Many Latin American countries have embraced cryptocurrencies in their economies as a method of payment for goods or services, and even in both national and international transactions. Experts in the field anticipate significant growth in the industry and the emergence of new ventures and projects encompassing different uses of crypto assets and blockchain technology.
In our first installment , we learned that the implementation of Bitcoin as legal tender in El Salvador has brought some positive aspects to the country. In Argentina, the use of cryptocurrencies is growing exponentially year after year. It is estimated that more than 12% of Argentinians use or have used this technology, compared to just 8% in Latin America. Furthermore, the country is recognized worldwide for its developers and innovative crypto projects since the ecosystem’s inception. In the case of Costa Rica, its Central Bank has stated that cryptocurrencies cannot be classified as legal tender because they do not meet the characteristics of that type of currency. However, digital assets are neither prohibited nor regulated, and individuals can conduct business with them, provided that such business is legal and does not violate public order or the rights of third parties. Finally, Mexico, although it is in position number 4 of the Latin American countries that have adopted crypto assets, has not achieved a significant penetration that allows measuring the benefits of its implementation.
In this second installment we talk with Adriana Moreno and Sergio Mendoza, partner and junior associate of the Colombian firm Gómez Pinzón Abogados; with Jaime Bofill and Claudia Fariña, partner and associate, respectively, of the Spanish firm CMS Albiñana & Suárez de Lezo; and with Antonio Canova, partner of the Venezuelan firm Araquereyna, who, from their areas of specialization, reviewed the panorama of crypto assets in these countries, the existing regulations and answered questions about whether or not there are political and economic motivations in the governments in the implementation of these digital assets.
Adriana Moreno and Sergio Mendoza of GPA: “Colombia has become one of the leading adopters of crypto assets in the region. Even though the applicable regulations are not yet fully developed from a regulatory standpoint, the industry is recognized as existing, and therefore, regulatory authorities have been working to support certain players in the crypto asset market. This has led some of the world’s leading exchanges to establish themselves and offer their services to Colombians under Colombian consumer protection, compliance, and data protection regulations. It has also given rise to various fintech startups to address specific user needs (i.e., protecting themselves from the (devaluation of the Colombian peso against the dollar). This interest led the Financial Superintendency of Colombia to establish pilot projects for cryptocurrency operations (cash-in and cash-out) at “laArenera,” several of which are currently operational. Similarly, as part of the Financial Superintendency’s ongoing monitoring of these projects, an alliance was formed with several cryptocurrency exchange platforms to address user needs regarding the use of these platforms. Likewise, financial institutions have been working on their cryptocurrency projects not only from an operational standpoint but also by developing services with virtual assets to implement anti-money laundering and counter-terrorism financing (AML/CFT) risk management systems, as well as protecting consumer rights.
Additionally, a few months ago a pilot project for a private bond issuance by a Colombian bank was completed. The issuance, placement, negotiation, and settlement were carried out through smart contracts and registered on a blockchain.
Financial institutions and regulatory authorities have repeatedly stated that regulation is a key element, and although it may not be keeping pace with the realities of the cryptocurrency business, there is indeed an interest among regulatory authorities in understanding the blockchain phenomenon. The Financial and Corporate Superintendency, the DIAN (National Tax and Customs Directorate), the Central Bank of Colombia, the DANE (National Administrative Department of Statistics), and the Financial Information and Analysis Unit (UIAF), from their respective areas, have developed regulatory and academic content on the underlying technologies, identifying not only their risks but also their potential benefits. They have also informed users, provided educational outreach, regulated specific aspects, and defined the scope of action of these entities regarding cryptocurrencies.
Finally, financial institutions and the national government have been working towards the development of the cryptocurrency market in Colombia, also fostering the interest of young investors, digital entrepreneurs and even the fintech ecosystem, to create new business opportunities related to cryptocurrencies in pursuit of the country’s economic growth.”
Jaime Bofill and Claudia Fariña, from CMS Albiñana & Suárez de Lezo: “Spain was not exactly a pioneer in this field, because when we jumped on the crypto bandwagon most of the countries around us were already getting familiar with the concepts and were even considering alternatives that would allow coexistence between this new industry and traditional institutions.
