While the discussion on digital asset adoption and regulatory framework is a nuanced one that requires a continuous update, it is time to set a temporal hiatus to the review on Latin American countries. On this occasion, we have chosen to close this series by analyzing a special case – that of digital asset adoption in Colombia.

Financial inclusion in Colombia

According to the World Bank, there is a significant portion of the population in Colombia that is not part of the traditional financial system. Only 46% of Colombian adults have a bank account, which leaves a great deal of opportunity for fintech start-ups. While ~84% of Colombians have had access to some kind of financial product in their lives, it is believed that only 30% of them use it regularly. Given this situation, the Colombian government launched a National Development Plan accompanied by a regulatory sandbox that allows fintech companies to obtain temporary certificates to experiment with business models without meeting all the requirements of a traditional financial services license [1].

Source: Global Findex database [2].

Digital asset adoption in Colombia

As may be expected, digital asset adoption has been gathering momentum and gaining ground in Colombia for some years now. The main difference is based on the relative growth rate it has had when compared to similar economies. While currently in the 11th place of Chainalysis’ Global Crypto Adoption Index, it peaked a year before, ranking ninth [3][4].

According to LocalBitcoins – the world’s largest peer-to-peer Bitcoin marketplace and proxy to cryptocurrency adoption- Colombia has climbed to reach the third biggest global Bitcoin volume, with a 11.3% of total volume – only behind Russia (17.4%) and Venezuela (12.3%), effectively taking the second place on the regional LATAM podium. 

Source: Biggest Markets of LocalBitcoins in 2020 [5].

Strangely enough, this adoption does not translate into special digital asset uses, such as the eminent DeFi; for instance, Colombia does not even appear in the top 20 Global DeFi Adoption Index [6]. We can therefore infer that Colombia is primed and ready to tap into actual use-cases of digital assets, besides treating them as a typical investment asset class.

Digital asset regulatory framework in Colombia

While its Central Bank declared that cryptocurrencies are not considered as currency or legal tender, Colombia’s law structure has failed to provide a clear classification of cryptocurrencies. 

Colombia’s digital asset tax framework: 

Currently, the tax framework is unclear and contradictory, as various Colombian agencies disagree as to how cryptocurrencies should be taxed. Depending on the entity, digital assets can be considered as material goods, intangible assets, or simply considered valueless. Therefore, these differences of opinion between Colombian agencies have provided a blurred tax framework for cryptocurrencies [7].

Attempts at inclusion and regulation in Colombia

By  January 2021, Colombia’s SFC announced a yearlong project to test new capabilities and possible implementations of digital assets within the financial industry. Furthermore, nine digital asset firms (out of 14) were chosen to test banking services for cryptocurrency platforms. According to the announcement, the goal of the pilot was firstly to allow fintech firms and the national government to safely test cryptocurrency use cases under the regulatory sandbox [8].

Banks will be working with digital asset platforms to test on/off ramps for deposits and withdrawals, but won’t touch any cryptocurrencies. The main objective is for all participating authorities to be able to measure the effectiveness of recent technological developments in verifying digital identity, as well as traceability in transactions within the scope of their assigned powers in the current framework.

AML/CFT 

According to subsection 4.2.6 of the AML/CFT circular published on December 2020 [9], digital asset companies fall within the scope of application of the Comprehensive Risk Management and Self-Control Regime LA/FT/FPADM, and have to carry out a series of processes – including but not limited to:

1. Intensified due diligence, 
2. Alerts for unusual and suspicious activities,
3. Educate employees on current regulations,
4. Report to the UIF on KYC/KYT, etc.

 

Conclusion

Similar to several sister countries in the region, Colombia has been fighting for a while now with low financial inclusion rates, thus enabling the scene for financial technology companies to flourish. With an implementation of a comprehensive regulatory framework, digital assets could follow a similar path – and carry out a social and economic revolution in the country.

Hence, we sum up our chapter on LATAM digital asset adoption and regulatory framework, and turn our attention to new regions. 

We welcome you to follow our socials for updates and more information, and subscribe to not miss any news! 

