CRYPTO REGULATION: American situation

Por 23 septiembre, 2021 No Comments

Further to our article on Bills for Crypto Assets Regulation focused mainly in the Argentinean
Congress activity regarding such an important topic for Argentina, it is interesting to have a global
idea of what is happening in nearby countries with similar conditions to ours (or not). Even though
Ukraine has also presented a bill defining virtual assets and for crypto activities regulation, which
will be covered in a future article, we will focus on American countries. In our article Legal Nature
BTC there are some notions of Comparative Law.
Considering the global aspect of crypto-economy, any regulation affecting a country we habitually
operate with (whether with restrictive or opening characteristics) can strongly impact on other
countries. On one side, our operations are likely to be affected by new rules and, on the other
side, some transnational agreements are likely to be reached regarding the concept of what a
crypto asset is or not and the requirements to be fulfilled for legal transactions.

United States
Even though we keep updated with the latest news on this issue, we consider it relevant to make a summary of the tendencies periodically. In fact, the media iProUp published an article in May referring to cryptocurrencies “legalization” based on our opinion. Our recommendation is to read it since it provides an exhaustive situation analysis of the region and of the world: In Texas, crypto was granted the legal status of “virtual currency” (a broader concept than cryptocurrency), whist in the rest of the United States crypto has other definitions; it also offers a summary of the situation in other Latin American countries such as Chile, Brazil, Bolivia, Colombia, Uruguay, Venezuela, Mexico and Panamá, among others.
This article highlights the importance of the North American crypto ecosystem and the impact worldwide considering its legal concept, since any transaction made with US Dollars would fall into North American jurisdiction and, in most cases, deposits and withdrawals of “fiat currencies” are made from and into US dollars. Therefore, any company dealing with cryptocurrencies unable to operate in or from the United States would be excluded from the market.
In this sense, we’d like to remark that, as from September 1st, 2021, cryptocurrencies have been recognized in Texas Uniform Commercial Code upon the Governor’s enactment, as reported by Cointelegraph. Hence, “The Lone Star State” joins to the tendency started by the Miami mayor (who was the first in accepting Bitcoin for tax payment and for the payment of wages and salaries together with an infrastructure development intended to compete with Silicon Valley) and by the City of New York (self-proclaimed as “the most friendly city for worldwide crypto ecosystem” by some politicians).
Even though these news are positive towards granting legal protection to cryptoassets transactions (Texas has recognized crypto as a “medium of exchange” and this issue turned to be controversial in worldwide regulations for its implications with the monetary sovereignty of all nations), the industry remains uncertain for the coming future. Generally, upon defining some legal concepts and general regulations, two of the most conflictive issues are approached: the requirements to transact legally with cryptoassets (which may be an obstacle for speedy transactions) and taxes (which may threaten the expected performance and may seriously increase the costs to use cryptocurrencies as a means of payment). This said, we can conclude that –from the logical point of view- taxes should not be levied on something which has no definition at all in spite of the attempts made by Spain, Panamá or by the province of Córdoba in Argentina.

