On August 20, 2024, the Legislative Assembly of El Salvador received a significant legislative initiative: the Draft Law for the Promotion of Fintech Entities and Regulation of Digital Financial Services. This initiative aims to establish a regulatory framework for fintech entities operating in the country to foster development and innovation in the digital financial services sector.
Objective and Scope of the Law
The Draft Law seeks to regulate and promote business models based on financial technologies in El Salvador, facilitating the development of new digital financial products and services. This includes legal entities, both Salvadoran and foreign, operating within the national territory and offering digital financial products or services through advanced technologies.
Regulatory Segments and Requirements
The law recognizes and regulates three key segments of the digital financial ecosystem:
- Payments through digital platforms
- Digital platforms for alternative financing (crowdfunding)
- Loans via digital platforms
These segments will be considered fintech entities and, therefore, will be regulated and integrated into the financial system under the new regulations. The draft sets forth the requirements for the establishment and initiation of operations of these entities, which must be authorized by the Superintendence of the Financial System or the Central Reserve Bank, depending on the specific activity.
Controlled Testing Environment
One of the key innovations of the draft is the creation of the Controlled Testing Environment. This setting will allow fintech entities to experiment and conduct pilot tests of their projects under secure conditions. The Central Reserve Bank will be responsible for granting authorizations to enter this environment, which will offer temporary licenses of up to six months, extendable at the request of the interested party. Successfully completing tests in this environment will enable entities to obtain the certification required to begin the authorization process for new products or services.
Tax Exemption and New Entities
The draft also proposes a five-year tax exemption for fintech entities concerning Income Tax on revenues, returns, or gains from their investments. This exemption will apply to new entities established under the new law and to existing entities with less than five years of operation, which can benefit from the remaining period until completing five years.
Additionally, the law provides for the creation of two new entities:
- Financial Innovation Council (CIF): Responsible for promoting a balanced digital financial ecosystem based on business models and financial technology.
- Office of Financial Innovation (OIF): Composed of technical staff from the Superintendence of the Financial System (SFF) and the Central Reserve Bank (BCR), dedicated to advancing financial innovation and the development of fintech business models.
Legislative Process and Next Steps
The Draft Law is currently under review by the Technology, Tourism, and Investment Committee of the Legislative Assembly. Once the corresponding opinion is issued, the draft will be submitted for discussion, modification, and approval in the Legislative Plenary. The law will come into effect 30 days after its publication in the Official Gazette, excluding entities regulated by existing laws such as the Bitcoin Law, the Digital Asset Issuance Law, and the Financial Inclusion Facilitation Law.
Conclusion
The Law for the Promotion of Fintech Entities and Regulation of Digital Financial Services represents a significant advancement in the regulation of the digital financial sector in El Salvador. By creating a clear regulatory framework and introducing tax incentives, the law aims to attract investment and encourage innovation in financial technologies. Stakeholders should closely monitor the progress of the draft in the Legislative Assembly and prepare to adapt to the new regulations that will impact the future of the fintech sector in the country.
Fernando Argumedo
Associate
El Salvador