 

 

 

References

[1] “Fintech in Colombia.” CMS Expert Guide, 31 Mar. 2021, cms.law/en/int/expert-guides/fintech-in-latin-america/colombia. 

[2] Asli Demirgüç-Kunt, Leora Klapper, Dorothe Singer, Saniya Ansar, Jake Hess, The Global Findex Database 2017: Measuring Financial Inclusion and Opportunities to Expand Access to and Use of Financial Services, The World Bank Economic Review, Volume 34, Issue Supplement_1, February 2020, Pages S2–S8, https://doi.org/10.1093/wber/lhz013

[3] Chainalysis (2020). The Chainalysis 2020 Geography of Cryptocurrency Report. Chainalysis. Available at: https://go.chainalysis.com/rs/503-FAP-074/images/2020-Geography-of-Crypto.pdf
[4] Chainalysis (2021). The Chainalysis 2021 Geography of Cryptocurrency Report. Chainalysis. Available athttps://blog.chainalysis.com/reports/2021-global-crypto-adoption-index.

[5] LocalBitcoins. “These Are the Biggest Markets Of LocalBitcoins in 2020.” Medium, LocalBitcoins Blog, SatoshienVenezuela, 8 Dec. 2020, blog.localbitcoins.com/these-are-the-biggest-markets-of-localbitcoins-in-2020-6ef07bf3f4c8. 

[6] Chainalysis (2021). The Chainalysis 2021 Global DeFi Adoption Index. Chainalysis. Available at https://blog.chainalysis.com/reports/2021-global-defi-adoption-index.

[7] Freeman, Jason B. “Colombia and Cryptocurrency.” Freeman Law, 19 July 2021, freemanlaw.com/cryptocurrency-blockchain/colombia/. 

[8] Handagama, Sandali. “Colombia’s Crypto Use Soars, and Local Regulators Step In.” CoinDesk, 30 Apr. 2021, www.coindesk.com/policy/2021/04/30/colombias-crypto-use-soars-and-local-regulators-step-in/. 

[9] Superintendencia de sociedades. Circular externa 100-000016 24 Dec. 2020. Available at: https://www.supersociedades.gov.co/nuestra_entidad/normatividad/NormatividadCircularbasicaJuridica/Circular_100-000016_de_24_de_diciembre_de_2020.pdf

Sources

Handagama, Sandali. “’No Middle Ground’: Inside Colombia’s Race to Become a Major Regional Crypto Market.” CoinDesk, 13 Jan. 2021, www.coindesk.com/markets/2021/01/13/no-middle-ground-inside-colombias-race-to-become-a-major-regional-crypto-market/. 

Following our introduction to digital asset adoption and regulatory framework in Latin American countries and the subsequent overview on Brazil, it is now time to visit a case in Central America. How can a country positioned 54th out of 64 participants in the 2020 World Ranking of Digital Competitiveness become a growing market -and clear opportunity- to a phenomenon mostly present in first-world countries [1]? The country we are speaking of is Mexico, and we will further review its digital asset adoption and regulatory framework.

Retail and institutional digital asset adoption in Mexico

The available data on digital asset adoption in Mexico is mixed; depending on the measure used, both sides of the adoption spectrum can be argued for. Using proxy measures, like total number of Bitcoin ATMs, would categorize Mexico as having relatively low adoption (19) compared to its neighbouring country, the United States (22,950) [2]. Inversely, Mexico appears to be a growing market for cryptocurrencies, and has been estimated to occupy the 18th place on Bitcoin adoption [3]. Instances involving Mexican-born exchanges reverberating throughout the whole region have become quite frequent, with cases such as Bitso, a digital asset exchange startup that attracted US $250M in a funding round, receiving unicorn status (+US $1B valuation) thanks to its millions of users [4]. 

