Cryptocurrencies as legal tender in Latin America: lights and shadows

The use of cryptocurrencies such as Bitcoin is increasing, especially in Latin America, where several countries are among the top 10 users. El Salvador became the first country in the world to adopt Bitcoin as legal tender last week. According to Statista surveys, the fourth, fifth and sixth highest rates of cryptocurrency usage in 2020 were recorded in Peru, Argentina and Chile, with population usage rates of 16%, 14% and 12% respectively. According to this ranking, Mexico is in ninth position, with 10% of respondents stating that they own or have used cryptocurrencies in 2020. 

One of the main advantages of cryptocurrencies is that they boost cross-border trade. Large transactions that would normally cost banks thousands in fees, with a delay of 3 to 4 days, can be carried out at a very low cost and in a matter of minutes thanks to cryptocurrencies. Despite the many advantages, it is necessary to focus on the importance of regulation to prevent money laundering and to develop the system in a framework of fair competition.

In addition, the use of applications such as Blockchain allows for end-to-end tracking of transfers, as exchange rates are public information and allow for greater agility by operating in real time. Blockchain is defined as a set of technologies that enable a secure, unalterable and decentralised record of information. It provides a Bitcoin blockchain exploration service, as well as a cryptocurrency wallet and cryptocurrency exchange that supports Bitcoin, Bitcoin Cash and Ethereum among other digital currencies. They also provide cryptocurrency data charts, statistics and market information to their users. 

As some Latin American currencies have depreciated due to the economic crisis caused by the pandemic, consumers see virtual money as an alternative to safeguard the value of their savings. Bitcoin is the most widely used digital currency in Latin America. According to Coin ATM Radar, Colombia is the Latin American country with the largest network of cryptocurrency ATMs, with 46 ATMs located in Bogotá, Medellín, Cali and Cúcuta, among other cities. Argentina has thirteen cryptocurrency ATMs, most of them located in Buenos Aires. Mexico has ten, four of which are located in Mexico City. 

Nobel laureates in economics Joseph Stiglitz, Paul Krugman and Robert Shiller are prominent crypto-sceptics. Warren Buffett, Berkshire Hathaway's CEO, said that cryptocurrencies are one of the worst bubbles of all time. And Bank of England governor Andrew Bailey warned a few weeks ago: "Buy them if you are prepared to lose all your money". The reason they are against the use of cryptocurrencies is because no one controls them; not a government, not a central bank, not a company. Because they operate on decentralised technology, cryptocurrency transactions do not require intermediaries or a validating body.

Cryptocurrencies are a very vulnerable medium. Late May saw the conclusion of Bitcoin's worst fall in 10 years, which was triggered when Tesla CEO Elon Musk rejected the digital currency as a means of payment via Twitter due to the high environmental cost of the infrastructure that allows it to operate. The price fell from almost $65,000 to $29,000 and then partially recovered to $38,000. It is currently trading well off the all-time high of $64,869 it reached on April 14, hovering around $30,000. 

Sceptics argue that the rise of cryptocurrencies could threaten the monetary sovereignty of countries. While this is certainly a possibility in the future, cryptocurrencies do not currently handle enough money to have this destabilising effect. Josh Lipsky, director of the Geoeconomic Centre of the international analysis organisation Atlantic Council, explained to BBC Mundo that he believes that in the future governments will create their own digital currencies to compete with cryptocurrencies. Thus, little by little, this sector will be regulated. 

Last week, El Salvador became the first country in the world to adopt Bitcoin as legal tender parallel to the dollar. This bill was proposed by President Nayib Bukele and will come into force in 90 days. It has been decided to adopt this law because of the potential to help Salvadorans living abroad to send remittances home. According to the president, this law will help generate jobs in the short term and favour the financial inclusion of thousands of people who are outside the formal economy.

The approved regulation establishes that all prices may be expressed in Bitcoin and that all tax contributions may be paid in the cryptocurrency but that, for accounting purposes, the dollar will remain the reference currency. The new legislation gives people the freedom to use either currency. On the other hand, it does oblige all economic agents to accept Bitcoin as a form of payment. The main criticism of the project is undoubtedly the high volatility that characterises Bitcoin.

El Salvador was in talks with the International Monetary Fund (IMF) for a nearly $1 billion programme. But IMF spokesman Gerry Rice, during a press conference, said: "The adoption of Bitcoin as legal tender raises a number of macroeconomic, financial and legal issues that require very careful analysis," clouding the prospects of securing such a programme while widening spreads on the country's bonds. El Salvador's bonds traded lower across the curve on Thursday, with the 2027 and 2052 issues down 1 cent each on the day.

Latin America Coordinator: José Antonio Sierra.