Cryptocurrency and Tokenization Adoption: The Digital Frontier in Latin America

Latin America is rapidly becoming a hotspot for cryptocurrencies and tokenization, as countries in this region adopt and regulate digital assets. Leading the world in digital asset regulation, El Salvador and the Bahamas are the pioneers in the launch of Central Bank Digital Currencies (CBDCs).

The Bahamas outpaced the globe by introducing the world's first CBDC, the Sand Dollar, while El Salvador recognized Bitcoin as legal tender, a revolutionary move in the financial landscape. Not far behind, Argentina, Brazil, Colombia, Mexico, Panama, and Paraguay have either established broad regulations or are contemplating digital asset regulation. 

Drivers of Cryptocurrency and Tokenization adoption in Latin America

In Mexico, Argentina, Brazil, Venezuela, and Chile, it is commonplace for retail outlets and merchants to accept cryptocurrencies as payment. This phenomenon has not gone unnoticed, with four South American countries ranking among the top 20 of Chainalysis’ 2022 Crypto Adoption Index. Notably, Brazil holds the 7th spot on the index, with Argentina, Colombia, and Ecuador ranking 13th, 15th, and 18th, respectively.

This surge in adoption rates is largely due to these markets grappling with significant inflation, leading residents to buy cryptocurrency on Exchanges to protect their savings. As of the latest data available for 2023, the inflation rate is 12.36% in Colombia, 45.36% in Cuba and a staggering 106% in Argentina.

Tokenization is driving adoption across Latin America for the same reason. Tokenization of investment products has allowed a broader audience access to assets that were once exclusive to large investors. This has been particularly appealing in a region where many countries have double-digit interest rates as a result of high inflation, prompting investors to seek assets with sustainable returns.

In fact, Latin America contributed to 9.1% of the global crypto value received in 2022, reaching $562 billion between July 2021 and June 2022. This represents a growth of 40% in the period, reflecting the region's booming interest in digital assets.

The Crypto Regulation Spectrum

Digital asset adoption is on the rise in Latin America, although it's important to note the diversity of regulations in the region. For instance, while Bolivia has explicitly banned cryptocurrencies, Cuba recognized them as a legal payment method in August 2021, implementing a licensing regime for crypto exchanges and other virtual asset service providers. At the same time, other countries have not taken significant regulatory measures yet.

However, increasingly more countries in Latin America are not just addressing money laundering; they're creating legal frameworks that ensure businesses are adequately monitoring risks and complying with the law. These frameworks acknowledge that market manipulation is a significant threat, and that systems for monitoring the market are crucial for comprehensive risk assessment and legal compliance.

Fighting against market manipulation is becoming a top priority to protect investors. Regulators are actively investigating suspected cases, and those companies that do not implement effective systems to monitor the market risk facing legal actions or being shut down.

Below are sections that cover regulatory progress in Colombia and Mexico. As a brief reminder, one of the main barriers to institutional adoption of cryptocurrencies is the lack of regulations that adequately mitigate criminal activity across the blockchain industry, thus protecting investors and the overall health of the financial system.

The Financial Action Task Force (FATF) is an inter-governmental organization with 212 member countries. Its mandate is to combat illegal financial activities. The FATF monitors progress in the promotion and effective implementation of measures designed to fight money laundering, terrorist financing, and other threats to the integrity of the international financial system.

There are several relevant indicators that depict a country's overall stance on blockchain and tokenization. However, the monitoring by FATF of the progress countries make, and their implementation of its guidance, stand as the most robust measures of effort being made at the governmental level.

Under the spotlight: Colombia

Last May, the Colombian Senate approved a bill regulating cryptocurrency exchanges, which could go into force later this year or early in 2024. Although Colombia ranked lower in Chainalysis’ 2022 global crypto adoption index, it was ranked second in 2021 and is expected to return to the top in 2023. It is one of the fastest-growing crypto markets in the region and is also one of the most proactive from a regulatory perspective.

Colombia is a signatory of the Blockchain Bill of Rights backed by the World Economic Forum and has to its credit multiple government initiatives related to blockchain technology, particularly during the last three years. In 2020, its stock exchange announced the use of blockchain technology for OTC derivatives trading. In 2021, Colombia's Central Bank launched the country's first blockchain bond pilot and its Financial Supervisor launched a regulatory sandbox. The sandbox enabled crypto exchanges Bitso and buda.com to partner with Banco de Bogota. In 2022, Resolution 314 came into force, mandating that cryptocurrency transactions above $150 be reported to the Financial Information and Analysis Unit (UIAF), which actively complies with FTAF rules.

Colombia is positioning itself as a leading force in Latin America's digital innovation landscape. It has emerged as a proactive player, regulating and testing blockchain technology in recent years, demonstrating an approach conducive to financial progress. The increasing collaboration between its public and private sectors, along with its regulatory measures and its recent focus on tokenization technology are laying the foundations of a dynamic crypto and tokenization ecosystem.

Under the spotlight: Mexico

Mexico stands out as one of the most advanced countries in terms of digital asset regulation in the Latin American region. In March 2018, Mexico set the pace by becoming one of the earliest Latin American countries to introduce specific regulatory requirements for bodies engaged in digital asset transactions by enforcing the "Fintech Law."

This regulation mandates that all virtual asset service providers report any transactions to the Mexican government that meet or exceed a value equivalent to roughly $2,700. The Financial Action Task Force (FATF) has even commended Mexico's approach to cryptocurrency regulation, particularly as it relates to rules on Virtual Asset Services Providers (VASPs).

In Mexico, cryptocurrencies are recognized as a means of payment and value transfer, but not as legal tender, although last year Representative Indira Kempis submitted a draft law to recognize Bitcoin as legal tender. In practice, individuals have access to cryptocurrency, and businesses accept payments in them. The Mexico-based crypto Exchange Bitso processed $2 billion in remittances to the US in 2022, and aims to capture 10% of the market in 2023. At the same time, Mexican banks are thus far not accepting cryptocurrencies, likely waiting for specific regulation.

Strict KYC and AML regulations are in place in Mexico and the country is enforcing them, while the Central Bank plans to launch its Central Bank Digital Currency (CBDC) in 2025. With a population of close to 130 million and a GDP of more than a trillion euros, Mexico is taking steps to becoming a regional leader in the cryptocurrency and tokenization space, with the trade of real estate and Non-Fungible Tokens (NFTs) taking off.