Digital Asset Adoption and Regulatory Framework in Nigeria

Nigeria has become one of the African countries with the highest digital asset adoption rates when measured by P2P volume transactions, adjusted for PPP per capita and internet-using population. According to the 2021 Global Crypto Adoption Index, Nigeria ranks 6th at a global level, second only to Kenya in the African continent [1]. Below we further explore  factors that contribute to digital asset adoption in Nigeria. 

Nigeria adopts digital assets

Digital asset adoption in Nigeria has been steadily increasing for the past half-decade. According to the Global Consumer Survey carried out by Statista, Nigeria is the leading country (per capita) for Bitcoin and cryptocurrency adoption in the world. The 2020 global survey estimates that approximately 300 million people have owned or used digital assets at some point, with Nigerians achieving an impressive response – 32% of surveyed Nigerians reported to have used or owned digital assets at some point [2].

how common is crypto statista

“How Common is Crypto?” Statista, 2020

Naturally, country-specific factors fuel digital asset adoption throughout the world. The case of Nigeria is no different. Currency controls and pervasive inflation light the spark of the remarkable rise of cryptocurrencies in Nigeria. 

The value of the Nigerian naira has plummeted almost 30% against the dollar in the past five years. Additionally, the Nigerian currency has been suffering from variable inflation rates, increasing from a 10 year low of 8% to a current 17%, according to the National Bureau of Statistics of Nigeria [3].

Digital asset adoption as insurance

Nigerians have also been subject to political repression, sowing an uncertainty that inadvertently propitiated the scene for digital assets to arrive. This repression was not only physical in nature, but financial, as well. Thousands of citizens marched last October against police brutality and the Sars police unit, resulting in hundreds suffering tangible afflictions. During these protests, several bank accounts belonging to groups that raised funds to free protesters and supply first aid were temporarily suspended. This scenario provided yet another strong argument in favour of digital assets,which are now also considered as a key insurance against hostile interventions [4].

Adapting the Regulator Speech

Despite adoption advancements, it wasn’t until relatively recently that the regulator started to show its official position regarding cryptocurrencies. In 2021, central authorities and regulators in Nigeria have shared their stance on cryptocurrency usage, though not in a consistent manner.

After initially warning users on the dangers of investing and trading digital assets, the Central Bank of Nigeria (CBN) ordered banks to close accounts of all cryptocurrency users. Following a worldwide trend of regulatory institutions repelling the use of digital assets, the CBN submitted a letter in February 2021 signed by the Director of Banking Supervision, Bello Hassan. With it, it reminded regulated banking institutions that dealing in cryptocurrencies or facilitating payments for cryptocurrency exchanges was “prohibited.” Banking institutions -DMBs, NBFIs, and OFIs – were therefore directed to “identify persons and/or entities” transacting with cryptocurrency or operating crypto exchanges on their platforms and immediately close their accounts. Finally, it clearly stated that any breaches would face severe regulatory sanctions  [5][6]. 

This state did not deter Nigerian citizens from getting hold of cryptocurrencies. In fact, Bitcoin demand in this region increased after the public ban, reaching highs of over USD 86,000 – nearly a ~ 70% premium over average market prices [7][8].

The official speech rapidly changed as the regulator faced both public unease and observed how the same actions that were designed to disincentivize digital asset use resulted in the exact opposite – an increment in usage and transactions [9]. Less than a month after the letter was submitted, the CBN issued a statement of clarification, where bank officials said the directive should not be mistaken for an outright ban. Instead, the alleged initial communication was only meant to prohibit transactions of cryptocurrencies in the banking sector [10]. 

Down the road

Less than a year since its mostly debated announcement against digital currencies, the Central Bank of Nigeria announced that it will launch the pilot scheme of its digital currency by October 1, 2021. Apparently, the CBN has been carrying out research on CBDC’s since 2017, and might conduct a proof of concept before the end of this year [11]. 

With the current pressures piling up in favour of digital assets, there is no time like now to take the opportunity and discover more about the industry. 

