payments for human traffickers exploiting Salvadorans.
Transnational organized crime. The transnational gang Mara Salvatrucha (MS-13), active in many American states and Latin American countries, is recruited and led mainly in the United States and El Salvador. MS-13 was the target of a major Justice Department campaign from 2016 to 2020, in cooperation with law enforcement in Mexico and Central America. Bitcoin would be as useful to MS-13 and other organized crime organizations that transfer money between the United States and El Salvador as it would be to migrants in the United States who send remittances to their families in the United States. Salvador.
These risks make El Salvador perhaps one of the worst cases of domestic Bitcoin adoption that could have emerged. Findings of significant criminal use of Bitcoin in El Salvador would provide a strong case for critics of cryptocurrencies, potentially negatively influencing attitudes and policies going forward. Crypto advocates and detractors should follow these issues and their impacts.
Bloomberg Law subscribers can find information about the US regulation of cryptocurrency activity on our Fintech compliance resource.
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