The State of Crypto Adoption in Latin America

Crypto Adoption in Latin America

The crypto community united to celebrate El Salvador in September 2021, when the Latin American nation became the first-ever jurisdiction in the world to make Bitcoin legal tender. Up to now, transactions in the country were mainly done in USD.

Of course, things didn’t go nearly as expected at first, with the government facing multiple protests, heavy criticism from financial market players and international organizations, as well as service outages, and a lack of clarity around the Bitcoin law.

That said, it made sense to expect the above challenges to emerge from such a bold move that took El Salvador to uncharted waters.

But, as nearly six months have passed since the Salvadorian Bitcoin adoption, the state has managed to resolve much of the chaos around the implementation of the BTC law. During the same period, the country’s digital asset infrastructure has been developing rapidly, with citizens getting more used to crypto (over 60% of the population is using the state-sponsored Chivo wallet).

For these reasons, El Salvador has effectively paved the way for the rest of Latin America to adopt Bitcoin as legal tender. While there have been multiple statements from individual lawmakers in the region on this subject, no LatAm nations have since followed the Salvadorian example. However, broadcaster and Keiser Report host Max Keiser expects this to change soon, stating that he “knows for a fact” that one new Latin American country will make Bitcoin legal tender by Q2 2022.

In this article, we will explore why crypto adoption is increasingly beneficial for emerging economies, the state of digital asset adoption in Latin America, and whether we can expect a new Bitcoin law in the region soon.

Let’s get started!

The Case for Crypto in LatAm and Other Emerging Economies

After passing the Bitcoin law, many (especially outside the crypto space) wondered about the reasons behind El Salvador’s decision.

The move was definitely bold but made great sense. What’s more, many other emerging nations in Latin America and other parts of the world are in the same shoes as the Salvadorians.

Unlike developed nations across North America, Western and Central Europe, as well as the Asia Pacific, a great share of Latin American citizens – which includes almost all jurisdictions in the Americas apart from the United States and Canada – don’t have access to robust economies, a well-functioning social infrastructure, and a wide range of financial services. Furthermore, many of these countries have high national poverty rates that can range anywhere from 8.6% (Chile) to 37.2% (Bolivia), with multiple governments in the region being viewed as increasingly autocratic by the international community.

As a result, many citizens migrate to richer, more developed nations to improve their life quality. Those who work from abroad often remit money back to their friends and family to support them. In fact, remittances account for 2.4% of Latin America and the Caribbean’s GDP on average, with nations like El Salvador (24.1%), Honduras (23.6%), and Nicaragua (14.7%) being among most remittance-reliant jurisdictions in the region. However, cross-border money transfer services to Latin American nations often come with high transaction fees (the average cost was 5.56% in Q4 2020) and slow settlements.

The LatAm region has been long infamous for the record inflation rates of national currencies, in part due to some states’ unorthodox or improper economic decisions. For example, because of the heavy money-printing and deficit spending, Venezuela’s VED was subject to over 65,000% of hyperinflation in 2018 alone. The rapid expansion of the money supply was also behind Argentina’s annual inflation rate of 25.7% and 53.5% between 2017 and 2020.

On the other hand, LatAm countries are increasingly dependent on the US dollar, with El Salvador, Ecuador, and Panama having USD as their national currencies. While such a decision helps them avoid the hyperinflationary practices of local governments, these states are still subject to the dollar’s inflation rate, which has recently reached a 40-year high at 7.5%. Another potential downside is that central banks don’t have access to the more sophisticated economic measures with the USD than with their own national currencies.

Furthermore, a significant part of the population throughout Latin America is unbanked, with no or limited access to conventional financial services. While the COVID-19 pandemic has fueled substantial positive changes in this field, with Brazil’s unbanked population decreasing by as much as 73% in 2020, less than half of Latin America’s population had a bank account in 2017. This statistic excludes Venezuela, Brazil, Costa Rica, the Dominican Republic, Bolivia, and Ecuador.And even then, these six nations featured unbanked populations between 26.8% (Venezuela) and 49.1% (Ecuador) at the time.

Overall, the citizens of Latin American nations face a wide variety of economic and social issues that make them an excellent case for crypto adoption. Unlike inflationary fiat currencies, Bitcoin features a limited money supply of 21 million coins, with the new flow of BTC reduced by 50% with each halving event every four years. Due to the deflationary nature of the cryptocurrency and its high growth rate, it serves as a good store of value featuring similar properties as gold.

For that reason, Bitcoin and other deflationary digital assets (and even USD-based stablecoins) can serve as excellent tools for Latin Americans to retain their purchasing power and potentially increase their wealth with this form of alternative investment. Since the underlying blockchain networks of cryptocurrencies are permissionless and public – meaning that anyone can join them and use the apps and services within the ecosystem as well as become validators –, crypto offers a viable alternative for the unbanked to traditional financial solutions (e.g., digital asset money transfers, borrowing and savings via DeFi).

Regarding money transfers, crypto networks are truly global, with no geographical restrictions and intermediates, and charge no extra fees for sending and receiving cross-border transfers. With instantaneous processing times and inexpensive costs via payment-optimized projects like Ripple (XRP) and Stellar (XLM) or Bitcoin’s Lightning Network, digital assets come in handy for remittance transactions in Latin America and beyond.

