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Cryptocurrencies: emerging rules lead the way in Latin America
Gabriela Pérez and Daniel González (Mexico); Jaime de Larraechea (Chile); Diego Harman y Miluska Gutiérrez (Peru); Camilo Gantiva and Eduardo Carlos Sanmiguel (Colombia); and Carlos Loaiza (Uruguay).
We are seeing a proliferation of cryptocurrencies throughout the world and Latin America is no exception. Here the legislation on cryptocurrencies is still at an emerging stage and in some countries has yet to be implemented. In this context, we examine the stages a few Latin American countries are at and what steps are being taken in a field where technology comes into play with finance.
In Colombia there is currently no specific legislation on the use or circulation of cryptocurrencies. In the past there have been a few bills (which still exist) intended to regulate this topic. These have not been widely discussed, however, nor have they attracted the expected amount of interest.
For the time being, what needs to be reported is that both Banco de la República (the country’s monetary, exchange and credit authority) and the SFC (the Colombian finance agency) have released statements on assets of this type, warning that they are not legal tender and therefore, unlike the peso, they do not have an unlimited releasing power for the discharge of obligations.
The SFC has further stated regarding the recognition of their value within the legal framework on the securities market in Colombia that they are not a valid investment for supervised entities, nor are their operators authorized to advise on or manage them.
Despite this, in September the SFC authorized a pilot project to create a sandbox test environment for entities supervised by the SFC in conjunction with cryptoasset exchange platforms formed in the country to put themselves forward to test temporarily in a controlled environment the handling of cash-in and cash-out transactions subject to a set of conditions and requirements defined to carry out the pilot test.
There is no specific legislation in Chile on these assets, or on their issuers or intermediaries, except regarding their taxation.
A few of the country’s public agencies have, however, made statements on them. Namely, for Chile’s Central Bank cryptocurrencies cannot be regarded as “currencies” within the legal meaning of the term as a result of their high volatility and the absence of any sovereign issuer supporting them Along the same lines, the Financial Market Commission has stated a number of times that under the legislation as it stands cryptocurrencies cannot be regarded as “securities”.
Additionally, the Central Bank, the Financial Market Commission, the Pensions Agencies and Banks and Financial Institutions Agency have been emphatic that despite the absence of a legal framework, all intermediaries, issuers and buyers of cryptocurrencies must comply with the general regulatory framework that is secondarily applicable to them, containing, among others, anti-money laundering and counter-terrorist financing provisions, and where international exchange transactions are carried out, with the foreign exchange legislation and regulations.
As we mentioned above, the only institution that has issued legislation on cryptocurrencies in Chile is the Internal Revenue Service (SII) which, in Notice no 963, issued on May 14, 2018, released a determination on the taxation of income obtained from buying and selling cryptocurrencies. It stated that the income obtained in these transactions is classified under number 5 of article 20 of the Income Tax Law, and taxpayers are taxable in respect of the general taxes specified in the law (first category, global supplementary and additional tax, as applicable). Alongside this it stated that sales of cryptocurrencies are not subject to Chilean VAT and included digital assets under Sworn Declaration no 1891, having the historic aim of recording the buying and selling of sales and purchases of assets and other instruments.
To respond to the high growth and increasing sophistication of financial platforms, in 2019 the Ministry of Finance prepared a bill on fintech firms, crowdfunding and cryptocurrencies, submitted for the first stage of the legislative process in the first half of 2020 and therefore expected to be published and come into in force in 2021.
In Mexico, the legislation on cryptocurrencies was defined in the LRITF, a law on technology institutions, published in the Official Federal Gazette on March 9, 2018. That law introduced the concept of virtual assets in international law, meaning, according to the LRITF, “an electronically recorded representation of value used among the public as a medium of payment for all types of legal transactions and that can only be transferred electronically”. Cryptocurrencies are therefore captured in that definition of virtual assets.
In relation to the use of cryptocurrencies, however, the LRITF only allows the financial technology institutions it contemplates to operate with any of the virtual assets that have been determined by the Bank of Mexico in general provisions and they can only carry out transactions with these currencies if they have first been authorized by the Bank of Mexico.
To comply with the LRITF, the Bank of Mexico issued Circular 4/2019 having a more restrictive scope regarding the use of virtual assets by financial technology institutions and credit institutions by considering that they present various problems (some relating to asymmetric information to the general public, money laundering, and terrorist financing) and the financial system needs to distance itself from them. As a result, only financial technology institutions and credit institutions can currently apply for authorization to carry out internal transactions, they can never authorize transactions intended to be used to provide directly to customers services for exchanging, transferring or holding virtual assets, and they must at all times prevent the risk of those transactions being transferred to those customers.
Lastly, despite the scenario described above, the Bank of Mexico has stated that, although financial technology institutions and credit institutions are not authorized to provide transactions with virtual assets to the general public, other institutions are not prevented from carrying out those transactions (e.g. virtual asset exchanges). This appears to give the Mexican market access to those transactions for anyone who so wishes and could provide an opportunity for the players involved in this market.
To date, there has been no specific legislation in Peru on supplying or promoting cryptocurrencies or virtual currencies, or tokens. So these types of financial assets are not currently supported by any Peruvian financial authority or public entity which means that any companies supplying or promoting those assets are not supervised by those entities.
Although certain provisions need to be mentioned that restrict the publicity of these types of offers. Namely, article 2 of Law 30050 on promotion on the securities market (as amended by additional provision four amending Urgent Decree no 013–2020, issued in January 2020) states that any publicity or notice on financial assets falling within the powers of the Securities Market Agency (SMV, the local securities market regulator), or of the Banking, Insurance and Pension Fund Manager Agency (SBS, the local financial supervisory authority) that takes place for the purpose of taking funds from the public in exchange for a financial return, a right to payment, a financial or property right, an equity interest, or a share in the profits of the recipient of the funds, in any form, and which is done within the country on mass media, such as newspapers, magazines, radio, television, mail, meetings, social media, internet services located in the country or elsewhere or other media or platforms, may only be carried out by parties authorized or supervised by the SMV or by the SBS.
