Latin America is a region of developing countries. It accounts for only 5-9% of all cryptotransactions in the world, but cryptocurrencies mean more to locals than to many Western users. In the region, cryptocurrencies help not only ordinary people but also businesses to protect their savings from hyperinflation, and give migrants access to faster and cheaper money transfers than traditional payment services. All of this creates the potential for truly massive adoption of cryptocurrencies in this region. We’ve looked at the specifics of the Latin American crypto sector and what its prospects are.
The volume of the crypto market in Latin America
To begin with, let’s look at the volume of the crypto market in Latin America based on data from last year’s Geography of Cryptocurrency Report by research firm Chainalysis. According to it:
Between 2017 and 2020, 7% of all cryptotransactions came from Latin America (in comparison, North America accounted for 15% and Asia accounted for 31%). The average figure ranges from 5% to 9%.
$49 billion is the total volume of cryptotransactions in Latin America between July 2019 and June 2020. Of this, $24bn came into the region and $25bn was withdrawn from it. Latin America is only ahead of Africa and the Middle East in this indicator.
South America ranked second in terms of growth in volume and number of transactions in 2019-2020.
Retail transactions account for a significant portion of cryptotransactions, with the region in second place. Meanwhile, the average amount of such transactions exceeds $10,000 in cryptocurrency – we are talking about large and commercial transfers.
Brazil leads the region in cryptotransactions, followed by Venezuela, Argentina, Mexico, Colombia and Chile with nearly three times the distance.
Cryptotransactions by country and currency, according to Chainalysis. Source.
In 2020, Venezuela and Colombia ranked among the top 10 countries in Chainalysis’s Cryptocurrency Acceptance Index. This ranking shows the countries with the highest local adoption of cryptocurrencies. Venezuela and Colombia ranked third and ninth, respectively. Notably, Ukraine is in first place, while Russia is in second place.
Latin America’s share of bitcoin mining is only a fraction of a percent.
According to the findings of Chainalysis, the popularity of cryptocurrencies in Latin America is due to factors such as the lack of access to banking services for the general population, the popularity of cryptocurrencies in international transfers, as well as the devaluation of local fiat currencies and, as a consequence, hyperinflation.
Characteristics of the crypto market in Latin America
Let’s highlight the main features of the Latin American crypto market.
The use of bitcoin for protection against hyperinflation and during crises. Countries such as Argentina, Uruguay, Colombia, Chile and Venezuela have been struggling with hyperinflation – a situation where national currencies depreciate by tens or hundreds of percent a year – for decades. Inflation in Argentina, for example, was 42 per cent last year and 53 per cent in 2019. In Venezuela, inflation was 6,500% last year and as high as 1,300,000% in 2018.
Against this background, even the high volatility of cryptocurrencies is no longer as frightening – if the value of bitcoin falls by several times, the holder of the coin will lose far less than when investing in the Venezuelan bolivar. For those living in hyperinflationary countries, cryptocurrencies, especially bitcoin and staplecoin, have become a real saviour – they not only save, but even multiply their savings.
Characteristically, cryptocurrencies hedge inflation risks not only for ordinary people, but also for large investors – they account for about 80% of all monthly cryptotransactions.
The popularity of cryptocurrencies for international transfers. The region ranks among the top remittance destinations in the world. According to the World Bank, the remittance market in Latin American countries is about $96 billion a year – that’s 1.7% of their total GDP. Last year, remittances from the US to Mexico alone totalled $40 billion (the United States is the largest source of remittances to Latin America in fiat currency). However, traditional payment companies such as Western Union, for example, impose high fees on their services, as well as limits and long transfer times.
Every year, cryptocurrencies are becoming an increasingly popular tool for international transfers. This is not surprising, given the advantages of digital currencies – high transfer speed and no high commissions. As a consequence, 90% of all cryptocurrencies come to Latin America from other countries.
Latin Americans mostly use Stablecoins, such as DAI and USDC, for transfers. Most often, cryptocurrencies are transferred to residents of Mexico and Venezuela. These countries have the third highest number of transfers on LocalBitcoins and Paxful, two of the world’s most popular P2P marketplaces. Local P2P platforms such as Valiu, Reserve or La PlataForma are also in high demand.
