Tech & Crypto

“GALICIA GATE.” Chronicle of an international botch.

Por 6 abril, 2023 No Comments

Update 06/10/2022
The Central Bank of the Argentine Republic (BCRA) banned local banks from offering cryptoassets to their clients and customers. This triggering event prompted an alternative resulting in a more expensive and complex structure to carry on such transactions (as mentioned in previous update). Conclusion: there is no point in pretending to block the sunlight with one’s hands.
On the other hand, those investors seeking to invest in crypto were forced to take their money out from the local banking circuit to be directed to exchanges operating locally or directly to virtual banks based on countries with a more friendly crypto regulation.
In this line, NuBank virtual bank based in Brazil- has allowed since July 2022 crypto trading to million users. Official investigations have reported a growth of 938% in Brazil within this segment.
This new case reflects how crypto regulation may foster cross-border transactions in a simple way. We can foresee that those countries offering an adequate balance between legal safety and dynamism will be likely to keep the biggest portion of this multi-billion industry.

Update 18/08/2022
As mentioned in our original post (below), the traditional bank sector aims to be included within crypto-associated products and services, highly demanded in Argentina. iProUp reported opportunely that Banco Galicia had launched a new Investment Fund for the trading of cryptocurrencies, mainly Bitcoin and Ethereum.Holding a participation in a fund that operates in crypto markets is not the same as buying these assets directly but it provides a step-forward to have (an indirect) access to an ETF (Exchange Trade Fund).
We would like to remark that only 10% of the fund would be in cryptoassets, being the rest of the portfolio in local assets. So, in case Argentinean shares drop in value, the fund price is likely to drop as well regardless of BTC and ETH price.