Digital asset regulatory framework in Mexico 

Understanding the legal and regulatory landscape in Mexico can be as complex as its adoption counterpart. Comparably to the Brazilian case, we can categorize the landscape in the following categories [5]:

1. Government definition and attitude. Since the publication of the Fintech Law in 2018, the Mexican financial system began to regulate operations regarding digital assets. The law vaguely defined terms regarding cryptocurrencies. It also provided a legal framework on how financial institutions can operate with them, along with the needed requirements. However, it also clarifies that they do not consider it a currency or embrace it as legal tender within the country. 
2. Cryptocurrency regulation. A year after the Fintech Law, a new circular published by Banxico – Mexico’s Central Bank – aimed to further clarify the characteristics digital assets had to have in order to be used by financial institutions and their customers.
3. Taxation. With no specific regulation for digital assets, the taxation landscape in Mexico is unclear. Only other established taxes may indirectly impact this asset class, while its treatment can’t be easily determined. From ICOs, IDOs, and IEOs’ participants to stablecoin holders and others, digital asset users have no coherent set of steps or rules to guide them through the tax reporting and payment process.
4. Ownership and listing requirements. Those subject to the Stock Market and Investment Funds laws are not entitled to operate with digital assets – only banks and fintech are allowed to do so.
5. AML requirements. Both fintech or banking institutions and natural persons are subject to the general rules of the Federal Law for the Prevention and Identification of Operations with Resources of Illegal Proceeds. Nevertheless, the tax and legal regulatory lines are blurred at best, providing an enticing scenario for criminals – nowadays, even drug cartels are being drawn to digital assets for money-laundering purposes [6].
6. Mining. Mining cryptocurrencies is not prohibited, and has not been the subject matter of any specific observation by Mexican authorities.
7. Reporting requirements. The reporting of trading, custody, or other activities involving digital assets depend on the person or institution carrying out said activity and the law they are subject to. Financial and non-financial institutions may be required to report crypto-to-fiat transactions that surpass ~USD 2500 to the Ministry of Finance. 

Additionally, institutions allowed to operate with digital assets need to register with the Financial Intelligence Unit. This is Mexico’s agency in charge of analyzing information related to illicit money operations and aiding AML/CFT. In a recent report, a dozen cryptocurrency exchanges have been found to be operating illegally because of their non-registered status alone [7]. 

Conclusion

All in all, the regulatory framework in Mexico does not seem to steer towards a more digital asset-friendly stance any time soon, as regulators and banks alike recently released a joint statement prohibiting financial institutions from carrying out operations with digital assets [8]. Notwithstanding, unclear paths may present the right set of circumstances for those prepared enough to navigate these waters. Our ample solution offering can cater to the most unprepared to the battle-tested veteran. From white-label technology to legal and regulatory advice, we can provide the necessary expertise for your blockchain project. Get in touch with our team today. 

 

 

 

 

References

[1] You can find updated information on World Competitiveness Rankings at: 

https://worldcompetitiveness.imd.org/countryprofile/MX/digital

[2] Updated information on country and city level of Bitcoin ATM can be found at https://coinatmradar.com/

[3] Finder Crypto Report. Cryptocurrency adoption rates. June 2021. https://dvh1deh6tagwk.cloudfront.net/finder-us/wp-uploads/sites/5/2021/06/Crypto_Adoption_final-compressed-1.pdf

 [4] Newsamericas. “Latin America’s Profile for Bitcoin on the Rise Thanks to Mexico and El Salvador.” Caribbean and Latin America Daily News, 15 July 2021, www.newsamericasnow.com/latin-america-news-bitcoin-on-the-rise-thanks-to-mexico-and-el-salvador/. 

[5] Blockchain and Cryptocurrency Regulation 2021, Mexico. Global Legal Insights. https://www.globallegalinsights.com/practice-areas/blockchain-laws-and-regulations/mexico#chaptercontent1

[6] Oré, Diego. Latin American Crime Cartels Turn to Cryptocurrencies for Money Laundering. Thomson Reuters, 8 Dec. 2020, www.reuters.com/article/mexico-bitcoin/insight-latin-american-crime-cartels-turn-to-cryptocurrencies-for-money-laundering-idUSL1N2IO25U. 

