RUSI | Assessment of the Current State of Cryptocurrency Adoption in Latin America

In September 2022, it marked one year since bitcoin became legal tender in El Salvador. While El Salvador remains one of the key players, other Latin American countries are also taking their first steps to expand their adoption of cryptocurrency. For example, the Argentinian province of Mendoza now allows taxpayers to pay with cryptocurrency; a Brazilian real estate developer accepts bitcoin as a means of payment; and Venezuela uses its state-issued Petro (cryptocurrency) to make social service payments..

Consequently, as the cryptocurrency industry grows in Latin America, without effective regulation, the risk of exploitation by illicit actors also becomes more prominent, even as an alternative vehicle for laundering illicit proceeds. This is particularly concerning in Latin America, as the U.S. State Department identified 20 Latin American countries on its list of high-risk countries for money laundering.

Therefore, this article will assess the current state of cryptocurrency adoption in Latin America, through examples where abuses may occur (either by states or criminals), and outline how national and global policymakers should respond.

By analyzing the relationship between cryptocurrency and criminal activity in the region from July 2019 to June 2020, Chainalysis reported that 2.4% of all cryptocurrency volume received and 1.6% of all volume sent were linked to criminal operations. This fraction indicates that, while there is certainly not a total shift towards the use of cryptocurrency for criminal activities, the sector remains at risk of being exploited and must react accordingly.

Specifically, the exploitation of cryptocurrencies in the region is notably linked to Colombian Transnational Criminal Organizations (TCOs), cybercrime, and sanctions evasion. Therefore, without the proper enforcement of legislation, regulation, and cryptocurrency-focused enforcement measures, the risk of exploitation of the cryptocurrency industry will inevitably increase as its use and access grow.

What is driving cryptocurrency adoption?

A series of economic and political factors are related to cryptocurrency adoption in the region. For example, hyperinflation, a monthly inflation rate exceeding 50%, is cited as a factor in the adoption rate of cryptocurrency in Venezuela. By the end of 2021, the country officially emerged from a four-year period of hyperinflation, but still maintained an annual inflation rate of 686.4%. The lack of confidence in a country’s national currency to maintain its value can lead to a shift towards other value assets. Although the volatility of cryptocurrency poses a risk to consumers, this may seem tolerable when compared to the loss of value caused by a country’s hyperinflation rate, leading citizens to invest and move their savings into cryptocurrency.

For the government of El Salvador, the adoption of cryptocurrency may have been perceived as an additional benefit that offers the potential to reactivate the economy, in order to increase citizens’ income. In addition to legislating the use of bitcoin, the Salvadoran president announced in June 2021 that the government planned to develop bitcoin mining facilities to leverage the country’s cheap geothermal energy from its volcanoes, hoping this could attract cryptocurrency mining companies and thus strengthen the economy through increased job opportunities and revenue from the mining process.

The reduction of transaction costs in sending remittances through cryptocurrencies represents a third important factor in the adoption rate in the region. For some countries, remittances represent a significant fraction of their GDP. According to World Bank data, personal remittances received accounted for 1% of El Salvador’s total GDP in 2020.

In September 2022, the Salvadoran government installed 231 government-controlled cryptocurrency ATMs, known as Chivo ATMs, throughout El Salvador and the United States. The goal of these Chivo ATMs is to increase access to sending and receiving remittances through cryptocurrency (hence their presence in the United States as well). The reduction or elimination of transaction fees offers the added advantage of allowing users to contribute more remittance funds to the economy.

Finally, government incentives also encourage the integration of cryptocurrency into society. The impact of these measures varies in scale depending on how they affect the daily activities of the population. In El Salvador, the introduction of bitcoin legislation aimed to promote a shift in the use of bitcoin across different sectors. According to the Article 7 of the Bitcoin Law all economic agents in El Salvador are required to accept bitcoin as a form of payment for goods and services when offered by a customer, regardless of their willingness. Despite this requirement, the initiative received an uneven response.

In August 2022, the Salvadoran newspaper La Prensa Gráfica surveyed 1,506 people in the country to assess the public’s response to the decision to make bitcoin legal tender, finding that less than a quarter (22.9%) approved, while nearly two-thirds (65.7%) disapproved (11.5% did not comment). This disinterest is further reinforced by a survey published by the Chamber of Commerce and Industry in 2022, in which only 13.9% of businesses reported making sales in bitcoin since it became legal tender.

What is the magnitude of criminal activity?