In early May 2022, the local crypto ecosystem was shocked by a striking news. What happened? A traditional Argentine bank intended to allow clients to purchase digital assets via their official websites. How long did this last? Spoiler alert: not even a week. Could it be possible in the future? We do not know. How much impact did this have? It had a great impact globally. Were the involved parties aware of this event? We will probably know in the coming months.
A little background will bring some light to this matter: Argentina had to close an agreement with the International Monetary Fund (IMF) for debt-refinance purposes, negotiated for over two years since current government took office. One of the “fine print” terms upon signing the agreement –disregarded by local authorities- was Argentina’s commitment “to discourage the use of cryptocurrencies.” In a USD 45 billion refinance agreement, this type of clause seems to be quite irrelevant. For further information on this topic and on the community reaction, we recommend this article posted by the specialized media BeinCrypto.
It is very well-known that both traditional finance and hegemonic States are quite concerned about such a flourishing industry capable of substituting money (invoking lack of financial information). The “Know-Your-Customer” (“KYC”) verification process is a tier upgrade imposed by regulators to get to know the identity of the individuals behind digital wallets, among other requirements. Within a severe regulatory process, the Central Bank of the Argentine Republic (BCRA) was seeking tight control over Payment Service Providers (PSP), responsible of virtual wallets. We recommend this article posted by iProfesional for further details on KYC for PSP.
But a traditional bank aiming to get involved with the Exchange crypto business was a completely unexpected event. It is true that Brubank (digital bank, modern features) informed jointly with Banco Galicia that it would allow its clients to trade crypto in its platforms but, however, focused was on Banco Galicia for its predictable consequences on the traditional bank circuit and on the overall financial sector. Surveys reported over 60% of clients aiming to trade crypto through their bank accounts.
On May 3rd., 2022, the local market was shocked by this move which was covered by local media: iProUp, Clarín, Ambito Financiero, among others. The mechanism was readyto operate: the bank’s technology supplier (Lirium) was a company with permit to operate in Argentina, USA and Europe.
The activity was legal; in fact, other companies offered the same service (Exchanges). Only investors with an aggressive profile would have access to this new feature, the KYC would be carried out by the bank, technology was quite the same as Homebanking technology, taxes and fees applicable to bank transactions and services would be charged, banks would be liable for their obligations, Top20 cryptocurrencies would be admitted and a second stage was ready to be launched including decentralized finance (DeFi).
Such a booming news would foster crypto mass adoption in a country ranked in the Top 10 within a competent framework for exchanges (which would be forced to share the market with a financial giant).
Sources reported that BCRA technical officers were acquainted with this situation and even confirmed that no special license was required and that connectedagreements were legal, but they did not recommend this type of investment on the basis of the risks involved and on the high volatility of these assets.
After a high-expectations journey, everything started to stay the same. On May 4th. (not even 24 hours after service was available), the BCRA posted two tweets warning users on the risks related to cryptoassets purchase. Up to here, the role played by BCRA was to prevent and to warn users on the risks associated to crypto assets in line with BCRA-CNV press releases of May and September 2021 (sticking to the same position of 2014). For further details enter this link.
Twitter exploded with jokes and critics addressed to BCRA – the entity in charge of controlling foreign exchange rate- under the motto “problem lies on pesos”. You can check BCRA’s Twitter official account or this summary posted by Cryptonoticias. Many factors put together are likely to undermine any private initiative: angry investors active in Twitter, a political opportunity, the need to keep reserves, a brand-new wallet worth USD 100,000 million dollars and a “battle lost in social networks”.
Finally, on May 5th. (48 hours after service was active) the booming announcement took place: BCRA launched a press release banning local banks and financial entities from providing crypto services. Local media covered the news again: La Nación, iProfesional, etc.At that point, statements made by Central Bank’s technicians and all sort of speculations were completely irrelevant. BCRA’s authorities backed their decision by invoking that “banks took advantage of the legislation grey area.” Extra official sources reported that “those who had to know, did not know.” Let’s remember that the new credit agreement between Argentina and the IMF stipulated that: “The National Government would discouragethe use of cryptocurrencies to prevent money-laundering and informality and for a better financial stability’s protection. Payments’ digitalization would have official incentives and financial consumers would enjoy additional protection.”Considering that the BCRA depends upon the Argentine government, a negative position was expected.
A (poor and wrong) explanation was reported by authorities arguing that financial entities “should focus their efforts to finance investment, production, trade and consumption of goods and services demanded in the domestic market and for export”. The President of the BCRA had already stated that crypto assets were merely worthless speculative assets. We wonder if the financial sector is able to achieve such commitments with current interest rates, multiple exchange rates and non-tariff barriers.
BCRA’s announcement made no mention to investors and clients missing the opportunity to preserve the value of their work and savings by being restricted frompurchasing BTC, stablecoins and other assets in pesos directly. It is suspected that cash availability was the main concern.
As reported by Infobae, Banco Galicia and Brubank had partnered with Lirium (digital wallet). Lirium had to resort to the blue-chip swap to transfer funds for crypto transactions overseas, with high impact on BCRA’s poor reserves. If the system continued operating, a mass “dollarization” through stable coins was likely to occur, affecting reserves and weakening the peso.
Even though it was not an express rule, banks suspended crypto services upon BCRA’s press release. Final legislation is expected for a better insight of regulatory framework.
Speculative positions emerged related to this new feature offered by local banks’ websites. Many argued that it was a marketing campaign to improve banks’ image, banned from offering new modern products. Others argued that the Central Bank was ready to tolerate this modernization until the application of stricter political regulation. We will never know what really happened and all versions are likely to be true.
Such commotion in the domestic financial market was reported by European media such as Europapress. Obvious to say, the lack of clear rules in our local ecosystem affects potential investments or business opportunities.
Finally,we can conclude that proper legislation is essential to boost financial development. Banks are likely to be banned from offering crypto trade in the future, demanding new mechanisms to operate in the crypto market, thus generating more bureaucracy, operation costs, delays, etc.
From our position, we look forward to finding more consensus among the market’s biggest players tending to modernization and an easier access to crypto assets. Decisions like this (from both sides) are negative for the whole ecosystem and, mainly, to small investors and entrepreneurs.

We also share this video in which our partner, Diego Nunes, explains this situation (in Spanish) on national radio, in the program Generadores TV – May, 23rd 2022, hosted by Juan Sosa Fernandez.

Diego J. Nunes


Estudio Nunes & Asoc.

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