EL SALVADOR Law and Practice Contributed by: Héctor Torres, Annette Herrera and Daniel Leiva, Torres Legal
Use of DeFi by CeFi Firms CeFi firms registered in El Salvador are not gener- ally prohibited from using DeFi protocols in connec- tion with their products or services, but they must ensure that doing so does not conflict with their CNAD authorisation or regulatory obligations. The main con- cerns fall into three categories. • First, compliance and AML/CFT: KYC, sanctions screening, Travel Rule compliance where applica- ble, transaction monitoring and suspicious activity controls. • Second, technology and operational risk: smart contract risk, cybersecurity, custody, asset seg- regation, business continuity, counterparty expo- sure and the ability to understand and monitor the protocol. • Third, user protection: clear disclosures, risk warn- ings, valuation, liquidity, complaints handling and the ability to explain the DeFi exposure to users and the regulator. 5.2 DeFi Structures There is no settled market practice or specific legal regime in El Salvador for DeFi structures, including decentralised autonomous organisations (DAOs). A DAO is not currently recognised as a separate legal entity under Salvadoran law, so questions of legal personality, capacity, governance, representation and liability remain uncertain. In the absence of legal recognition, DAO participants with a Salvadoran nexus may face personal liability under general civil or commercial law, as there is no statutory limited liability shield equivalent to that avail - able through a corporation or other recognised legal entity. For DeFi projects with a Salvadoran connection, the most practical structure is usually a Salvadoran com- pany, or a foreign foundation/company with a Salva- doran operating entity, to perform off-chain functions such as development, governance support, treasury management, marketing, regulatory engagement or user support. However, if that entity controls the protocol, man- ages user access, receives fees, provides custody,
exchange, transfer, placement or advisory services, or otherwise acts as an intermediary, the structure may fall within CNAD’s regulatory perimeter and require registration as a DASP or compliance with digital asset issuance rules. Set-Up, Substance and Capital Requirements A purely decentralised protocol with no identifiable issuer, operator or service provider does not have a specific DeFi set-up or capital requirement in El Sal- vador. However, as CNAD has not yet issued specific guidance on DeFi, this analysis is based on the current scope of the LEAD and may evolve as the regulator develops its supervisory approach to decentralised protocols. Where a DeFi structure uses a Salvadoran entity or performs regulated activities, ordinary corporate, tax, AML/CFT, governance and regulatory requirements will apply. If DASP registration is required, the appli- cant must satisfy CNAD requirements on corporate substance, minimum equity, AML/CFT controls, com- pliance officers, CISO, cybersecurity, risk manage- ment, business continuity and user protection. In practice, DeFi projects should analyse whether they are truly decentralised or whether a legal entity, pro- moter, interface operator or service provider creates a regulated nexus in El Salvador. 5.3 Liability At the time of writing, there is no significant public judicial or CNAD precedent in El Salvador specifi- cally addressing liability for harm caused by a DeFi protocol, nor any major reported enforcement action focused exclusively on DeFi. In the absence of DeFi-specific rules, liability would likely be assessed under general civil, commercial, contractual and criminal law. If there is an identifiable operator, promoter, interface provider, treasury man- ager or controlling entity, courts and regulators would likely look at the substance of that role rather than the project’s description as “decentralised”. Where the relevant conduct involves regulated ser- vices such as custody, exchange, transfer, placement, administration or advisory activities, CNAD may treat
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