[7] Engler, Andres. “Mexico Regulator Says 12 Crypto Exchanges Are Operating Illegally.” CoinDesk, 28 July 2021, www.coindesk.com/markets/2021/07/28/mexico-regulator-says-12-crypto-exchanges-are-operating-illegally/. 

[8] Abraham Gonzalez, Anthony Esposito. Mexico Says Cryptocurrencies Are Not Money, Warns of Risks. Thomson Reuters, 28 June 2021, www.reuters.com/world/americas/mexico-says-cryptocurrencies-are-not-money-warns-risks-2021-06-28/. 

Cryptocurrency adoption indexes have been growing uninterruptedly for almost a decade now, with digital assets reaching peripheral countries the same way they did central Europe and USA at their inception. Having briefly introduced the state of digital asset adoption on the Latin American market, it is time to follow up with specific countries of the region. Firstly, we will look at Brazil, America’s second largest country by population.

Digital asset adoption in Brazil

The adoption of digital assets in Brazil has had a steep curve ever since its first exposure. Curiously enough, a 221-page Global Digital Report by Hootsuite and We Are Social reveals that Brazil – the fifth largest economy and sixth country in terms of population – is also placed as the fifth country in the world in terms of owners of cryptocurrency [1]. Regionally, Brazil accounts for the most cryptocurrency usage by on-chain volume of all Latin American countries – by far [2]. 

At a more granular level, the distribution of adoption is an interesting topic in itself. Electroneum, an instant payment blockchain-based app, found that while ~25% of Brazil’s population stands below the poverty line, 40% of crypto holders earn less than the minimum wage [3]. Furthermore, cryptocurrency adoption is growing both as an investment type and as a payment method in Brazil. A survey carried out by the Center for Governance of Change to over 1,000 Brazilians showed that over 10 percent of respondents utilize cryptocurrencies on a monthly-basis [4].  

Source: Current usage of money in Brazil [4]

Digital asset acceptance in Brazil

Digital asset acceptance has also been increasing in Brazilian marketplaces. It is reaching hundreds of businesses in several cities – potentially touching millions of lives. The latest mapping carried out by Statista in 2021 showed that over 40 million people could be exposed to businesses with cryptocurrency ATMs or in-store crypto payment methods:

Characteristics	No. of crypto businesses	Population (2020)
São Paulo	358	22.046.000
Rio de Janeiro	65	12.272.000
Porto Alegre	56	1.484.941
Belo Horizonte	37	5.159.000
Recife	37	1.555.039

Source: Top Businesses in the 5 biggest cities in Brazil that either have a cryptocurrency ATM or offer crypto as an in-store payment method as of March 9, 2021 [5] 

With the approval of Bitcoin’s ETFs by Brazil’s securities exchange commission, a number of crypto-indexed funds launched at the beginning of the year. Significantly, this has allowed investors the ability to include digital assets in their holdings in a similar manner as buying stocks. Mercado Bitcoin, the largest Bitcoin exchange in Brazil, has recently achieved unicorn status and processed a higher volume this year so far than the aggregate time period from 2013 to 2018 [6] [7]. 

The scene has even come to showcase an uncommon adoption cases. For instance, Burger King Brazil now accepts dogecoin as a payment method to purchase the fast-food chain’s Dogpper, their dog snack [8]. 

Digital asset regulatory framework in Brazil

Despite the impressive growth it’s had adoption-wise, regulation in Brazil has had a hard time keeping up, proving inconsistent. Several governmental and regulatory institutions also have differing conceptions on digital assets, creating a complex landscape for holders and traders [9]. 