However, the evolution of crypto is a marathon, and over time it has gained significant traction in Spanish society and (some) institutions. In this way, it has established itself, to some extent, as an alternative to the current system, thus becoming both a solution and a problem.
On the one hand, it is a solution because it provides citizens with an alternative to the traditional system, and it provides financial freedom, understanding this as the possibility of regaining ownership of money.
On the other hand, it’s a problem because by providing freedom, it eliminates institutional support for investors, leaving them unprotected due to their possible lack of experience, the system’s lack of transparency, or the risk of being more vulnerable to economic crimes.”
Antonio Canova, from Araquereyna: “It is reasonable that those people who live in highly centralized, intervened systems, with great limitations on their civil and economic freedoms and subject to state legislation whose purpose is exploitation, are the first to be incentivized to use these technologies that were invented precisely for such purposes, to grant them freedom.
Citizens subject to the Venezuelan legal system will gradually understand what best serves their own personal interests. Many will continue to docilely comply with state regulations, for example, by using the bolívar or the petro (an example of a cryptocurrency that will disappear, since it was created by the state) as currency; while others will explore alternative options outside the obligations imposed by this unjust, freedom-crushing state legislation. It is an evolutionary process. Everyone learns from their mistakes and avoids repeating them (as happened to Venezuelans who saved in bolívares and have suffered the loss of their money due to hyperinflation), while we all tend to imitate those who succeed or avoid harm (like Venezuelans who saved in dollars or other currencies, especially Bitcoin).
The truth is that in Venezuela there is a growing community opting for Bitcoin for their transactions. Similarly, more and more people are using blockchain technology to enter into contracts, publicize their activities, or resolve disputes themselves. These are slow but unstoppable changes, silent revolutions, the fruit of evolution.
I invite you to think in terms of 5, 10, or 50-year periods. Isn’t it obvious that this will be the trend? Can anyone imagine their grandchildren refusing to use Bitcoin, whose main characteristic is that it’s a scarce resource, and submitting to fiat money that constantly devalues everywhere and can’t be used globally? The end of state-issued currency has already been decreed; it’s only a matter of time.
It is said that the main appeal of cryptocurrencies is their decentralization, which in regions like Latin America allows for a new form of wealth that is not controlled, restricted, or blocked by a country, government, or public or private banking institution. What are your thoughts on this?
Adriana Moreno and Sergio Mendoza of GPA: “Cryptocurrency users find many attractive features. Decentralization is undoubtedly one of the most important, as it grants users complete autonomy and freedom to insert and access information not only in a replicated and synchronized manner, but also securely. Because it is a decentralized system, it is more difficult to attack, destroy, or manipulate, and at the same time, less likely to fail. However, the decentralization of the blockchain has led to all kinds of legal and illegal activities, since there is no way to prevent a transaction from taking place or to “block” a participant’s access to the network.”
In Colombia in 2021, only 60% of the adult population had access to the traditional financial system through a bank account, often preventing them from accessing financing and hindering payments and transfers for nearly half the population. Through the decentralization offered by cryptocurrencies, it is possible for each person to store and trade crypto assets and obtain credit quickly and securely, without the need for a financial intermediary, with just a few clicks. Additionally, by accessing products linked to cryptocurrencies, users have the opportunity to access these local and international sources of investment and financing.
Through cryptocurrencies, an economic system is created that belongs to its participants on equal terms, a situation that was difficult to achieve in an economic system like Latin America’s, given the social inequality experienced in our countries. On the other hand, although cryptocurrencies also carry market risks, they are global currencies that can be traded without incurring the inflationary risks currently faced by Latin American economies. Therefore, we believe that the decentralization offered by cryptocurrencies could allow for the democratization of economic systems across different industries and purposes.
Jaime Bofill and Claudia Fariña, from CMS Albiñana & Suárez de Lezo: “The reality is that, even though we have bank accounts in our names, the money doesn’t truly become ours because it’s the banking institutions themselves that invest it and decide how to manage it. For example, it’s up to these entities to establish the maximum amount of cash we can withdraw in a day.
