Cryptocurrency in Latin American Countries

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Introduction

In the past two decades, cryptocurrency has gained a strong interest across the globe. Some countries have provided more clear regulations to the participants in the crypto space to ensure they are safe and understand more about it. In addition, the world; has seen the emergence of cryptocurrency in the corporate world held as assets, with Tesla being one of the notable companies that adopted Bitcoin as an investment in its balance sheet. This study will evaluate cryptocurrency adoption in Latin America, how it is used to store value, current regulations, and how it influences countries.

What Is Cryptocurrency?

Cryptocurrency is a digital asset that can be used to trade and work as a medium of exchange. The transactions are usually done online and are recorded in a blockchain. The blockchain acts as a transaction record because it shows the transaction history and can be used to show ownership (Rudolf et al., 2021). Cryptocurrency can be illustrated as virtual tokens, an internal system that records financial and other important information.

Cryptos most lucrative feature is using it as a monetary system. This is because it enables users to send cryptocurrency between different parties in exchange for goods and services. Since cryptocurrency is not limited by any central institution, such as a bank, it has unique advantages over normal currencies. For instance, it has little or no processing fees, which makes it relatively cheap to process (Rudolf et al., 2021). In addition, it is not controlled by any government; therefore, no single government can control its movement. This makes cryptocurrency inflation-resistant, portable and has a very transparent transaction history.

Crypto Trading

Cryptocurrency trading has been the latest and growing feature in the crypto world. Trading is separate from the monetary system because it allows users to buy and sell crypto as they do with company shares. Whereas purchasing grants gives some ownership of a company, purchasing crypto tokens gives the person ownership of that cryptocurrency. In some countries, such as the US, crypto is taxed similarly to stock trading transactions (Chey, 2022). Just as the desirability of a companys shares depends on its products and performance, the cryptos cost of trading is impacted by the crypto monetary system. This implies that the demand for cryptocurrency is majorly affected by its demand, supply in the market, competition for currencies, and availability.

The supply of cryptocurrency is mainly based on the number of new coins being mined and owners willingness to sell their coins. The other factor which determines its value is its usefulness (Chey, 2022). This is determined by how low the transaction fees are, businesses that accept cryptocurrency, and whether smart contracts are common. The main forms of cryptocurrency are bitcoin, altcoins, and tokens, as explained below:

Bitcoin

Bitcoin is regarded as the main and original form of cryptocurrency because it is capped. This implies that after 21,000,000 bitcoins are mined, there will be no more coin mining (Documents et al., 2021). Being a capped currency implies that bitcoin can be used as a store of value investment tool. When an individual invests in a store of value currency, it is the same as investing in gold. However, gold has some transactional value because it is a physical commodity. Mining Bitcoin involves having a network of miners who use complex calculations to ensure the blockchain runs (Documents et al., 2021). In return, the miners are awarded bitcoins as a reward for the work they have completed. The miners must provide proof of work, giving them a physical value to the transactional system. This implies that each bit is worth some computing power; hence it can keep its value.

Altcoins

Altcoins are other alternatives to Bitcoin that have minor charges due to the Bitcoin fork. The main differences between altcoins and bitcoin are evident in the blockchain itself. For instance, some of the altcoins are uncapped, which makes their use different from bitcoin. Other altcoins make the blockchain faster, speeding up the mining of bitcoins and other transactions. Altcoins have different verification methods which are used to authenticate their transactions (Documents et al., 2021). Some altcoins use proof of stake consensus others use proof of work systems that succeed minors with validators. Proof of stake mining needs fewer resources and fewer resources than proof of work systems because the latter requires more work in mining the blocks. Additionally, blockchains are used to create smart contracts that are automatically executed once various conditions have been met (Documents et al., 2021). Altcoins do not require a third party which is why they are done almost immediately. Smart contracts are used in diverse transactions such as stock, property, and gas, making them very appealing.

Tokens

Tokens are digital currencies that do not have blockchain and are created to use smart contracts. Crypto uses the mining process and the corresponding blockchain as a physical measure of the currency. Tokens are set on decentralized applications, and their mining process is similar to how banks reserve their gold backed by corresponding fiat currencies (Documents et al., 2021). Tokes are not representative of any physical thing and thus are used to purchase from the dips to gain discounted fees or voting rights, making them popular. This is just the same way fiat is decoupled from the gold standard.