Position of the local regulators
In various statements, the SMV has brought the general public's attention to the potential risks associated with buying virtual currencies, cryptocurrencies, or tokens, in transactions performed on various types of electronic or digital media, and called upon members of the public to become properly informed before using their money to make these purchases.
For its part, the SBS has stated that virtual currencies are outside the reach of any type of register. Since they are not a currency within the traditional meaning (being instead virtual assets that have been created, have a real existence, and may be woven into the existing freedom of contract framework) it is important to be careful, because this activity is not supervised by the SBS.
Along the same lines, the Peruvian Central Reserve Bank (BCRP) has underlined that these financial assets are not legal tender and are not supported by central banks either, so they do not fully meet the functions of money as a medium of exchange, unit of account, and store of value. The regulators mentioned above have similarly called upon the public to be aware of the risks such as a loss of value of their investments (due to high volatility in their prices and the likelihood of fraud), and that the assets may be used in unlawful activities.
In June 2019, Stefan Krautwald, member of the board of directors of LATAM, announced that BITPoint, a worldwide leading Japanese firm started operating in Peru on June 1, 2019 and reported that Peru is one of the countries with the highest number of cryptoasset transactions in Latin America.
What to expect
In 2019 a few individuals analyzed the potential effects of implementing the use of cryptocurrencies in the tourism industry, especially in the Peruvian market, where this industry is the third largest generator of foreign currency and one of the fastest growing industries over the past five years. This would allow tourists arriving in Peru to use cryptocurrencies as payment tools to get around problems associated with exchange rates and security (i.e. theft).
Lastly, at the beginning of 2020, the Operational Risk Oversight Department at the SBS determined, through its Financial Intelligence Unit (FIU), a need to assess the option of regulating the cryptocurrency sector to prevent asset laundering scenarios, given that, since transactions with cryptoassets started, the risks of them being used to hide fraudulent transactions have only increased.
This year the SBS expects to reach a conclusion on the option of passing legislation on asset laundering matters for businesses operating with cryptoassets.
*contents created by Brazilian law firm NBF|A
Brazil is among the countries with the highest numbers of investors in cryptocurrencies, in proportion to its population. Despite this, the country has no specific legislation on the subject. What it does have for the time being are bills laid before National Congress (among them, Bills 2303/2015, 2060/2019, 3825/2019 and 3949/19), aside from a few disperse rules and statements issued by public authorities on the topic, which, while not intended to regulate the subject broadly, do make it clear that investment in cryptocurrencies is allowed under certain parameters.
One example is Legislative Instruction 1,888/2019 by the Brazilian Public Finance Authority (Receita Federal do Brasil – RFB), which compels investors and exchanges to report monthly to that authority on certain types of transactions performed with cryptoassets. The specific reportable transactions are any performed by individuals or legal entities with foreign exchanges and any not performed through exchanges if in either case they individually or jointly exceed a monthly value of R$ 30 thousand. And the exchanges have to report all transactions performed on their platforms.
The Brazilian Securities Commission (CVM), holding the highest level of authority over the Brazilian capital market, has also issued statements on the subject. In 2018 it published Circulars SIN 1/2018 and 11/2018, authorizing the Brazilian investment funds under Instruction CVM 555/2014 to invest in cryptoassets indirectly, by acquiring interests in funds, derivatives instruments or other assets traded abroad, if their trading is regulated in the legislation of their countries of origin and certain parameters are observed. Also, if according to its characteristics a cryptoasset falls within the legal definition of “security” under article 2 of Law 6,385/1976, the transaction concerned is subject to the Brazilian Securities Commission's regulations.
The Brazilian Central Bank in turn issued a statement in 2017 (Statement no 31,379/2027) alerting the market to the risks associated with trading in cryptocurrencies. In a display of openness to innovation, however, the institution adopted a number of measures designed as an incentive to the participation of new business models on the financial market. Two such measures, which are currently being implemented – open banking and PIX, an instant payments system – seek to achieve greater competitivity on the market, by making room for the activities of fintech companies, including those operating with cryptocurrencies.
It is important to note in this context that both the Brazilian Securities Commission and Central Bank are implementing their respective sandbox programs (the Securities Commission’s regulatory sandbox is defined in Instruction CVM 626/2020 and the Central Bank has yet to issue a set of rules) aimed at creating experimental regulatory environments in which allowed participants will be authorized to conduct innovative businesses with a dispensation from the regulatory authorization or relaxed requirements. This provides an interesting opportunity for the various cryptoasset market players to try out their business models under the regulator’s supervision, while the final legislation is being crafted.
*Garrigues does not have an office in Uruguay
In Uruguay there is no specific legislation on cryptocurrencies, although since 2018 the Uruguayan Chamber of FinTech announced that a cryptocurrency committee had been set up to analyze what the future cryptocurrency legislation should look like. The business and legal communities in Uruguay have nevertheless been sensitive to the topic, as shown by Uruguay hosting in 2019 the seventh edition of the LA Bit Conf, the most important bitcoin and blockchain conference in Latin America, together with the academic conferences and seminars dedicated to this subject that have been held in the country.
By and large, legal analysts have found that cryptocurrencies are captured by the definition of property contained in the Uruguayan Civil Code (article 460), although they dispute whether these currencies fall within the definition of “electronic money” in article 2 of Law 19.210 on financial inclusion, particularly for what are described as “stable” cryptocurrencies, which to be issued have to be backed by a value.