Past experiences show us cases like those of Argentina, Uruguay or Brazil where the State, due to the country’s financial situation, decided to limit the availability of citizens’ funds on funds that really belonged to them.
For reasons like these, we believe that decentralization, and the fact that each person can become their own bank, is a positive thing; it develops individual responsibility and, although it requires more learning on the part of the user, cryptocurrencies give, for the first time, total control over their funds and their money.”
Antonio Canova, from Araquereyna: “Cryptocurrencies is an ambiguous, generic, and not very useful term because it encompasses a series of very different products that, perhaps, have in common that they are immaterial and digital. While this characteristic is true, it is not the essential one for analyzing the impact of this new technology on society and on people’s lives.
Time, experience, and trial and error will make it clear which cryptocurrencies people will choose and to what extent they will impact societies and other institutions.
My prediction: what are known today as cryptocurrencies, but which have been or may be created, promoted, or are susceptible to being controlled by states, will disappear. Furthermore, if you ask me to double down, I’ll say: very possibly in the end only Bitcoin and other decentralized forms of using blockchain technology will remain.
Thus refined, the notion of cryptocurrencies will have such an impact that, even if there is resistance or most people haven’t noticed, and even if those in power intensify attacks against them, the final impact of this brilliant technology is nothing more and nothing less than the dismantling of the State, the transformation of the Law, and the increase, as never before, of the areas of individual freedom and the consequent progress of free societies.
Let us remember that states are mere abstractions, mere constructs used to dominate people. We must put an end to the false justifications of the social contract and the idea that the state is all of us. States are the greatest enemies of individual liberty. This has always been the case.
Furthermore, what we understand today as law is, in reality, legislation issued by states. Constitutions and the entire set of hierarchically ordered rules are norms imposed by the majority group that seizes power by any means.
And it is precisely these States, through law, that have distorted the main evolutionary social institution that peacefully unites people: money.
Bitcoin, and other decentralized forms of blockchain, are a torpedo below the waterline of those three notions (state, law, and money) upon which today’s societies are forcibly ordered from the top down. Thanks to these new technologies, the future is dawning as an increasingly free world, in which individual liberty and free cooperation among people will prevail.
I’m not going to elaborate on and explain this assertion, which will surely contradict the convictions of most readers of this interview, whom I understand to be lawyers or law graduates. Perhaps I will recommend four books so they can draw their own conclusions: *The Bitcoin Standard* and *The Fiat Standard*, both by Saifedean Ammous; *The Philosophy of Bitcoin*, by Álvaro D. María; and *The New Technologies of Freedom*, by Chris Berg, Darcy Allen, and Sinclair Davis.
Are there political and economic motivations in governments for implementing these digital assets?
Adriana Moreno and Sergio Mendoza of GPA: “Undoubtedly. There are many countries where political and economic factors have influenced the adoption or prohibition of crypto assets. Many central banks have explored the option of issuing Central Bank Digital Currencies (CBDCs), cryptocurrencies representing legal tender. Other countries have explored the option of issuing crypto assets pegged to the prices of certain commodities, as Venezuela is said to have done with the Petro.”
Perhaps the most emblematic case is that of El Salvador, a country that adopted Bitcoin as legal tender in 2021, with macroeconomic results different from those expected. When implementing crypto assets in a regulated manner, a gradual approach is necessary, since, while they can generate benefits, they can also entail very high costs and risks. Political pressures should take a back seat to regulatory prudence and macroeconomic stability.
On the other hand, many countries have experienced a significant surge in cryptocurrency adoption due to their economic conditions: Venezuela and Argentina are undoubtedly two prime examples. To protect their savings from currency depreciation, Argentinians and Venezuelans have turned to investing in cryptocurrencies as easily accessible safe havens with the potential for profit and very low commission costs.
Jaime Bofill and Claudia Fariña, from CMS Albiñana & Suárez de Lezo: “Although at first the position of most legislators was one of distrust (and in particular, the Spanish legislator and supervisors were openly opposed to its adoption and development), over time we consider that there has been an awareness-raising effort at the European level that can be summarized in the saying “if you can’t beat them, join them.”