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Our range of clients include the international digital asset exchange, TradeFada. Together, we explored the rise of cryptocurrency in Africa in a webinar, which you can view here

 

 

 

 

References

[1] Chainalysis (2021). The Chainalysis 2021 Geography of Cryptocurrency Report. Chainalysis. Available at https://blog.chainalysis.com/reports/2021-global-crypto-adoption-index.

[2] Buchholz, Katharina, and Felix Richter. “Infographic: How Common Is Crypto?” Statista Infographics, 17 Mar. 2021, https://www.statista.com/chart/18345/crypto-currency-adoption/.

[3] https://tradingeconomics.com/nigeria/inflation-cpi.

[4] Akinwotu, Emmanuel. “Out of Control and Rising: Why Bitcoin Has Nigeria’s Government in a Panic.” The Guardian, Guardian News and Media, 31 July 2021, https://www.theguardian.com/technology/2021/jul/31/out-of-control-and-rising-why-bitcoin-has-nigerias-government-in-a-panic.

[5] https://www.cbn.gov.ng/Out/2021/CCD/Letter%20on%20Crypto.pdf.

[6] Akhtar, Tanzeel. “Nigeria’s Central BANK ORDERS Banks to Close Accounts of All Crypto Users .” CoinDesk, 5 Feb. 2021, https://www.coindesk.com/policy/2021/02/05/nigerias-central-bank-orders-banks-to-close-accounts-of-all-crypto-users/.

[7] Pechman, Marcel. “Why Is Bitcoin $86K in Nigeria ? Here’s Why the BTC Premium Is Huge in Some Countries.” Cointelegraph, 26 Feb. 2021, https://cointelegraph.com/news/why-is-bitcoin-86k-in-nigeria-here-s-why-the-btc-premium-is-huge-in-some-countries.

[8] Adesina, Olumide. “Nigerians Increasingly Using Bitcoin since CBN’s CRYPTO BAN.” Nairametrics, 21 Apr. 2021, nairametrics.com/2021/04/21/nigerians-increasingly-using-bitcoin-since-cbns-crypto-ban/

[9] Avan-Nomayo, Osato. “Bitcoin Adoption in Nigeria Soars as Central Bank Blocks Remittances in Naira.” Cointelegraph, Cointelegraph, 18 Dec. 2020, https://cointelegraph.com/news/bitcoin-adoption-in-nigeria-soars-as-central-bank-blocks-remittances-in-naira.

[10] Sinclair, Sebastian. “Nigeria’s Central Bank: We Didn’t Ban Crypto Trading .” CoinDesk , 22 Mar. 2021, https://www.coindesk.com/markets/2021/03/22/nigerias-central-bank-we-didnt-ban-crypto-trading/.

[11] Essien, Hillary. “CBN’s Digital Currency Cbdc Set for October 1.” Peoples Gazette, 23 July 2021, https://gazettengr.com/cbns-digital-currency-cbdc-set-for-october-1/.

Digital Asset Adoption in Africa: Strongest Countries

Understanding the forces that drive digital asset adoption in heterogeneous regions throughout the world can be a complex endeavour. While the process involves high initial fixed costs and variable (constantly updating) ones, it acts as an authentication level needed before setting out to undertake any new venture in the digital asset world.

Following an overview and subsequent detailed analysis on some of the Latin American countries with the highest potential for digital asset adoption -such as Brazil, Mexico and Colombia – we turn our attention to digital asset adoption in Africa. 

Digital asset adoption landscape in Africa

The African continent provides a curious case for analyzing a number of phenomena. As the largest continent with almost 30,000,000 square kilometers (second only to Asia) and a population of approximately 1.3 billion people living in 54 countries, it naturally raises questions about the place it should be occupying at a global scale.

What makes this region interesting for digital assets from a business perspective?

The answer to this particular question – and any others that may be derived from it – lies in its realized development in relation with its potential. More specifically, Africa represents an array of untapped markets, from commodities to finance, that presents time-sensitive opportunities to those that pay close attention.