Global Legal Insights produced a diligent first approach to the regulatory framework in Brazil [10]:

1.  Government definition and attitude. While not specifically regulating the creation, use and trade of digital assets, Brazilian authorities don’t regard digital assets as legal tender. Several institutions -such as the Central Bank or the Brazilian equivalent of the US SEC- have made public their position of caution and stated the risks of holding cryptocurrency.
2. Cryptocurrency regulation. Overlapping bills are currently being considered by the House of Representatives -Brazil’s legislative bench-, simultaneously aiming to: define and allow them, and prohibit regulatory bodies from creating rules that could ban or hinder the issuance, circulation and use of cryptocurrencies; or the activities of exchanges.
3.  Sales regulation. As in every other country aiming to determine the nature of cryptocurrencies, digital assets in Brazil are undergoing tests regarding how they should be defined. Pending the definition, it may result in them being considered as securities and therefore required to register with the securities exchange commission (CMV).
4.  Taxation. Digital assets are currently being considered as assets, so digital asset holders must declare them in their income tax returns, and pay the corresponding tax or capital gains obtained from selling them.
5.  Ownership and listing requirements. At the present time, the only Circular Notice issued in 2018 bans the direct acquisition of cryptocurrencies by Brazilian investment funds as cryptocurrencies are not qualified as financial assets under current regulations. However, Brazilian investment funds are still able to make indirect investments in cryptocurrencies (via cryptocurrency-based derivatives or third party vehicles directly investing in cryptocurrencies or their derivatives and which are incorporated in jurisdictions where they are allowed to hold cryptocurrencies or their derivatives).
6.  Mining. Mining cryptocurrencies is not prohibited, and has not been the subject matter of any specific observation by Brazilian authorities.
7.  Reporting requirements. Reporting reaches both retail users and institutions (or legal persons). Therefore, retail users need to report digital assets holdings in their income tax returns as “other assets,” under federal tax authorities. Institutions – mainly digital asset exchanges – are also required to report a series of transactions, including purchases, sales, donations, issuances and any other transfers of cryptocurrencies.

Scaling to new territories

With the discovery of new use cases for cryptocurrencies and rising digital asset adoption rates in Brazil, new opportunities appear. The Brazilian case is an enticing one for those who see the potential digital assets have on a major world economy. But building this endeavour from the ground up can be a complicated journey, with a long list of tasks ahead. 

Scalable Solutions can provide a wide range of products and services in the space to make this journey easier – from building your exchange from scratch, auditing your project to ensure a secure release, to tokenizing real world assets. The Brazilian market is one ripe with opportunities for new and existing businesses and investors to scale. 

Get in touch with our team today to bring your project to life. 

 

 

 

References

[1] Inc., H. (2021). Digital 2021 – Social Media Marketing & Management Dashboard – Hootsuite. Retrieved 22 August 2021, from https://www.hootsuite.com/resources/digital-trends 

[2] Chainalysis (2020). The 2020 Geography of Cryptocurrency Report Analysis of Geographic Trends in Cryptocurrency Adoption, Usage, and Regulation. Available from https://go.chainalysis.com/rs/503-FAP-074/images/2020-Geography-of-Crypto.pdf.

[3] “Why Is Brazil, a Country of Contrasts, Where the Poorest Use Crypto the Most?” Electroneum Press Room, news.electroneum.com/brazil-a-huge-business-opportunity-where-crypto-is-on-the-rise-among-a-median-population-of-32. 

[4] CGC, Cryptocurrencies and the Future of Money. Madrid: Center for the Governance of Change, IE University, 2019

[5] Best, Raynor de. “Cities in Brazil That Accept Bitcoin 2021.” Statista, 29 Mar. 2021, www.statista.com/statistics/1224861/firms-with-crypto-payment-solution-brazil-city/. 

[6] Engler, Andres. Brazil Crypto Exchange Mercado Bitcoin RAISES $200M. CoinDesk, 9 July 2021, www.coindesk.com/softbank-invests-200m-in-brazil-crypto-exchange-mercado-bitcoin. 

[7] “Latin America’s Largest Crypto Exchange Eyes Global Expansion.” Investable Universe, 21 Jan. 2021, investableuniverse.com/2021/01/21/mercado-bitcoin-brazil-cryptocurrency-exchange/. 

[8] Engler, Andres. Burger King Brazil Will Accept Dogecoin for ‘DOGPPER’ Dog Food. CoinDesk, 27 July 2021, www.coindesk.com/burger-king-brazil-will-accept-dogecoin-for-dogpper-dog-food. 