Furthermore, as the sector evolves and innovative market models are developed, it becomes clear how there are almost endless alternatives that benefit and modernize institutions without having to compromise on essential tasks such as protecting citizens or fighting crime.”
Antonio Canova, from Araquereyna: “States have every motivation to prevent, regulate, and discredit (even criminalize) these technologies that have been invented and implemented precisely to evade their interventionist regulations. The problem is that they don’t have, and won’t have, the tools to stop them. They can do absolutely nothing. Nothing.”
What are the legal challenges and obstacles in the face of the increased adoption of digital assets?
Adriana Moreno and Sergio Mendoza of GPA: “The biggest legal challenge is to design a regulation that is easily adaptable to the rapid innovations in the world of crypto assets, and that in turn allows for security and peace of mind for all actors in the market.
The rapid pace at which new markets related to crypto assets (i.e., metaverses, NFTs, etc.) are developing requires regulation that fosters innovation while also allowing for control of the activity when necessary.
The Colombian approach has allowed the market to grow considerably; however, calls for comprehensive regulation are becoming increasingly common. This regulation would address the main concerns currently facing those participating in or interested in participating in the cryptocurrency market, such as the lack of traceability in transactions, money laundering and terrorist financing, and fraud, among others. The Financial Superintendency took a decisive step in this direction by recently publishing a draft regulation that would allow supervised entities to open deposit accounts on behalf of exchange operators. This draft regulation incorporates all the lessons learned from the successful pilot project that the Financial Superintendency issued at the end of 2020 in the “Arenera” (a reference to the Colombian cryptocurrency exchange).
Jaime Bofill and Claudia Fariña, from CMS Albiñana & Suárez de Lezo: “We have been hearing about cryptocurrencies and digital assets for years, and it still sometimes feels like we don’t know anything given how quickly this industry is evolving.
It is undeniable that we are dealing with a highly technical sector that is constantly and rapidly evolving. Therefore, one of the main challenges will likely be how to concretely define and categorize digital assets, given that new issues arise almost daily and sectors previously excluded are now involved (for example, the virtual real estate sector).
Likewise, and taking the MiCA regulation as an example (the European regulation on crypto assets expected in 2024), it is really complex to establish definitions that are concrete enough to limit its application; this regulation must be flexible and broad enough to adapt to new creations in the sector without the need to constantly update the regulatory texts, because the consequence of the contrary would be an unsustainable system.
Likewise, we would like to highlight the potential challenges we must address regarding dispute resolution within the sector. As we have been discussing, the high level of technical expertise and technological knowledge required to understand the operation and development of businesses, among other things, will pose a significant challenge to the judicial and administrative branches, which will need to update and train themselves to continue acting efficiently and securely.
Antonio Canova, from Araquereyna: “Those of us who work in law must understand this phenomenon well in order to make a crucial decision: Will we side with the people who seek these technologies in order to regain their individual freedom? Or, rather, will we be enforcers of the unjust prohibitions imposed by governments to maintain their control over individuals and society as a whole?”
It’s as simple as that. That’s why I said that these decentralized technologies directly threaten the State, the law, and money as we understand it today.”
Is there a legal framework in your country that is appropriate to the real risks presented by these assets?
Adriana Moreno and Sergio Mendoza of GPA: “In Colombia, there is no comprehensive legal framework for crypto assets. Different national entities have regulated specific aspects or issued non-binding opinions on their use and acceptance, according to their respective jurisdictions. For example, the Financial Superintendency has stated that entities under its supervision cannot operate, purchase, invest in, manage, or trade crypto assets. However, the aforementioned Superintendency recently published a draft regulation that would authorize supervised entities to offer deposit products to exchange operators for the purpose of fulfilling their corporate objectives. Furthermore, the Financial Information and Analysis Unit (UIAF), through Resolution 314 of 2021, has mandated that crypto asset exchange platforms report their transactions. In April 2022, the DIAN (National Tax and Customs Directorate) established that, for accounting purposes…” For tax purposes, crypto assets are considered intangible assets (digital data) and constitute income for tax purposes; however, their transaction is not subject to VAT. The Superintendency of Companies, for its part, has stated that crypto assets can be contributed in kind to commercial companies and that they can be included within the corporate purpose of these entities.