El Salvador
El Salvador can be considered a booming star today since the adoption of Bitcoin as legal tender in May 2021, effective as of September 7th, 2021. This decision may boost other countries of the region to speed crypto legislation and/or to review some considerations based on the experience achieved.
The Central Bank of El Salvador, Banco Central de Reserva (BCR), released a document titled “Technical Standards to Facilitate the Application of the Bitcoin Law” with instructions intended to comply with international regulations on anti-money laundering and terrorism financing procedures (in spite of all, an issue for debate). A cutting-edge document for such a pioneering move with concrete guidelines for cryptoassets regulation and for crime prevention from the State itself.
Pursuant to one of the provisions, all exchanges and BTC ATMs are obliged to report suspicious transactions and all Bitcoin transactions shall be registered. Hence, all companies involved shall keep a record of all transactions made with their customers and clients as long as the business relationship lasts and for 15 years once concluded, implying more legal safety than the traditional banking system.
The CEO of Uphold (one of the main exchange platforms) has stated: “El Salvador’s decision can be interpreted in many ways. On one side, it is reasonable from the economic point of view: the dollar is facing an “almost latin” devaluation process all over the world with a considerable inflation rate though transitory, according to FED.” Such a decision enables El Salvador (a nation with a dollarized economy) to separate from the future of the US Dollar (depreciated due to the issued amounts for incentive programs of the last years). An “apolitical” currency is a good solution.
As any booming news with great expectations, just the opposite was likely to happen. And, in fact, that exactly happened when Bitcoin became legal tender; we could say It was a perfect storm. Many expectations all over the world, the principle of the financial markets “buy the rumor, sell the news” (which helped BTC keep a good price), a huge social and institutional discomfort against President Bukele and a volatile currency as legal tender. I strongly recommend this timeline as a summary of the events to come.
The rumors that the nation could become a paradise for money laundering (released by the most traditional sectors and that helped to downgrade the country’s credit position as from the law enactment), protests in the streets complaining for antidemocratic attitudes and merchants in general who rejected to be paid in cryptocurrencies (mainly Small and Medium Sized Companies, even though they were not compelled to accept Bitcoin at this first stage) on the date the measure was made effective, triggered an unavoidable avalanche. BTC adoption was mostly resisted by small merchants and shopkeepers, retired people and trade-unions, besides the people already mentioned and Salvadoran traditional political parties. Another concern was the lack of financial education of the people, essential to understand the risks of collecting and keeping savings in BTC and the lack of infrastructure required to ensure a wallet to every citizen (and how to use it).
On launching day, Chivo, the free national digital wallet intended for payment of goods and services, was marred by system bugs and frequent periods offline due to technical problems, unable to be downloaded in Android nor iOS; Coinbase and Kraken, two of the five major exchanges, also had delays in their transactions. Simultaneously, the government created an initial trust of 150 million dollars with public funds to cover Chivo transactions and to back the purchase of the required BTC to start operating. These events altogether caused general panic, mostly in the population.
Such a pivotal day for crypto resulted in a currency crash. At the same time, several pre-loaded selling orders were run automatically (as can be seen in a viral video of Chinese traders) and tumbled BTC 10% in a few minutes. It is estimated that El Salvador lost USD 1 million in BTC to hold the currency. Luckily, some traders took advantage of price drop and “bought the dip”, closing slightly downtrend. To conclude, when we speak of crypto volatility it is not a joke (especially if the economic future of the nation is bonded to it).

In September 2021 a bill was introduced for crypto market regulation. Some media speculated that “Uruguay could be benefited from Bitcoin adoption as legal payment currency becoming a major financial market of the region”.
Ámbito commented on the bill on August 12th.: The latest news on cryptoassets regulation are connected to the bill recently introduced in Uruguay. According to the bill, cryptoassets have been defined as virtual assets and as value representation electronically registered, used by the general public as payment instrument for any type of legal acts and that can only be transferred through electronic means. A Virtual Asset is a digital product with cryptographic data to ensure its ownership and for transactions reliability. These products do not exist physically. A digital wallet is used for storage. All transactions are registered in a blockchain by software technology.
The bill presented by Uruguay intends to use cryptocurrencies as a means of payment for legal acts same as the Mexican or the Salvadoran law, so that cryptoassets can be considered a valid means of payment.
The rule has also been conceived to protect legally to those companies and traders using BTC as a means of payment or exchange.
As reported by Infobae, there are still few investors in cryptocurrencies in Uruguay. However, this could be reverted if the law is passed; they intend to be legal pioneers to regulate crypto use, storage, exchanges, issuance and transactions (as happened with marihuana legalization).