[9] Handagama, Sandali. Crypto Is Booming in Brazil, but Regulations Lag Behind. CoinDesk, 7 May 2021, www.coindesk.com/crypto-is-booming-in-brazil-but-regulations-lag-behind. 

[10] Blockchain & Cryptocurrency Regulation 2020. Global Legal Insights, www.cgmlaw.com.br/wp-content/uploads/2019/11/GLIBLCH20_Brazil.pdf. 

While initially intended to be used as means of fast, secure and transparent payment systems, digital assets have evolved to become the building blocks of a potentially disruptive new economic system. Decentralized finance, also known as DeFi, has been stepping firmly in this regard, with several other industry applications -such as supply chain, health, and more- following in its steps. Below we will explore digital asset adoption in Latin America (LATAM), highlighting the strongest countries of the region. 

Reasons behind adoption

Many users throughout first world countries view digital assets as a payment system; others see them as an alternative asset class capable of providing returns unseen in traditional markets. For a third group, digital assets can become a simple safe-haven for purchasing power parity stability and alternative employment sources. In lay-man terms, countries characterized by high inflation and unemployment rates -such as those located in Latin America and Africa- see pegged digital assets as a way to maintain the value of their holdings. Furthermore, they can simultaneously slow down the negative externalities of their respective countries monetary, fiscal and labour policies.

Similarly to our overview on the countries leading the tokenization cause [1], we will take this opportunity to look at those Latin American countries that are distinguished from the rest in the digital asset adoption landscape.

Main Latin American countries adopting digital assets

Colombia

Colombia has been positioning itself as one of the top three countries with the highest adoption in LatAm. Since 2019, it has been showing an almost unparalleled adoption rate, with store of wealth and means of transaction taking the charge as its two main uses. This adoption boom resulted in the government paying closer attention to the new asset class. It is further expanding their financial regulatory testing environment, adding tax-guidelines and AML regulations. At its peak, banking-crypto pilot projects were set out for testing within an oversight sandbox. For instance, Colombia’s biggest bank, Bancolombia, worked with several digital asset firms to test banking services [2].   

Argentina

Though not as complicated as other LatAm brother countries, Argentina has several and constant inflationary problems on top of a fictional free floating exchange rate and constant controls. Argentinians have been demanding US dollars as their main currency for store of wealth for decades now. With the introduction of digital assets, Argentina was but one of the most likely candidates for their adoption. Therefore, cryptocurrencies present a relatively simple and secure way to move between currencies. With few international exchanges leading the charge and a user-base growth rate in the 250% for 2020, Argentina has yet to sort regulatory obstacles before fully adopting these digital assets. At the moment, several ramp-on/ramp-off limitations are slowing down adoption, mainly as the result of the legislative and legal treatment of cryptocurrencies [3].

Brazil

Following Coinbase’s IPO and subsequent stock adoption by national banks, digital assets have been gaining more and more notoriety in Brazil. MercadoBitcoin, the digital asset exchange that recently achieved unicorn status, has had a higher trading volume this year so far than the aggregate from 2013 to 2018. With the launch of crypto-indexed funds at the beginning of the year, investors now have the opportunity to diversify their digital asset holdings in a matter of a few clicks, through crypto Exchange-Traded Funds (ETFs). By March, even the SEC equivalent of Brazil’s regulatory agency approved Bitcoin’s ETFs. Despite the impressive growth it’s had adoption-wise, regulation in Brazil has had a hard time keeping up, and has proved unreliable, with inconsistent frameworks [4]. 

Mexico

The case for Mexico stands out from the rest. While being one of the countries with the highest digital assets adoption rates in America, it still has a reluctant political stance regarding holding, trading and uses of digital assets. A recent joint statement between the Bank of Mexico, finance ministry and banking regulator prohibits financial institutions from carrying out operations with digital assets [5]. 