Cryptocurrency transfers are used not only by migrant workers, but also by local businesses. According to Chainalysis, East Asia is one of the main regions to which cryptocurrencies are being transferred from Latin America. Many of these payments are actually commercial transactions between Asian exporters and Latin American companies buying goods for retail sale. Local firms use bitcoin for payments because the transactions are faster and easier than bank payments, which also have to be accompanied by supporting documentation.
Number and volume of crypto-transfers sent from Latin America to other regions, according to Chainalysis. Source.
Increasing people’s access to financial services. About half of the population in Latin America does not have a bank account because they do not have a stable income, sufficient savings or, in some cases, even access to a bank branch. At the same time, over 55% of adults own a smartphone. Thus, through cryptocurrencies, they have access to a new, decentralised financial system.
Traders prefer foreign exchanges. Most Latin American traders prefer to work on major international exchanges such as Binance, Huobi, OKEx, Coinbase and Bitstamp. Many of them use fiat to buy VTC or USDT on local cryptoservices or P2P venues and then transfer them to larger exchanges where they get access to more trading pairs and liquidity. Also popular in the region are Bitso, registered in Europe, and Argentina’s Ripio.
High level of cryptocurrency crime. 2.4% of all cryptotransactions in the region are criminal transactions. Last year, the global average was 0.34%. Over 60% of all criminal transactions are scam projects, the largest of which are F2TradingCorp, FXTradingCorp and WishMoney.
However, the share of cryptocurrency use by criminals is now decreasing dramatically. We have previously discussed why criminals don’t like cryptocurrencies and prefer cash and bank transfers.
Top 10 South American scam projects, according to Chainalysis. Source.
Cryptocurrency regulation in Latin America varies greatly from country to country – there is no uniform approach across the region. Many jurisdictions (e.g. Colombia, Chile, Peru, Uruguay) have not yet adopted specific legislation on digital currencies.
In Bolivia and Ecuador, the use of cryptocurrencies and the operation of cryptocurrency exchanges are prohibited and offenders face prison sentences. The Ecuadorian authorities only allow the use of the state’s SDE token, a form of electronic money linked to the US dollar (the country’s official currency). SDE users can pay for a range of services and make transfers.
In other countries in the region, the crypto sector is legal. In Mexico, Argentina, Brazil, Venezuela and Chile, for example, cryptocurrencies are freely accepted as payment by retailers.
Cryptocurrencies in the region are mostly treated as assets and are subject to capital gains tax. The exception is Argentina, where cryptocurrencies are defined by various authorities as a commodity or the equivalent of securities. The authorities in Brazil, Argentina and Chile also levy income tax on profits from crypto transactions.
Crypto exchanges are not regulated everywhere. For example, in 2018, Mexico became the first country in the region to pass a law regulating cryptocurrencies, requiring them to register and conduct KYC/AML checks on users. Later, similar laws were passed by Brazilian and Argentine authorities. In those countries, trading platforms are required to provide regulators with user and transaction data.
Brazil and Colombia launched cryptocurrency regulatory sandboxes in 2020 and 2021, which are special legal regimes that allow cryptostartups to legally engage in these activities.
Argentina’s economic problems (from huge debt obligations to high inflation), also exacerbated by the COVID-19 pandemic, a ban on buying dollar amounts over $200 and another default, are motivating residents to use cryptocurrencies more often.
In 2020, the country’s crypto market experienced a real boom: the number of users of the most popular crypto exchanges Ripio and Bitso grew several times over the year to more than 1 million people. At the same time, the volume of trading on P2P platforms LocalBitcoins and Paxful has also increased manifold.
The Latin American version of the so-called “kimchi premium” – the difference between the price of VTCs on national and global exchanges – has emerged in the country. At the end of May, for example, the value of bitcoin on local exchanges reached $62,000 (5.9 million Argentine pesos) against $35,900 on international exchanges (3.4 million pesos).
The country now has a surprisingly favourable environment for mining. The government subsidizes residential electricity. This makes it very profitable to mine bitcoin in Argentina – mining the first cryptocurrency costs about half as much as in other countries in the region. Taking advantage of the situation, the Canadian firm Bitfarms plans to open Latin America’s largest mining farm in the country.
In terms of regulation, Argentine authorities require local crypto-exchanges to report monthly information on user transactions, as well as income and account balances. In the autumn of 2020, two coalitions of MPs introduced bills to the country’s parliament to regulate cryptocurrencies, but they were not passed.