How Cryptocurrency Is a Store of Value

A store of value implies an object that can retain purchasing power into the future and is readily exchangeable. It should not have a short lifespan and should be liquid which determines how cheap or expensive it is to exchange. For instance, exchanging a bar of gold for money is easier than exchanging a house, implying that gold is more liquid than a house. Therefore cryptocurrency is essential and considered a store of value (Piscini, 2022). While some people argue about its newness as a weakness due to volatility, it has been one of the best-performing liquid assets in the last decade. Every year more businesses accept cryptocurrency, which has strengthened it, and it is now easier to transact with it than gold. This shows that many enterprises and individuals use cryptocurrency as a store of value.

Current Regulations of Cryptocurrency in Latin American Countries

Global policies in cryptocurrency are all in between banning it completely or embracing it fully. For instance, Russia sanctioned it, China banned it, and the Central African Republic and El Salvador embraced it (Piscini, 2022). Although Latin America was a latecomer in the tech industry, it has shown some leadership in embracing cryptocurrency. This is attributed to having a significant population of unbanked individuals. Latin America has a high poverty rate and a lack of financial institutions, which has left many people with no option but to use cryptocurrency (Chey, 2022). Due to the high poverty rate and the lack of ability to transfer funds, many people have opted to use cryptocurrency to transfer funds.

Another reason many people in Latin America have opted for cryptocurrency is due to economic turmoil and reliance on the US dollar and other foreign remittances. Most countries in Latin America tether their currency to the US dollar, have large reserves of foreign currency, or use it in their daily business activities (Chey, 2022). This significantly affects their economy by placing them at the mercy of the US economy and other foreign remittances. Therefore the adoption of cryptocurrency has been seen as a move to gain financial independence for Latin countries since any bank does not control the currency.

Due to favorable regulatory and energy environments, Latin America has seen a great increase in cryptocurrency users. Most countries are motivated by the desire to achieve financial freedom and are significantly inclined towards new technology. Politicians in those countries have been promoting cryptocurrency to solve most of the financial problems they face in Latin countries (Piscini, 2022). The countries in this region have accepted to embrace cryptocurrencys growth and come up with methods of taxing it and ensuring that the users adhere to global standards. Below is a compilation of different Latin countries and the regulations they have taken for cryptocurrency.

Colombia

Colombia is one of the countries that has widely adopted cryptocurrency. Bitcoin is the most active trading cryptocurrency, and it has automatic vending machines and merchants who provide crypto services. The countrys growth of cryptocurrency is due to the booming developing economy, access to cheap energy, and the peace that has prevailed in the country. Therefore, the Colombian government has initiated policies that help regulate cryptocurrency use. For instance, in December 2021, the Colombia Financial Information and Analysis Unit required that all crypto transactions be reported. In addition, all Bitcoin transactions above $150 have required registration since April 2022 (Piscini, 2022). Colombia has developed a regulatory sandbox that enables users to operate with banks.

Mexico

Mexican politicians are working hard to ensure that cryptocurrency is regulated. Due to their desire to boost the economy and counter unbanked voters, they are pushing to adopt El Salvadors policies by making cryptocurrency a legal tender. However, the government has declared that cryptocurrency is not a legal tender yet. Mexico has allowed cryptocurrency storage providers and exchanges to operate, but they must obtain permits (Documents et al., 2021). To get this permit, the company must provide its description, staff roles, operations, and know-your-customer checks. The Mexican government has stated that it intends to create a central bank digital currency before 2024 (Documents et al., 2021). However, the government has been slow in this process and has altered the plans of some biggest investors. For instance, billionaire Ricardo Salinas wanted Banco Azteca to start accepting payment through Bitcoin, only for his planes to be delayed by the central government.

Argentina

Argentina plans to adopt new IMF regulations regarding cryptocurrency to avoid money laundering. In addition, the most reliable money system called the peso, has seen an inflation rate of up to 55% (Harrison & Orbach, 2022). Although it is not officially signed, government 796/2021 requires that all cryptocurrency transactions be recorded and reported monthly. The national capital, Buenos, announced on April 27 that it would start accepting cryptocurrency as payment for taxes. The countrys high rate of cryptocurrency adoption is due to government mistrust and a volatile currency (Harrison & Orbach, 2022). There has been an increase of 340% for companies that use cryptocurrency to pay their employees, making the country have the highest number of crypto-paid employees (Harrison & Orbach, 2022). The use of crypto is relatively more in the south due to the availability of cheap energy. Patagonia is an arable region in the south that does heavy cryptocurrency mining, requiring high energy. However, mining cryptocurrency is becoming harder due to the increasing popularity of crypto and the increase in energy taxes by the government.