A curious adoption case

Lastly, Venezuela can be seen as an exponentiated case of Argentina. Indeed, its political, economic and social situation is known worldwide, but it has found innovative avenues to circumvent some issues within its economy. 

“It has become a tool to send remittances, protect wages from inflation and help businesses manage cash flow in a quickly depreciating currency, according to interviews with crypto users and experts.” [6]

Cryptocurrency has proved it can help in sorting a number of structural challenges in Venezuela. Firstly, it helps users hedge against inflation and use digital assets as a remittance service. Furthermore, it has provided an alternative to poor wages. With daily gaming earnings in the hundreds of US dollars, many Venezuelans have turned to cryptocurrency gaming to earn an income – helping them achieve decent wages, contrary to their current average of ~ USD 3/month [7]. 

Build a Scalable digital asset exchange for LATAM 

As demonstrated by the examples above,  adoption rates of digital assets across Latin America are increasing exponentially. These are fueled by factors such as the economic situation of the country, expanding technology and seeing new opportunities and demand for what blockchain technology and digital assets can offer. 

Scalable’s white label software for cryptocurrency exchanges can help you take advantage of the new opportunities on the market; you can invest in an exchange that will grow and work seamlessly from the get-go. Whether you’re an existing exchange that is looking to scale and upgrade your technology to cater to the needs of your users through better security and transaction speeds, or at the idea-stage of your project, we can help make it a reality. 

To find out more about the benefits of a white label exchange solution, check out this post: How to set up a digital asset exchange. 

Eager to get started on your project? Get in touch with our team here. 

 

 

 

References

[1] “Tokenization: Countries Leading the Cause .” Resources, Scalable Solutions, 30 Oct. 2020, scalablesolutions.io/news/tokenization-countries-leading-the-cause/. 

[2] Handagama, Sandali. Colombia’s Crypto Use Soars, and Local Regulators Step In. CoinDesk, 30 Apr. 2021, www.coindesk.com/colombias-crypto-use-soars-and-local-regulators-step-in. 

[3] Engler, Andres. Argentines Look to DAI as US Dollar Replacement. CoinDesk, 22 Dec. 2020, www.coindesk.com/why-argentines-are-turning-from-dollars-to-stablecoins-like-dai. 

> https://www.coindesk.com/crypto-is-booming-in-economically-challenged-argentina

[4] Handagama, Sandali. Crypto Is Booming in Brazil, but Regulations Lag Behind. CoinDesk, 7 May 2021, www.coindesk.com/crypto-is-booming-in-brazil-but-regulations-lag-behind. 

[5] Abraham Gonzalez, Anthony Esposito. Mexico Says Cryptocurrencies Are Not Money, Warns of Risks. Thomson Reuters, 28 June 2021, www.reuters.com/world/americas/mexico-says-cryptocurrencies-are-not-money-warns-risks-2021-06-28/. 

[6] Ellsworth, Brian. As Venezuela’s Economy Regresses, Crypto Fills the Gaps. Thomson Reuters, 22 June 2021, www.reuters.com/technology/venezuelas-economy-regresses-crypto-fills-gaps-2021-06-22/. 

[7] García, Jorge G. “When Playing Video Games Becomes a Full-Time Job.” EL PAÍS, 12 Aug. 2021, english.elpais.com/usa/2021-08-12/when-playing-video-games-becomes-a-full-time-job.html. 

Sources

Chainalysis (2020). The Chainalysis 2020 Geography of Cryptocurrency Report. Chainalysis. Available from: https://go.chainalysis.com/rs/503-FAP-074/images/2020-Geography-of-Crypto.pdf

Security and liquidity can be burdensome concepts to have in mind when carrying out trading activities, especially for less knowledgeable retail investors. Understanding the way actors are interlinked within the digital asset exchanges realm is a yet more complex -and a priori less urgent- matter that should also be considered. In traditional trading environments, trading happens either through a centralized party (exchange) or between parties (OTC). We will explore the way these actors connect with each other on a more technical and practical level by taking a look at FIX, WebSocket APIs and REST. 

