On January 11, 2023, the Legislative Assembly of El Salvador approved the new Law on the Issuance of Digital Assets (LEAD) as part of the technological and financial innovation that the State has been promoting as a mechanism to attract foreign investment, that began with the adoption of the Bitcoin Law.
Among the most relevant aspects of the regulations, we can highlight the following:
Purpose
The purpose of the LEAD is to establish the legal framework to regulate digital assets: their transfers, the public offerings, the requirements and obligations of the issuers, the digital asset service providers, and any other potential actors in the public offering process.
Definitions
LEAD defines digital assets as “a digital representation that can be stored and transferred electronically using a Distributed Record Technology system or similar analogous technology, in which records are linked, and encrypted to protect security and privacy of transactions.”
State Actors:
The LEAD establishes the creation of the following public institutions:
National Digital Assets Commission (CNAD): is the institution in charge of the LEAD application, its Regulations, and other rules of public offerings of digital assets. Within its responsibilities, is being in charge of approving the issuance of digital assets. Its administration will oversee 3 designees (Proprietary and their respective Surrogates) who will be appointed by different state institutions; and will be required to be in office for five years.
Bitcoin Funds Administration Agency (AAB): is the institution in charge of the administration, safekeeping, and investment of the funds coming from the public offerings of digital assets carried out by the State of El Salvador, as well as the yields coming from such public offerings. The administration will be in charge of an administrator appointed for five years by the President of the Republic.
Private actors:
Likewise, the LEAD also establishes the creation of the following institutions of a private nature:
Digital Asset Service Providers (PSAD): those natural or legal persons dedicated to provide digital asset services and are domiciled in El Salvador or those Providers that, although they are not domiciled in the country, they promote and market services in El Salvador.
To register with the CNAD and be a PSAD; there are a series of requirements that need to be accomplished.
Some relevant services that the PSAD can provide are:
- Carry out the exchange of digital assets for fiduciary money (FIAT) or its equivalent or for other digital assets, with its capital or that of a third party.
- Operate an exchange, a trading platform for digital assets or derivative digital assets.
- Evaluation of risk and price, as well as the subscription of digital asset issues.
- Placing digital assets on digital platforms or wallets.
- Promote, structure, and manage all kinds of investment products in digital assets.
Issuers: are natural or legal persons who make or promote an offer to the public of digital assets or seek the admission of a digital asset to sell or trade it on a centralized or decentralized exchange platform, regulated or not.
Issuers must be domiciled in El Salvador or, alternatively, use an exchange or negotiation platform domiciled in the country. The CNAD will authorize the public offerings of the Issuers and, in turn, will be part of the Registry of Issuers managed by the CNAD.
They will be considered Issuers of a public offering of digital assets when they are offered to the public, massively and with the aim of marketing or selling such digital assets.
Issuers can make public offerings by using pre-existing digital assets, building new digital assets through them, or creating original digital assets.
The State can make public offerings, such as the Ministry of Finance, the Central Reserve Bank, autonomous institutions, private individuals, and legal entities. Among the obligations that the LEAD establishes for the Issuers of stable coins, it stands out that they must inform the number of stable coins that they plan to issue for the next 12 months and pay the rate corresponding to that amount, according to the rates established in the LEAD.
Certifiers of Public Offers: Can be defined as legal entities that will carry out a financial, legal, technical, and administrative analysis of the material and relevant information of the public offers contained in the Relevant Information Document.
The Certifiers will issue and submit a report to the CNAD on compliance with the formal and substantive obligations of the Issuer. Those who will be Certifiers will register before the CNAD before a special registry.
Benefits granted by the LEAD
Following the provisions of the LEAD, all issuers, providers, certifiers, acquirers, and public offerings of digital assets will enjoy the following benefits:
- The nominal value and the returns or income from digital assets will be exempt from all kinds of liens, taxes, rates, and contributions.
- The capital gain or ordinary income obtained by any mode of transfer of digital assets will be exempt from any type of taxation.
- Issuers, certifiers, and registered digital asset service providers will enjoy the tax benefits established in the LEAD, being exempt from VAT, Income, Municipal Taxes, or any other tax (regardless of its nature); They will also be exempt from the obligation to withhold said taxes if said obligation applies to them.
- In the case of legal persons, the tax benefits of the two preceding points will be applied to the partners or shareholders individually considered; concerning the profits or dividends from the activities detailed in the previous literal.
The tax benefits established in the previous paragraphs will not apply when exchanging operations of digital assets for goods or services that are not detailed in the LEAD.
Rates
The LEAD supposes a series of fees for the authorization of operation according to the different activities that can be given under its protection.
Briefly, they are detailed below:
- For PSD and Certifiers:
-Initial registration fee: Fifteen minimum wages (US$5,475.00 as of the present date) for one time.
-Rate for renewals: Ten minimum wages (US$3,650.00 to the present date) annually.
-Fee for each additional registration certification: $50.00 or the equivalent in bitcoin.
- For Issuers:
– At the time of receiving the authorization for the requested issuance: they will pay 0.01% of the amount of the public offer enabled.
– For each certification of the resolution issued for the issuance authorization: $50.00
The State, Ministry of Finance, BCR, and Autonomous Institutions will not pay the fees established in the LEAD.
Penalty Regime
Finally, the LEAD regulates the infractions for suppliers, certifiers, and issuers of public offers, as well as the fines that apply according to each infraction.
For its imposition process, the seriousness of the infraction, the damage caused, and the intention and ability to pay; will be taken into account for the determination of the infractions, sanctions, and prescriptions, the provisions of the relevant passages of the Law of Administrative Procedures will be applicable.
Given the above, we can highlight that LEAD will enable; an interesting attraction of investment in innovative instruments, which will help boost the Salvadoran economy.
For more information about LEAD or other aspects related to it, do not hesitate to contact our team in Central Law in El Salvador at [email protected]
Fernando Argumedo
Associate
CENTRAL LAW in El Salvador