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In less than two months, on Sept. 7, the law that establishes Bitcoin as legal tender in El Salvador will go into effect.

But the history-making adoption faces at least two strong headwinds, experts say.

Already razor-thin margins on international transactions will make it difficult to deliver on competitively priced cross-border payments, according to two remittance experts. Strike CEO Jack Mallers, who’s been working with the Salvadoran government on Bitcoin adoption, has said he wants them to be free.

Meanwhile, the law itself could cause Salvadoran institutions to run afoul of the Financial Action Task Force (FATF). The intergovernmental regulator, charged with combating money laundering and terrorism financing, would likely take issue with the lack of Customer Due Diligence (CDD) and Know Your Customer (KYC) checks, according to the U.N., International Monetary Fund and World Bank.

When the Salvadoran bill was announced at the Bitcoin 2021 conference, much of Maller’s speech focused on the impact of making remittance payments not just more affordable, but free.

“We want to make cross-border payments free. I want to make cross-border payments free to solve the remittance problem and the financial inclusivity problem,” he said, adding that fees on those transfers could be upwards of 50 percent.

That promise seems to rely on a very common misunderstanding about how remittance companies work and what accounts for the bulk of their operating costs.

“It turns out that a lot of the cost of remittance has nothing to do with the actual transfer, it's actually all compliance, all regulation. The actual act of transferring money is about as cheap as you could possibly get it already,” said Luis Buenaventura, chief strategy officer at BloomSolutions.

He’s previously worked as a Bitcoin remittance specialist and co-founded, a Philippines-based Bitcoin remittance company, in 2014. It shuttered a year later after the team realized keeping up with compliance costs made offering competitive transfer fees impossible.

“At that point, what matters is whether or not they have enough venture capital money to lower their costs in a competitive way that allows them to get more market share,” Buenaventura said. “So we were trying to do something along those lines but, you know, young, small startups run of money pretty quick. And it just wasn't sustainable.”

There are other factors that will make offering competitive remittance rates difficult, like the fact that El Salvador has been using the U.S. dollar since 2001.

“In countries like El Salvador, that are U.S. dollar-denominated, generally the largest country that’s sending money to those Central American countries is the U.S. So USD-to-USD transfers make it even more competitive than perhaps other corridors where you have to change the currency,” said George Harrap, co-founder of Step Finance.

He’s the former CEO of now-defunct remittance platform Bitspark, which shut down in 2020. It launched in 2014 and used Bitcoin exclusively for remittances for five years before switching to stable coins to deal with price differences in countries like Indonesia, where he says crypto prices tend to be 1% higher than in the rest of the world.

Both Harrap and Buenavista acknowledge their experiences at Bitcoin remittance startups can make them sound jaded. Each of them told Crypto Investor that they’re optimistic about the impact of Bitcoin adoption in El Salvador, even if they’re very familiar with the hurdles Strike will face in bringing free cross-border payments to the country.

“No matter how clever you are with finding ways to reduce your costs, eventually [regulators] will ask you to apply an industry-standard level of compliance and screening, and anti-money laundering,” Buenavista said. “And once you've done that, your costs will eventually be the same as your competitors.”

Even if the El Salvadoran government doesn’t intend to force the issue on compliance, there’s reason to believe that FATF will, according to a working paper recently published by Johns Hopkins University professor Steve Hanke.

“At present, El Salvador and its dollarized currency regime have been as clean as a hound’s tooth,” he writes.

The paper highlights 27 FATF compliance checks that will be “difficult, if not impossible, for El Salvadoran banks, merchants, and their customers to comply with” under the new law, like Know Your Customer (KYC) or the sender lacking knowledge or providing inaccurate information about the transaction, source of funds or their relationship with the counterparty.

So, what happens if FATF takes a hard line on El Salvador’s Bitcoin adoption? A big regulatory mess.

“If a country is suspected of engaging in money laundering or terrorist-financing behaviors with probable cause, it will be flagged by the FATF and placed on the FATF Grey-list,” Hanked writes. “While on the Grey-list, the flagged country will have to cooperate with FATF monitoring and comply with a FATF action plan to address deficiencies in anti-money laundering and counter-financing terrorism.”

The FATF itself hasn’t yet issued a statement on El Salvador, but other regulatory bodies have. The World Bank, International Monetary Fund and the United Nations Economic Commission for Latin America and the Caribbean have expressed concern about the upcoming change. 

In less than two months, on Sept. 7, the law that establishes Bitcoin as legal tender in El Salvador will go into effect.

But the history-making adoption faces at least two strong headwinds, experts say.

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