Understanding connectivity and data communication

Similarly to how computers communicate with each other utilizing TCP/IP, digital asset exchanges need a way to connect every actor in the ecosystem. As we have developed in earlier articles, digital asset exchanges provide trading through bridging several actor needs: retail traders, institutional investors, brokers, and more. They accomplish this by creating centralized order-books with aggregated trading orders from the aforementioned actors. In order to do this, they need a way of sending and receiving information on the object of trading: assets and their financial information.

The way applications and software programs -and not computers in general- communicate with each other includes APIs.

“An application programming interface (API) is a connection between computers or between computer programs. It is a type of software interface, offering a service to other pieces of software. A document or standard that describes how to build such a connection or interface is called an API specification. A computer system that meets this standard is said to implement or expose an API. The term API may refer either to the specification or to the implementation” [1].

The majority of cryptocurrency exchanges use two mainstream API protocols: REST and WebSocket. Both possess advantages and powerful features, yet they haven’t gained widespread adoption in the broader world of finance. Because of this, cryptocurrency exchanges are likely to have a more complicated time communicating with Wall Street and other traditional exchanges around the world [2]. 

REST and WebSocket APIs

REST

While APIs allow programs to talk to each other, REST APIs determine how a specific API looks like. REST stands for representational state transfer, and comprise a set of rules that developers follow when they create their API -commonly known as their architectural style. REST are request-response types of APIs, where users send requests (get or post) and receive one-time responses. However, REST APIs can cause backups on servers. This makes them less reliable for high-volume institutional-grade trading exchange platforms compared to other APIs.

WebSocket

WebSocket represents a standard when it comes to both way communication between client and server. While REST are request response APIs, WebSocket handles the “push notifications” side of things, like market data. 

Financial Information eXchange (FIX) APIs 

While both WebSocket APIs and REST have several use cases, FIX provides a comprehensive solution that is particular to trading of digital financial assets. FIX is the connectivity protocol specifically designed for global financial markets. Across the financial industry, from Wall Street to foreign exchange markets and investment banks, it provides a link for the transfer of information. 

FIX addresses one main challenge present when utilizing REST and WebSocket -the necessary conjugation of APIs. Currently, both WebSocket and REST must be used concurrently with web APIs to achieve the type of communication needed for trading activities. FIX opens a constant TCP connection which allows the parties to exchange both types of message. A FIX engine handles this automatically.

FIXing your digital asset exchange – Scalable Solutions

Scalable is one of the few to support the FIX protocol – standard in global financial markets, but unusual  in the digital assets sector. It allows established financial institutions to  integrate trading algorithms designed for traditional markets seamlessly into the world of digital assets.

Transaction data generated on our platform is highly valuable to all market participants. We constantly strive to improve our connectivity interfaces and offer only the most advanced API protocols.  The less-efficient REST and WS interfaces are far more common than  their superior FIX and Binary counterparts. However, platforms supporting FIX protocols have significant advantages. As the digital  asset industry matures, pressure to offer support for them will intensify.  

The Scalable platform also supports FIX protocol 4.2 (standard in US equities today), 4.4 and 5.0 for MD feeds and managing orders. These battle-tested protocols are optimized for minimum latency. 

Get in touch with us and learn how you can set up a white-label digital asset exchange, or adapt your already established one to the new industry-flagship communication technologies.

 

 

References

[1] “API.” Wikipedia, 5 Aug. 2021, en.wikipedia.org/wiki/API. 

[2] “How Financial Information Exchange Can Fix the Crypto Market.” NewsBTC, 3 Aug. 2020, www.newsbtc.com/etoro/how-financial-information-exchange-can-fix-the-crypto-market/. 

Sources

Gulko, Serg. Rest/Ws vs Fix for Crypto Trading. Medium, 19 Mar. 2019,  medium.com/@serg.gulko/rest-ws-vs-fix-for-crypto-trading-7074c135d756. 

Lees, Chris. “What’s the Difference between Fix and Rest Apis?” Fixspec, 24 May 2021, fixspec.com/whats-the-difference-between-fix-and-rest-apis/.