Let us limit the analysis to our interest in blockchain technology. Blockchain has the potential to fill the gaps that are plaguing African communities, most of them based on financial inclusion; this includes personal credit availability, infrastructure funding, currency stability, and more. According to the International Monetary Fund, internet penetration in sub-Saharan Africa has grown tenfold since the early 2000s, compared with a mere threefold increase in the rest of the world [1].

Still, Sub-Saharan Africa is reported to have the second highest population of unbanked adults in the world, at about 350 million people, or 17% of the global total. Citizens need new, better and more efficient ways of sending and receiving funds, as well as transacting or maintaining a stable reserve currency.

This is easily evidenced in the category distribution of main blockchain projects being developed in Africa estimated by PositiveBlockchain.io

Africa key projects

Source: Blockchain projects in Africa by sector, according to PositiveBlockchain.io [2]

A large market opportunity is therefore present for blockchain to step in and become the main underlying financial infrastructure throughout the region.

As per this report by Smart Africa, there are a number of use cases that appear most feasible or outright needed throughout the African continent. Some of these use cases include:

  • Digital payment infrastructures, including central bank digital currencies,
  • Public spending and governance,
  • Peer-to-peer energy trading,
  • Digital claims to land ownership,
  • Digital claims to education credentials,
  • Tracing agricultural goods along supply chains and
  • Trade facilitation.

Digital asset adoption in Africa

In a region plagued by a lack of access to financial instruments, high transaction fees [3], unemployment, inflation and more, it is but natural to understand the power that a technology such as blockchain can have. By combining cheaper and easier money transfers with access to stable currencies, alternative systems can easily compete and take market share away from fiat currencies. KamPay, a continent-long borderless DeFi solution is a clear example of the potential of blockchain in this region – with over 50 million potential users, it elevates main African digital asset uses such as commercial transactions. KamPay is also developing a suite of possible products to incentivize further adoption, such as their 50k farmer pilot program in Zimbabwe that will gain access into blockchain and provide micro lending [4].

A report by Binance showcases a surge in the number of African users on its platform. It saw an increase of 2228.21% in P2P users on the platform and 386.93% in P2P volumes across Africa [5].

Despite the range of possibilities, the advancement of blockchain in the continent is naturally related to its regulatory landscape. While some specific cases explicitly banned or prohibited digital assets, others have yet to have an official stance.

Africa crypto adoption

Source: Geographical overview of country-level stance on digital asset adoption (2019) [6]

Cardano to take part in African special projects

To further understand the necessity of an inclusive technology-based system, you can analyze Caradano’s involvement in the region. A conversation between Charles Hoskinson and James B. discussed the role IOHK and Cardano will have on Africa’s special projects, including digital identity and blockchain-based schooling information. Furthermore, having a verifiable ID means that “users can get a passport or driving licence, register property and access vital financial services like banking and loans.”

It seems that one of Cardano’s goals is to deliver economic identity to those currently left behind by current systems – a world’s estimate of 2.2bn unbanked [7].

Main African countries adopting digital assets

According to UsefulTips, four main African currencies have been taking the spotlight in USD denominated weekly volume transactions. These are the Nigerian Naira, South African Rand, Kenyan Shilling and Ghanaian Franc [8]. 

order book volumes africa

This assessment is in line with the 2021 Global Crypto Adoption Index, where several African countries appear in the top 20: Kenya (5), Nigeria (6), Togo (9), South Africa (16) and Tanzania (19). Some of these, among other emerging countries including Vietnam and Venezuela, rank high on their index largely because they have huge transaction volumes on peer-to-peer (P2P) platforms when adjusted for PPP per capita and internet-using population. 

Nigeria

Notwithstanding its place in world rankings on digital asset adoption, Nigerian authorities do not share its citizen enthusiasm. The Central Bank of Nigeria (CBN) recently directed banks to stop offering services to cryptocurrency providers.

Last February, the CBN issued a circular prohibiting banks and financial institutions from facilitating payments for cryptocurrency exchanges. This followed a trend of governments worldwide pushing back on the use of cryptocurrencies, with United States Federal Reserve Chairman, Jerome Powell [9]. 