Instead of a centralized authority, public and permissionless blockchain networks are governed by their own communities. For that reason, while most cryptocurrencies do not offer anonymity for users, they are free from the control of governments and large corporate players. Furthermore, Bitcoin and other decentralized provide people financial sovereignty, enhance human rights, and is borderless.

Bitcoin can also be useful for governments seeking to reduce the US dollar’s influence on their economies. For example, countries like El Salvador that have been using the USD as the official national currency within their jurisdictions can adopt Bitcoin as legal tender to add flexibility for both the state and the private sector.

Bitcoin Adoption Surges in Latin America

We have explored why it makes great sense for Latin American citizens (and potentially for governments and businesses as well) to increase their exposure to digital assets. Now, let’s see how crypto adoption has been going in the region lately.

According to Chainalysis’ 2021 Geography of Cryptocurrency report, four Latin American nations have been ranked among the top 20 jurisdictions in the firm’s 2021 Global Adoption Index, with Venezuela, Argentina, Colombia, and Brazil claiming the 7th, 10th, 11th, and 14th spot respectively. Furthermore, researchers of the study revealed that LatAm is responsible for around 9% of the global value received in digital assets.

The report also provides some insights into the nature of different Latin American crypto markets. For example, while citizens of Venezuela and Argentina use digital assets out of necessity to combat the hyperinflation of their national currencies, Brazilian users focus more on investments and wealth growth.

For that reason, Brazil not only has a larger crypto market than the other nations (with $91 billion of value received between July 2020 and June 2021) but also has a larger institutional transfer volume ($10 million) and a bigger share of DeFi transactions (39%).

Indeed, the Brazilian crypto market is substantial and has undergone quite some development in the last few months. While 10 million Brazilians are now part of the crypto community (according to CoinMarketCap), the South American nation already has several Bitcoin- and Ether-based exchange-traded funds (ETFs) listed on the B3 stock exchange, with asset manager QR Capital launching the world’s first local DeFi ETF in February 2022. By November 2021, investors have poured $5.6 billion BRL – equivalent to $1.1 billion USD – into digital asset-based exchange-traded funds in Brazil.

At the same time, the Central Bank of Brazil (BCB) is set to pilot its CBDC this year, with the final version’s launch expected in 2024.

Notably, the government has recently decided to regulate the local cryptocurrency market, with the Senate’s Economic Affairs Committee unanimously approving the nation’s crypto bill. Set to be voted in the Senate and the lower house later on, the proposed legislation will define digital assets and outline the responsibilities of industry service providers. While the bill aims to facilitate cryptocurrency adoption among the country’s businesses and individuals by providing much-needed clarity on a wide range of subjects, it also focuses on combatting illicit activities, such as money laundering and tax evasion.

In addition to Brazil, Argentina, Venezuela, Colombia, and, of course, El Salvador, crypto adoption is also surging in Mexico. While around 10% of a survey’s Mexican respondents stated they either owned or used cryptocurrency in 2021, huge companies like Elektra (one of Mexico’s largest stores) are increasingly accepting digital assets for their products and services. Furthermore, despite president Andrés Manuel López Obrador’s statement to maintain orthodoxy in terms of financial management and economics, multiple lawmakers support making Bitcoin legal tender in the country. In fact, Mexican Senator Indira Kempis stated in late February that she would propose a BTC law that is very similar in nature to El Salvador’s in the near future.

However, the proposed bill will likely meet resistance among lawmakers, especially if we consider that Mexico’s central bank seeks to launch its CBDC by 2024 instead of adopting Bitcoin as the national currency.

Potential Plans to Make Bitcoin Legal Tender

With great demand to achieve financial sovereignty, combat hyperinflation, provide an alternative financial ecosystem for the unbanked, remit money more effectively, and increase wealth and savings, crypto adoption makes perfect sense in Latin America.

As a result, we can see a rapidly growing trend across LatAm countries – such as Brazil, Venezuela, Colombia, Argentina, and Mexico – in which more and more individuals and businesses embrace cryptocurrencies.

El Salvador’s Bitcoin law has likely accelerated this trend. On the other hand, while it paved the way for the rest of the states in Latin America, it also set the bar high for them, as many are following a more conservative and less bold approach towards digital assets.

Furthermore, despite seeing quite some development in the crypto infrastructure and ecosystem in El Salvador, Latin American nations may become hesitant to consider adopting Bitcoin as legal tender due to the heavy criticism and opposition of finance heavyweights like the International Monetary Fund (IMF).

For example, in addition to warning the Salvadorian government about the dangers of making BTC legal tender and request that it reverse its decision, the IMF even stated that a digital sovereign currency in the Marshall Islands would raise the risks of macroeconomic and financial stability, not to mention financial integrity.

That said, it is very likely that at least one more Latin American nation will make Bitcoin or another decentralized cryptocurrency legal tender in the future.

The question now is not only who will be the next in line, but also when it will happen. For Latin American states, it would make more sense to go with a more careful and comprehensive Bitcoin law implementation that would provide the same benefits to locals while keeping the potential risks at a minimum.

At the same time, industry players like Max Keiser expect this process to go much faster, predicting that at least one more Latin American nation would make Bitcoin legal tender by the second quarter of this year. If that’s the case, we will find out soon enough.

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