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ANALYSIS: Crypto Critics Should Examine El Salvador Bitcoin Use

June 23, 2021, 9:01 AM

El Salvador passed a law adopting Bitcoin as legal tender on June 9, and reactions already run the gamut from excitement among crypto-evangelists in El Salvador to warnings of financial risks from the International Monetary Fund to critical analysis of the authoritarian politics behind the move. The future impact on transnational financial crime problems involving El Salvador is another issue to watch, as this first-ever national adoption of Bitcoin develops. Multiple potential problem areas are readily apparent.

Tax evasion. In addition to pushing the adoption of Bitcoin as legal tender, El Salvador’s president is welcoming foreign “crypto entrepreneurs” to El Salvador with promises of immediate permanent residence and no taxation. At the same time, the Internal Revenue Service is investigating cryptocurrency tax evaders, and the Biden administration is starting to prioritize international crypto tax enforcement. The IRS—and the tax authorities of other countries—may find significant amounts of tax evasion in the movement of persons and their Bitcoins to El Salvador.

Cross-border human trafficking. El Salvador accounts for approximately 30% of migrants attempting 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 extracted a median payment of approximately $4,000 from each Salvadoran migrant. Bitcoin’s usefulness for international funds transfers makes it likely to become a significant medium for receiving payments for human traffickers exploiting Salvadorans.

Transnational organized crime. The transnational gang Mara Salvatrucha (MS-13), active in numerous U.S. states and Latin American countries, is recruited and led mainly in the U.S. and El Salvador. MS-13 was the target of a major Department of Justice 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 moving money between the U.S. and El Salvador as it would be to migrants in the U.S. sending remittances to their families in El Salvador.

These risks make El Salvador perhaps one of the worst cases for national Bitcoin adoption that could have emerged. Findings of significant criminal use of Bitcoin in El Salvador would provide strong arguments to critics of cryptocurrencies, potentially negatively influencing attitudes and policies in the future. Crypto’s advocates and detractors alike should track these issues and their impacts.

Bloomberg Law subscribers can find information on U.S. regulation of cryptocurrency activity on our Fintech Compliance resource.

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