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Detail of a judge sitting at his desk.

Crypto regulation slow to move in Latin America

Cryptocurrency adoption in Latin America moves forward in leaps and bounds, as its citizens increasingly turn to digital assets as a means to hedge against local currency depreciation and, in some cases, rising inflation.

A study by Chainanalysis shows that Argentina, Venezuela, Colombia, and Brazil were among the top 20 countries with the most significant cryptocurrency adoption as of 2021. The firm specializes in blockchain data. Latin America accounts for roughly 9% of all global crypto transactions.

Across the region, regulatory bodies have issued high-level guidance on how to handle crypto assets, often as part of broader frameworks, as opposed to tailor-made regulation on the burgeoning sector.

Some countries, however, are studying industry-specific regulation, with law bills to regulate the industry on its own account and not as part of a broader fintech charter. 

In most Latin American nations, cryptocurrency regulation has been either embedded into broader financial technology regulation or instead postponed as authorities take a “wait and see” approach to develop the industry.

Industry observers view current regulations (or lack of them) as favorable.

Most Latin American countries have a “permissive stance” towards cryptocurrencies, Mexican consultancy firm CryptoFintech stated, except for Bolivia, Venezuela, and Central American nations such as Panama, Nicaragua, and Guatemala.

Framework needed for security

But as adoption grows, so does the urge for regulators to bring about a framework that can both safeguard users and promote the industry.

Eloisa Cardenas

“More and more countries are now open to cryptocurrency initiatives,” Eloisa Cardenas, CEO of CryptoFintech, said. “But as regulators witness the growth of the ecosystem, they are inclined to set up rules to keep the industry under a controlled framework.”

Of course, that is no easy task.

“The crypto industry is so broad and ever-changing that if you want to take a detailed picture of all of its aspects now and combine in a law, you might wind up generating problems more than everything else,” Santiago Mora, a lawyer and head of Fintech at GPG Advisory Partners, said.

“We know that sometimes regulation is necessary, but there are also risks of doing it poorly,” he added. He argued that failing to bring entrepreneurs into the discussion might result in a stranglehold on the sector, to the point that it kills innovation.

In the Andes, the government of Chile proposed a fintech law in Congress that encompasses several subsectors, including cryptocurrencies. A framework is given to cryptocurrencies, defining them as a financial investment product, and Chilean industry sources claim that they have had active participation in crafting the text.

Chile law in works

If successful, Chile would join Mexico as Latin American countries with integral fintech laws. The North American country was a pioneer back in 2018 when it enacted its own fintech law, a Latin America first. However, no specific crypto regulations seem to be expected at the moment, according to public statements made by government officials, and traditional banks are mostly barred from offering trading services. 

In Colombia, there is still no regulatory body for crypto assets. However, some financial authorities, such as the central bank, have published a series of norms. 

But as adoption rapidly grows in Latin America, with many trusting their savings in cryptocurrencies or using them as payment mechanisms, regulators come under increasing pressure to develop a proper legal outline. 

In a recent report, the International Monetary Fund argued that regulators should act in favor of setting up frameworks on the industry, given that “crypto-assets are at the core of the fintech revolution” and that they are “potentially changing the international monetary and financial system in profound ways.”

Daunting task

The need to regulate the crypto industry comes from the intrinsic risks around digital assets: high volatility, anonymity, cyber risk, market manipulation, and fraud.

“Setting up a comprehensive, consistent, and coordinated regulatory approach to crypto is a daunting task,” the entity said in the post. “But if we start now, we can achieve the policy goal of maintaining financial stability while benefiting from the benefits that the underlying technological innovations bring.”

How they are regulated, however, is a matter of discussion. For Mora, an Argentine lawyer, a high-level guidance approach or general fintech laws that comprise cryptocurrencies as a vertical are not ideal, given that industries within fintech can vary substantially within themselves.

The IMF suggested a cross-border and cross-sector approach given that “many crypto service providers operate across borders, making the task for supervision and enforcement more difficult.”

But in Latin America, that has not been the case yet, with some unique experiments as well. 

El Salvador set the bar high

By all standards, no Latin American country went as far as El Salvador regarding cryptocurrency. The Central American country took it to a new level when it established Bitcoin as a legal tender for all transactions. 

Its decision, which came in place as of September 2021, sparked greater interest across regulators in the region. Although most countries are not expected to mirror El Salvador, many are advancing specific cryptocurrency guidelines.

“El Salvador was a watershed,” Cardenas said. “It brought a lot of global debate around crypto regulation and placed El Salvador in the spotlight.”

Brazil, which had taken a high-level approach in previous years, is now closer to having a tailor-made regulation in the sector. By the end of 2021, the lower house in Congress approved a bill that regulates cryptocurrency trading. The bill would create a supervisory body to be appointed by the President, which will be responsible for the oversight.

Heavy penalties

It also hardens punishment for wrongdoings and fraud related to cryptoassets, with prison sentences that can lead to up to eight-year prison convictions.

“We need to take care of investors. We have to give security to those who believe in virtual currencies but put an end to hacking, crimes such as money laundering, among others,” Expedito Netto, the project’s rapporteur, said to local media.

Driven by necessity, Argentina has had one of the most impressive growths in the adoption index by Chainanalysis: it jumped from 28th in 2020 to 10th as of this year. Argentines take refuge in cryptocurrency amid weakening local currency and stubborn inflation.

There is still no specific law for crypto-asset regulations, but some law bills in the works could address digital assets. However, some are skeptical of how far they can go. “They do not have the right methodological approach,” Mora said.

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