Brazil

Brazil has seen an increase in the number of people who use cryptocurrency in their daily trades. The Brazilian senate on April 27 passed a bill aimed at assigning regulatory responsibility to the executive arm of the government and eliminating all the taxes on imports of ASIC machines (Harrison & Orbach, 2022). This policy aimed to reduce money laundering by placing tough measures on fraudsters. So far, this bill has been focused on forcing cryptocurrency traders to adhere to Brazils anti-money laundering rules. However, the carrot-and-stick policies are expected to see more Brazilians get into cryptocurrency because it is safer against money laundering and fraud.

Cuba

Cuba adopted mobile internet in the last few years; however, it has had rapid development in cryptocurrency. With its population of 11 million residents, over 100,000 people in the country use cryptocurrency (Harrison & Orbach, 2022). This quick uptake of cryptocurrency on the island is due to the US embargo on the Cuban economy, whereby the West has limited the financial services they have access to. Therefore, the countrys virtual financial services are common in remittance payments. For instance, in 2020, US President Donald Trump banned Western Union use on the island despite being the main method they used to receive funds (Harrison & Orbach, 2022). This leads to the accelerated adoption of cryptocurrency financial services such as bitcoin. In 2021, the Cuban government approved the use of cryptocurrency for financial transactions. Later April 2022, Cubas central bank provided licensing to various cryptocurrencies (Harrison & Orbach, 2022). Since cryptocurrency is not attached to any national or multinational regulation, it has allowed them to maneuver behind Western-based financial sanctions.

El Salvador

Despite having a low population and being one of the smallest countries in Latin America, it has been making enormous steps toward supporting the use of cryptocurrency. In 2021, President Bukele made Bitcoin a legal tender, a bold move in supporting cryptocurrency (Rudolf et al., 2021). Additionally, the country has adopted a project to issue subsidies to rural citizens using hot wallets to ensure that everyone has easy access to cryptocurrency. The country has another project aiming to build a volcano-fueled city shaped like the symbol for bitcoin. However, the country has not instilled tough regulations that aim to protect its citizens against fraud or money laundering of bitcoin. The IMF warned the country to adopt cryptocurrency due to its volatility. For instance, Mays bitcoin crush saw the country go losses totaling $40 million, the highest in their history, and thus they had to pay bondholders (Rudolf et al., 2021). However, the president has adopted means to strengthen and stabilize the coin by making state coffers buy over $105 million of bitcoin (Rudolf et al., 2021). Fitch has downgraded the countrys credit score because of their move to use Bitcoin, which they consider unstable.

Peru

Unlike most Latin countries, Peru has adopted a slower approach in adopting its regulatory framework. Recently, they have started talks on how to create a public registry of crypto service providers so that they can be able to track their operations (Rudolf et al., 2021). Cryptocurrency is considered a suspicious operation; therefore, the government has not given the public confidence in cryptocurrency. However, the country has not made significant moves in supporting cryptocurrency or making Bitcoin a legal tender like El Salvador.

Panama

Panama is one of the countries which have been largely considering the expansions of legislation of crypto. They have a bill regulating eight cryptos, including Litecoin, Elrond, Ethereum, Bitcoin, XPR Stellar, XDC Network, and IOTA (Rudolf et al., 2021). If the bill is successful, the country would be free to use these cryptos in their private businesses and other civil matters, including paying taxes. In addition, the bill has some provisions that talk about tokenization in the digital currency category but as a physical asset. However, the country has expressed worries about the illegal use of cryptocurrency for money laundering (Rudolf et al., 2021). This is because the country has suffered from the problem of illegal financial activities, such as the Pandora papers. The government has ensured the citizens that cryptocurrency will be well protected using the countrys existing financial laws, and all transactions will be recorded.

In general, most Latin countries have experienced problems with drug violence, corruption, and poverty for a long period. Therefore, cryptocurrency is viewed as a solution to these perennial problems, and it can turn dangerous if not well-regulated. That is why most countries in Latin America have taken significant approaches to regulate the currency and ensure it is not used for illegal deals. Although most countries have taken steps to ensure the currency is well utilized, there is still a long way to them. Therefore, whether cryptocurrency turns out to be a game-changer or another corruption tool in Latin American countries, the decision lies on the lawmakers and the laws they place in the next few decades.

How Cryptocurrency Is Influencing Countries in Latin America and the Rest of the World

Latin America has been one of the top regions to adopt cryptocurrency. This may be attributed to their limitations in accessing Western financial services and their dependence on the US economy for survival. The crypto community had something to smile about when El Salvador adopted cryptocurrency in September 2021, becoming the first nation to make Bitcoin a legal tender (Rudolf et al., 2021). Before then, transactions in the country were mainly done in dollars; therefore, adopting Bitcoin has helped them gain financial freedom. Although the plans did not go as planned, the government faced significant backlash from financial market players and international organizations, a lack of clarity, and service outages. However, such challenges were expected after making the bold move of making Bitcoin a legal tender.

