Authors: Tan Chok Geow, Yong Hwee Shi, Paarth Agarwal, Ryan Ang Region Head: Tan Chok Geow
Editor: Akshat Daga
Illustration by Yen Ting
Digital currency has been dubbed as the next step forward in the world of businesses and e-commerce for governments and institutions. In Latin America, digital currencies usage is prevalent, with a handful of countries making the top 10 list of cryptocurrencies users. However, the region is faced with significant hurdles, such as high levels of corruptions and money laundering. These hurdles are mostly due to a low level of regulation and lack of proper finance infrastructure and institutions to oversee the transactions. We dive deep into China, and explore the workings behind the nation’s successful digitization policies. We concur that Latin America requires more than just regulations, but the complement of society's inclusion, investment in infrastructures and heightened regulations. Collectively with these policies, Latin America is well on its way to lead the global market in digital currency.
The global adoption of digital currency is edging the world toward a new age of commerce. Today’s digital currency was built on the foundation of blockchain technology with the introduction of Bitcoin in 2009. The blockchain technology has actually solidified the use of digital currency in today’s world and paved the way for global adoption. Social and economic factors are also driving the acceptance of digital currency. Global business-to-consumer (B2C) e-commerce has risen from $1.336 trillion in 2014 to $3.453 trillion in 2019 and it is projected to reach more than $6.5 trillion by 2022. Thus, as technology and development of mobile banking applications continue to advance, the growth of the digital currency market will continue to accelerate.
What’s going on in Central & Latin America?
Within this region, there is a rising interest in digital currency. According to data from Contxto, as of 2019, within the top ten cryptocurrencies countries were Brazil, Columbia, Argentina, Mexico and Chile, as illustrated in Appendix 1. Brazil accounts for by far the most cryptocurrency usage by on-chain volume of all Latin American countries shown in Appendix 2. Drivers of digital currency in this region are found to be unique and intrinsic.
Firstly, the use for remittances is prominent. The establishment of start-ups like La Plata Forma of Chile has also helped facilitate the transfer of funds to family and friends due to lack of physical banks. Secondly, these countries have reflected high prominence of digital currencies due to financial difficulties in recent years. For instance, the collapse of Argentine Peso has caused many savings to decimate. Based on Appendix 3, it suggests that cryptocurrency users in Argentina, Uruguay, Columbia and Chile in particular are turning to cryptocurrency as a means to store value when their native fiat currencies are losing value.
However, despite its high potential, the region is facing significant hurdles. Venezuela, for example, has seen rampant use for drug trafficking, corruption, illegal mining, agriculture and other criminal activities. According to N. Otieno from Blockchain News, Latin America has a higher number of crypto activities associated with transfer to and fro from criminal entities, constituting 1.6% of all the region’s sending volume and 2.4% of the receiving volume moved over in 2019. Many fell victim to crypto scams organized by WishMoney and FXTradingCorp, which accounted for most of the illicit transfer between July-November 2019 when cryptocurrency crime in the region was at its highest level. PYMNTS also reported in early 2020 that criminals are taking advantage of unregulated exchanges that do not require registration information and proof of identification for tracking purposes.
Case Review: How did China do it?
Looking at another region on the other side of the world, most transactions are already cashless. Research by Analysys claimed that in 2019, four out of five payments in China were made through either Tencent’s WeChat Pay or Alibaba’s Alipay. The People’s Bank of China (PBOC) is likely to be the first major central bank to issue a digital version of its currency, the Yuan. With the Covid-19 pandemic and need for social distancing providing a new sense or urgency.
The successful integration of its own digital currency owes to a list of factors. Firstly, China successfully identified multi-purpose mobile applications as the catalyst. The blend of social, e-commerce and payment functions has appealed to consumers as they seek flexibility and convenience in managing their finances and social lives simultaneously.
The inclusiveness of those who live in the rural areas aided too.. The nation focused on heightening exposure of digital technologies to consumers by expanding internet availability, especially in the rural areas. Alibaba and JD have set up online services that help farmers buy and sell. Evidently, according to the central bank, 66.5% of people in rural areas were already using digital payments by 2017, but in the country as a whole, the percentage is 76.9%.
How Central and Latin America can overcome their hurdles
While the review of China’s situation proved informative, most of the factors are unique to the country itself, thus might not be entirely applicable in Latin America’s context. However, to tackle some of the hurdles aforementioned, countries in this region could heighten regulations and improve digital security systems. For instance, Brazil has stepped up regulation on cryptocurrency transactions by requiring residents to report transactions involving the currency. In addition, apart from having coherent regulations to enforce standards and promote accountability in the digital market, the region also needs to divert finances to erect infrastructures to support and facilitate the rise of digital currency in the region.
What now for Latin America?
The digital currency represents an alternative to traditional systems of money like fiat. To many, the use of digital currency is seen as a convenience, but to others, it may be a saving grace from their own country’s economic downturn. Many people in this region today still face significant hurdles when it comes to adaptation of digital currencies despite its high usage. Latin America indeed has the potential to be the pioneer in the global digital currency market. However, the hurdles they are facing now seem insurmountable without collective efforts from the government, institutions and businesses. Ultimately, as Pavel Matveev, CEO of Wirex, claimed, replacing a system of money that has dominated for nearly 50 yeast is no mean feat and requires a profound overhaul of the world’s financial infrastructure
Appendix 1: Top 10 countries with the most cryptocurrency issues.\
Appendix 2: Valuation received by country.
Appendix 3: Correlation between P2P transactions and ER
1.Carolina Zepeda (2019). Why is Latin America the most crypto-friendly region in the world. Contxto. Retrieved from: https://contxto.com/en/informative/cryptocurrency-revolutionizes-monetary-exchanges-latin-america/
2.ChianAnalysis Team (2020). Latin America’s cryptocurrency market 2020. ChianAnalysis Insights.
3.Financial Times (N.d.). Why millennials are driving cashless revolution in China. Financial Times. Retrieved from: https://www.ft.com/content/539e39b8-851b-11e8-a29d-73e3d454535d
4.Jay Woldar (N.d.) The evolving marketplace of global digital currency. ISG, Imagine your future.
5.Nicholas Otieno (2020). How banking difficulties drive crypto adoption in Latin America. Blockchain News. Retrieved from: https://blockchain.news/news/how-banking-difficulties-drive-increasing-crypto-adoption-in-latin-america
6.Pavel Matveev (2020). The future of digital currency. International Finance. Retrieved from: https://internationalfinance.com/the-future-of-digital-currency/
7.Peter Schechter (2020). Latin America cryptocurrency market is soaring. Brink, The Edge of Risk.
8.PYMNTS (2020). Latin America’s dark, crypto-driven, cybercrime underbelly. PVMNTS. Retrieved from: https://www.pymnts.com/news/security-and-risk/2020/latin-americas-dark-crypto-driven-cybercrime-underbelly/