As informed by Natalia Foletti of the specialized media iProUp, Paraguay introduced a bill in July for the regulation of cryptocurrencies as well as the use and mining thereof. It is interesting to keep an eye on the evolution of this issue since this is one of the Latin-American jurisdictions with more foreign investments in the last years.
The bill proposes to regulate cryptocurrencies and to permit mining. One of the main goals is to set the legal, financial and fiscal security guidelines for those businesses related to virtual digital assets. If the bill is passed, Paraguay should become the second nation where cryptocurrencies can be legally used. One remarkable aspect is that the bill is intended to regulate the use of crypto as well as mining activities. It is recognized as an industrial activity with a potential ministerial promotion regime. It promotes the free competition, international investment, consumers’ and suppliers’ protection, industry good practices and prevention of money-laundering. Paraguay aims to create the conditions required for the development of a new industry with great added value through the design of a legal framework for this new disrupting technology. Even though the bill is general, it is the first step towards more specific rules for the development of companies and new ventures.
We would like to point out the distinction between this bill and El Salvador’s one. This bill does not consider cryptoassets as legal tender but consider them as intangible assets. In my opinion, a more reasonable framing.

Colombia takes another step towards a more friendly legal system for crypto sphere and blockchain technology. Moreover, Colombian companies are able to invest in BTC (the document released by the Corporations Superintendence on December 14th., 2020 is particularly interesting related to improving infrastructure under the “sandbox” format, testing different rules and practices before becoming effective). They follow the Australian regulation where different uses are analyzed on a case-by-case basis.
The last bill introduced by Colombia looks for a major approach to trading and mining of digital assets. It is under analysis and the recommendation by the Colombia’s Financial Superintendence (SFC) is still pending. This new bill is supported by trade unions, private entities and organizations, very important upon becoming effective.
This legal framework intends to regulate the crypto industry in terms of legal safety and to expand crypto related businesses within this challenging market. Pursuant to this bill, cryptocurrencies are defined as “means of exchange for goods and services”, excluding legal tender, legal tender securities and currencies. and to contribute to public trust in the stock exchange market through regulatory compliance in terms of information, safety and the like.
FinTech comprises several business models with different compliance requirements. We can mention, among others, crowdfunding, transactions alternate systems, credit or investment consulting and financial instruments management.

Mexico has several startups waiting for their permit to start operating. In 2018 the Mexican government presented its draft FinTech legislation (similar to the Chilean one) for the regulation of crowdfunding, sandbox and digital platforms, among others.
Legislation enables virtual assets to be used as cancellation instruments of legal acts; so, they can be used for the purchase of goods and services, for payment of taxes, among others.

Even though cryptocurrencies have no legal framework, they are subject to taxation. As already mentioned, from the legal point of view, it is a methodological mistake. Notwithstanding, on September 7th., 2021 a bill was introduced for the adoption of Bitcoin and Ethereum as means of payment.
The bill introduced before the Legislative Assembly has been designed to regulate cryptocurrencies and to accept them as a means of payment. One remarkable aspect is that they could be used for cancellation of tax and debts with the State (with the subsequent exchange by the tax authority for stable currencies to protect public assets from crypto volatility). Another aspect to mention is that one chapter is fully dedicated to mining activities (though not auspicious at all): mining would only be permitted using renewable energies and miners would be compelled to pay 25% of their profits to the State.

In spite of the growing use of cryptocurrencies (mainly due to high inflation rates), no laws nor draft legislation is still available. For the time being, authorities only regulate mining activities.

The Brazilian case also resembles the Australian format of regulatory sandbox with some regulatory and treatment differences. It is conducted by the main activity (trading, mining, saving) and tax treatment depends on frequency. As suggested by the Central Bank, crypto regulation is supported by the government and could move forward in 2022.