Adopting cryptocurrency in Latin countries has played a significant role and made great sense for emerging nations. Unlike developed economies in western and northern Europe and North America, most Latin countries do not have access to stable financial services (Harrison & Orbach, 2022). In addition, these countries have a high poverty level and autocratic governments. Thus, most citizens escape these nations to seek greener pastures abroad. Once they work abroad, they send money to those they leave at home to support them. Remittances account for 2.4% of Latins GDP, with countries like El Salvador being the main beneficiary at 24.1%, followed by Honduras at 23.6% (Harrison & Orbach, 2022). However, these cross-border transactions have been met with high transaction charges and many restrictions, such as on the amount of money someone can send. However, cryptocurrency has helped make these transactions cheaper and faster than traditional financial methods. In addition, it removes limitations set by the Western financial systems, such as the maximum amount a person can transfer and the need to provide details on money being sent.

Using cryptocurrency in Latin nations has helped to cap the inflation problem too. Latin countries have been known for experiencing some of the highest inflation levels in their economies due to improper economic decisions. For instance, in 2018, Venezuela experienced an inflation rate of 65,000% due to heavy money printing, which significantly harmed the economy (Harrison & Orbach, 2022). Besides, Argentina experienced inflation of 53.5% for the period between 2017 and 2020 due to the rapid expansion of the money supply (Harrison & Orbach, 2022). On the other hand, their dependence on the dollar, with some of the Latin countries such as Ecuador, El Salvador, and Panama having USD as their primary currency, had exposed them to the economic challenges of the US. Although it protects the countries against inflation, it subjects them to hyperinflation of the dollar, which reached a high of 7.5% in 2020 (Doumenis et al., 2021). These countries central banks did not control their national currency due to the sophisticated economic systems. Therefore, cryptocurrencys use cushions them from hyperinflations danger because cryptocurrency experiences little to no inflation.

The larger population of Latin American citizens is unbanked and has limited access to financial services. Less than half of Latin American citizens had a bank account in 2017, although this situation changed during COVID-19, whereby more people got access to the financial systems (Documents et al., 2021). This is a challenge that could be solved by exposing them to the use of cryptocurrency. With digital technology increasing its relevance in Latin America through phone access, cryptocurrency would enable more people to have an international financial system that allows them to send and receive money from any part of the world. Crypto provided them with non-restricted money access from all geographical locations, eliminated intermediaries, and ensured that they transact at lower fees. Thus, cryptocurrency has enabled them to increase their citizens access to financial systems and connect them to the rest of the world.

Conclusion

Cryptocurrency has been a significant game-changer in the finance world by allowing people to transact t electronically using blockchains. This implies that it does not need a central bank or intermediary to regulate the currency. Latin America has significantly adopted cryptocurrency for various reasons, including freeing themselves from the economic attachment to the dollar, low cost of power, and high poverty rate. In addition, the use of cryptocurrency has provided them with lower transaction fees, the ability to send money to any geographical location, and cushioned them from inflation which has been a significant challenge facing Latin countries.

However, cryptocurrency adoption still has its disadvantages, including the losses resulting from cryptocurrency crashes. In addition, many countries that have adopted cryptocurrency have faced sanctions from Western monetary systems affecting their ability to access financial aid and loans. Evaluating the advantages and disadvantages Latin America faces, as a result, it is evident that it has more advantages than disadvantages; therefore, I support the potion of cryptocurrency in Latin countries.

References

Chey, H. (2022). Cryptocurrencies and the IPE of money: an agenda for research. Review of International Political Economy, 13(2), 116. Web.

Doumenis, Y., Izadi, J., Dhamdhere, P., Katsikas, E., & Koufopoulos, D. (2021). A critical analysis of volatility surprise in bitcoin cryptocurrency and other financial assets. Risks, 9(11), 207. Web.

Harrison, C., & Orbach, J. (2022). Explainer: Crypto in Latin America. AS/COA. Web.

Piscini, V. (2022). Bitcoin limits external influence on South America. Bitcoin Magazine Bitcoin News, Articles, and Expert Insights. Web.

Rudolf, K. O., Ajour El Zein, S., & Lansdowne, N. J. (2021). Bitcoin as an investment and hedge alternative. A DCC MGARCH Model Analysis. Risks, 9(9), 154. Web.

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