While there have been legislative proposals aimed at regulating crypto assets, none have become law. We believe that in the short term, this regulatory approach will follow the same path, and regulatory bodies will control the crypto asset market according to their respective jurisdictions.
Jaime Bofill and Claudia Fariña, from CMS Albiñana & Suárez de Lezo: “In Spain, the first (and practically only) regulation of the sector has focused on money laundering and terrorist financing. The characteristics of the cryptocurrency market, such as user anonymity and decentralization, initially seemed ideal for unleashing all kinds of criminal activity, and in particular, money laundering.
Therefore, the Bank of Spain included as obligated entities the exchange and the custodians of electronic wallets, consequently creating a register (which is not a license) that is mandatory for all those entities that provide one (or both) of the services previously indicated.
In parallel, the Spanish financial market regulator (CNMV) developed Circular 1/2022 at the beginning of this year regarding advertising, in order to prevent misleading and aggressive advertising campaigns, and requiring that potential investors be warned of the risks involved in investing in this type of product.
Spain, therefore, has not adopted a passive stance towards the world of cryptocurrencies, but those of us who work in the sector have found that the regulator also fails to help those who want to do things right. A prime example of this is the response time to inquiries submitted to the regulator, which, while sometimes they arrive, are usually late and incomplete.
One possible response to this attitude from our regulator and supervisor could be to wait for the aforementioned regulation on crypto assets, MiCA. However, there are other examples in Europe, such as Germany and France, which, while awaiting MiCA, have attempted to take the initiative and begin legislative work to adapt their domestic regulations to the future content of the Regulation.
Therefore, the key point here is that it’s not about regulating quickly and poorly, but it’s also unacceptable for legislators to turn a blind eye and cause the market to become obsolete when other sectors like fintech have demonstrated the great potential that Spain has to offer the world.”
Antonio Canova, from Araquereyna: “No. Nor will there be.”
What current regulations govern the use of cryptocurrencies in Latin America, and how are they being implemented?
Adriana Moreno and Sergio Mendoza of GPA: “The approaches are very different among Latin American countries. The most advanced countries in fintech matters have issued comprehensive frameworks for the regulation and control of fintech companies and crypto-asset operators.
There are other countries, such as Colombia, that have not fully regulated this issue and whose regulatory bodies have opted to issue opinions on specific topics or draft regulations that have not yet been approved. The case of El Salvador, which made Bitcoin legal tender, is atypical, and it is highly unlikely that any other country will replicate it.
Antonio Canova, from Araquereyna: “Basically, and logically, the different Latin American states have enacted regulations to prevent these technologies. And in that sense, well, inevitably, they are doing very badly.”
Will the use of cryptocurrencies continue to become more widespread and adopted at all levels in Latin America?
Adriana Moreno and Sergio Mendoza of GPA: “Without a doubt. We anticipate significant industry growth and the emergence of new ventures and projects encompassing different uses of crypto assets and blockchain technology (i.e., public ownership registries, NFTs, stock market applications, etc.).
Jaime Bofill and Claudia Fariña, from CMS Albiñana & Suárez de Lezo: “We don’t have a crystal ball to predict the future—unfortunately—but we believe that cryptocurrencies are here to stay. We don’t think they will achieve the goal that Satoshi Nakamoto intended with Bitcoin, but we do believe they will continue to develop as an investment instrument and store of value.
Furthermore, when cryptocurrencies are discussed, one of the first arguments used to discredit the crypto asset market is that, lacking backing and being somewhat anonymous, only criminals have an interest in using it. However, it’s important to remember that criminal codes and economic crimes predate the emergence of cryptocurrencies. The point is that perhaps it’s time to stop automatically regulating the sector and instead explore the myriad possibilities it offers society. Both citizens and institutions can benefit from the development of an alternative and more sustainable economy, while still guaranteeing minimum standards of coverage and protection for all its participants.
Antonio Canova, from Araquereyna: “Yes. At least the ones I mentioned before: Bitcoin and all the others that use Blockchain technology in a decentralized way.”