Kenya

So, what makes Kenya the right place for blockchain technology?

Firstly, Kenya is already an innovation hub in Africa. Connectivity, infrastructure, high literacy rate, and other high-achieving status on distinct categories evidence that Kenya is well-developed and a natural place to start. Moreover, Kenya has already benefited from the adoption of M-PESA – an electronic mobile money service that allows you to store, send and receive money on your mobile phone, which was key to solving the problem of remittance in several African countries. After M-PESA, the demand for other technology solutions in Kenya started to rise. 

Conclusion

Stay tuned as we develop upon some of the most interesting cases in the African digital asset market, reviewing both adoption and specific regulatory landscapes. We will further take a look at digital asset adoption in Nigeria, Kenya and South Africa. 

 

 

 

 

References

[1] Baker McKenzie (2019). Blockchain and Cryptocurrency in Africa.  Stolp J., Perumall A., Selfe E. Available at https://www.bakermckenzie.com/-/media/files/insight/publications/2019/02/report_blockchainandcryptocurrencyreg_feb2019.pdf

[2]  Smart Africa Secretariat (2020). BLOCKCHAIN IN AFRICA: OPPORTUNITIES AND CHALLENGES FOR THE NEXT DECADE. How African countries can take advantage of distributed ledger technologies as they are maturing. Available at: https://www.giz.de/expertise/downloads/Blockchain%20in%20Africa.pdf

[3] Based on a report from the World Bank, remittances worth less than $200 to sub-Saharan countries cost an average of about 9% compared to a global average of 6.8%

[4] Marcus, Dov. “With Crypto Adoption on the Rise across Africa, the Need for a Leading Digital Currency Grows Stronger.” KamPay, 23 Aug. 2021, www.kampay.io/post/with-crypto-adoption-on-the-rise-across-africa-the-need-for-a-leading-digital-currency-grows-stronger

[5] Nwokoma, Chimgozirim. “Despite Clampdowns on Cryptocurrency Usage, African P2P Users on Binance Grow by over 2000%.” Techpoint Africa, 16 May 2021, techpoint.africa/2021/05/17/binance-users-grow/

[6] Devermont, Judd, and Marielle Harris. “Digital Africa: Leveling up through Governance and Trade.” Digital Africa: Leveling Up through Governance and Trade | Center for Strategic and International Studies, 8 Sept. 2021, www.csis.org/analysis/digital-africa-leveling-through-governance-and-trade

[7] “Africa’s Huge Potential Could Be the Key to Mass Adoption for Crypto.” CityAM, 29 Apr. 2021, www.cityam.com/africas-huge-potential-could-be-the-key-to-mass-adoption-for-crypto/

[8] https://www.usefultulips.org/combined_Sub%20Saharan%20Africa_Page.html

[9] Adesina, Olumide. “Nigerians Increasingly Using Bitcoin since CBN’s CRYPTO BAN.” Nairametrics, 21 Apr. 2021, nairametrics.com/2021/04/21/nigerians-increasingly-using-bitcoin-since-cbns-crypto-ban/

Sources

Chainalysis (2021). The Chainalysis 2021 Geography of Cryptocurrency Report. Chainalysis. Available at https://blog.chainalysis.com/reports/2021-global-crypto-adoption-index.

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

Bilotta, Nicola, and Fabrizio Botti. The (Near) Future of Central Bank Digital Currencies: Risks and Opportunities for the Global Economy and Society. Peter Lang International Academic Publishers, 2021.

Kingsley, Alo. “Exploring the Landscape of Crypto Regulations in Sub-Saharan Africa.” Cointelegraph, Cointelegraph, 19 Oct. 2020, cointelegraph.com/news/exploring-the-landscape-of-crypto-regulations-in-sub-saharan-africa.

Colombia: Digital Asset Adoption and Regulatory Framework

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].

Unbanked economies

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. 

Biggest Markets of LocalBitcoins

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. 

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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/

Mexico: Digital Asset Adoption and Regulatory Framework

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/

Brazil: Digital Asset Adoption and Regulatory Framework

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].  

Brazil crypto usage

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

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