This month (on September 2021) Chile started debating a bill to regulate the FinTech ecosystem after a delay of more than two years. Their aim is “to promote the development of FinTech companies and to define the rules for a broader and more fair financial system” as reported by La República. The government believes this regulation could improve PyMEs (Small and Medium sized companies) financing supported by clear rules governing the financial services market.
The bill foresees to develop open finances to allow banks and FinTech companies to generate data interfaces for a better connection and data exchange, aiming to improve the financial ecosystem. Sensitive data such as payment behavior, debts and accounts, etc. will be made public in order to improve their products and to expand credit access. We will see how it can be instrumented.
The Chilean Government seeks to boost the FinTech ecosystem and to attract investors through a suitable legal framework for FinTech companies for a better industry development. They also seek to improve the relationships between FinTech and customers/clients, their financing procedures.

In spite of the encouraging news coming from the Americas, some nations still remain excluded. As reported by Criptonoticias in May, Bolivia stated that Bitcoin cannot be considered as money. The only currencies considered as money by the local authority (ASFI) are those backed by any Central Bank. Besides, cryptocurrencies are banned in Bolivia by Central Bank authorities since 2014. Besides the lack of legislation, ASFI Executive Director warned on the risks for incautious investors. We consider it unfair to talk about cryptocurrencies “irregular elements” in general without a detailed comprehensive analysis, considering them a fraud and as an instrument to finance illegal activities (historically financed by fiduciary currencies). People like this, totally misinformed, disregard the value and safety brought by this new technology to the financial ecosystem and as a protection against inflation (caused by the central banks themselves).
To make things worse, if a cryptocurrency is banned in a certain jurisdiction, citizens will try to transact in more friendly jurisdictions, taking with them their capital and profits. Notwithstanding this banning, crypto transactions are allowed through “peer to peer” (P2P) markets with international exchanges like Binance or Paxful with some restrictions or additional costs. Bolivia seeks a total banning instead of financial education.

Even though we have analyzed this topic deeply in some articles in our newsletter (and we move towards further analysis), we would like to remark that two bills have been introduced in our legislative system with no progress up to now and a struggle has arisen among the different players of the financial sector.
Briefly, the Central Bank has rejected several times the idea of considering cryptocurrencies as a means of payment and even its President (Pesce) has reportedly stated that cryptocurrencies are not financial assets because they “do not create value”. However, he actively participates of webinars organized by the FinTech community as the one organized some few days ago by the FinTech Chamber, when he insisted (healthy and beyond other concepts) on the need to strengthen financial education, focused mainly on the risks of these instruments. As we all know, the problem of inflation and huge paper money issuance affecting Argentina since many years ago, together with the growing cryptocurrencies adoption (along with the growing crypto community), clearly reflects why Bitcoin is valued as a reserve and safeguard instrument: economic policies against inflation and money issuance would contribute to a safe and stable investment environment independently from the daily fluctuation price (like the drop of September 7th., for instance). AFIP, Central Bank and/or other relevant players’ regulations can seriously affect the development of a flourishing ecosystem that brings new opportunities, excellent performance and unicorns.

Many experts conclude that, as long as deposits in cryptoassets can be suitable regulated and can become a reliable option as investment instruments and means of payment, this will be a threat for all Nations as paper money issuers and for the traditional banking system worldwide. The fact that an investor can legally store, hoard and operate his/her/its own bonds and securities without payment of fees for commissions or agents can endanger the whole traditional system, not to mention if such crypto instruments can be used for the purchase of goods and services.
In this sense, we strongly recommend to read our articles on Cryptocurrencies Adoption and the struggle among all players: traditional banks, the Central Bank (regulating entity) and FinTech companies in Argentina. Mostly all nations will have to decide “on what side” they choose to be.
As can be seen in this article, main trends move towards adoption and incentives for this emerging industry on one side and, on the other side, the banning by some (few) countries that elect to skip the opportunities brought by this industry due to some eventual risks unlikely to be confirmed (or, at least, not only ascribable to cryptocurrencies). In the near future most nations are likely to adopt an intermediate position in this innovative field, supporting this new industry and the expanding horizons ahead.

Diego J. Nunes
Estudio Nunes & Asoc.