Unlike Venezuela and Argentina, whose economies have suffered from persistent crises for years, cryptocurrencies were much less popular in Brazil before the COVID-19 pandemic. Many residents associated digital currencies with scams and pyramid schemes.
But over the past year, more and more people began to view cryptocurrencies (and especially bitcoin) as a long-term savings option or as a tool for international transfers. As a result, Brazil has become one of the countries with the largest number of investors in cryptocurrencies, in proportion to its population.
Over the past 2 years, the country has also experienced a boom in institutional and venture capital investment in the local crypto sector. For example, earlier this year the country’s largest crypto exchange, Mercado Bitcoin, raised $38 million in funding and announced expansion into Chile, Mexico and Argentina. Traditional financial services companies are also showing interest in cryptocurrency storage and the use of Stablecoin. For example, Uzzo, Zro Bank, Alterbank, Bancryp and Nexo have begun to offer crypto services.
Brazil now has around 60 crypto exchanges, of which Bitrawr, the country’s leading exchange, has so far opened 1.5 million accounts. The platforms must report to the regulator on user activity, and residents are required to report their cryptotransactions. Brazil, along with Canada, is one of two countries that allow bitcoin-ETFs.
Brazil’s central bank has spoken several times about the possible launch of the digital real, and at the end of May it even published the principles of the future CBDC. But the regulator has no concrete plans for this yet.
Authorities are also exploring the practical use of blockchain – several government agencies, such as customs and notaries, are already using the technology to certify documents, while large companies are adopting blockchain for production certification.
Venezuela stands apart in Latin America because of its experiment with the digital bolivar, the national cryptocurrency PETRO.
The fiat bolivar has almost depreciated – the currency has managed to lose millions of percent a year. In the 1970s and 1980s, Venezuela was one of the richest countries in Latin America. But the socialist economic reforms of former President Hugo Chávez (and their continuation by current President Nicolás Maduro) have pushed the economy back to mid-century levels.
Consequently, despite the country’s largest oil output, it lacks water, food, electricity, petrol and medicine. Everyone who could has long since left Venezuela or is working abroad – of the country’s 30 million inhabitants, 5 million have emigrated. And so far there are no signs that the situation will improve in the near future.
In this environment, crypto-assets have taken on an important role in Venezuela’s economy – many residents use them for international remittances and to protect their savings from hyperinflation. As a result, the country has achieved one of the highest rates of cryptocurrency use in the world.
The Venezuelan authorities launched PETRO in 2018, claiming the coin was backed by oil, gold and diamond reserves, but no proof was provided. PETRO is based on the Ethereum blockchain, so it is effectively a token.
The launch of PETRO had several goals: to combat currency devaluation and the crisis, as well as to circumvent US sanctions imposed on the country. The authorities hoped that the token would be in demand on the international market. But that hasn’t happened. Even within the country, PETRO is not popular – the local population prefers other cryptocurrencies. That’s why Venezuela has the third highest number of users of the P2P exchange LocalBitcoins.
The government sets the PETRO exchange rate, as well as paying civil servants’ salaries and pensions in it, and paying for government contracts. PETRO can also be used to pay major retailers and even street vendors, but the country’s central bank exchanges the token for fiat currency at a greatly undervalued rate.
Following the launch of PETRO, Maduro’s regime allowed seven cryptocurrency exchanges to operate in the country – their aim was to facilitate the exchange of PETRO on the international market. Other cryptocurrencies can also be bought on these platforms. According to Chainalysis, more than 75% of cryptotransactions on them exceed $1,000. And given that the average Venezuelan earns $0.72 a day, it is likely that most of the country’s crypto users are people close to the Maduro regime. For them, cryptocurrency is an opportunity to avoid sanctions (most high-ranking Venezuelans cannot open bank accounts in other countries) and to move capital out of the country.
Latin America is the ideal region for mass adoption of cryptocurrencies
Latin America’s crypto market may seem too insignificant – there are no breakthrough projects operating globally and setting the direction for the sector (like the crypto markets in Asian countries).
But this is where cryptocurrencies can become much more popular than in the West or East. Latin Americans perceive them as a serious and viable alternative to traditional currencies. With the right regulation, the region could become one of the world leaders in the use and integration of crypto-assets into the real economy.