As previously noted, criminal operations in Latin America are estimated to represent 2.4% of all cryptocurrency volume received and 1.6% of volume sent between July 2019 and June 2020, with 61% of this criminal activity associated with cryptocurrency scams. For example, AirBit Club, a fraudulent cryptocurrency mining and trading company operating in the region and abroad, defrauded tens of millions of dollars from its victims. In addition to scams like this, there is also evidence of the exploitation of cryptocurrencies by criminal organizations based in Latin America to move and launder illicit profits. This activity includes the use of cryptocurrencies by TCOs and cybercriminals, as well as the potential use of cryptocurrencies to evade sanctions.

If only drug sales in the United States, Central America, and Mexico are considered, Colombian TCOs generate $10 billion annually.Traditionally, the illicit profits associated with this business are laundered in the ‘offline’ world through the black market for pesos and trade-based money laundering. However, the U.S. Drug Enforcement Administration (DEA) noted that Colombian TCOs have also used cryptocurrencies to facilitate international transfers. Criminal actors can exploit cryptocurrency infrastructure to convert illicit profits and move them across borders. There is evidence, for example, that criminals take advantage of cryptocurrency exchanges to convert and transfer illicit funds between Spain and Colombia. In 2017, Europol, the Spanish Civil Guard, and the National Police of Colombia found that a criminal organization based in Spain was exploiting cryptocurrency exchanges to launder

an estimated €2.5 million. The identified criminal organization assisted other criminal groups in laundering illicit funds associated with drug trafficking and other crimes in Spain. The laundering process involvedconverting these funds into cryptocurrencies, through cryptocurrency exchanges, and then transferring the funds to digital wallets controlled by a Colombian organization. There are also links between local cartels and cryptocurrency mining groups. In 2019, as part of an ongoing drug investigation, Brazil’s Narcotics Investigation Department arrested an individual operating a cryptocurrency mining facility. Along with the arrest of the operator, agents

found 25 cryptocurrency mining machines believed to have been smuggled from China, each costing $65,000. Although this case does not specifically reveal why drug trafficking organizations use cryptocurrency mining, the revenue generated through mining may be one of the reasons. Cryptocurrency mining also provides access to ‘clean’ funds as miners receive newly minted coins that are not linked to any prior activity, and therefore can be used by criminals with a reduced likelihood of detection by an investigation. Another dimension of cryptocurrency development was the emergence of state-issued cryptocurrencies as a potential method to reduce the impact of sanctions on an economy. Although major cryptocurrency blockchains are typically transparent, governments can issue their own digital currency through a permissioned blockchain

[1]where only specified individuals can gain full visibility of transactions. More generally, access to and use of cryptocurrency infrastructure can facilitate a certain degree of sanctions evasion by avoiding the use of the traditional financial system. Although liquidity and price volatility often impose significant limits on the ability of cryptocurrencies to facilitate sanctions evasion, the case of the Venezuelan state-issued cryptocurrency, the Petro, demonstrates this potential role in accessing the international financial system. The English version of the Petro white paper, published in January 2018 (one of several versions in different languages containing varied information), states that the state

commits to ‘promote the adoption of the Petro, fostering the growth of its national and international user base,’ and that the state-issued cryptocurrency can assist in overcoming the limitations imposed on the traditional financial system by sanctions. To overcome resistance to adoption and encourage the growth of its state-issued cryptocurrency as a means of cross-border payment, Venezuela attempted to integrate the Petro into activities associated with its international trade. In 2018, the Venezuelan Ministry of Transport

imposed a requirement on shipping companies using Venezuelan port services to make payments in euros or the equivalent amount in Petro. Another measure implemented by Venezuela required international airlines flying to Venezuela to pay for fuel in Petro. That same year, Venezuela and Palestine established a binational fund for industrial development with 20 million Petros as initial participation. The Petro white paper acknowledges the risks posed by price volatility, arguing that the link between the state-issued cryptocurrency and the country’s oil reserves

provides a greater degree of stability and intrinsic value. However, the downside is that it will have limited international appeal, similar to the limited appeal of a fiat currency outside the group of major trading and reserve currencies. Currently, the U.S. dollar stands as the primary reserve currency internationally. Therefore, to enhance and improve cross-border appeal, Venezuela complemented the Petro with the development of an

algorithmic stablecoin, Glufco, linked to the U.S. dollar, which is likely a more reliable vehicle for value transfer and sanctions evasion. According to Decrypt news, the Glufco stablecoin is traded on small international exchanges and shows potential to gain traction and be perceived as a value. Permissioned blockchains allow pre-established users to access the blockchain and are not publicly accessible. What should be done? It is undeniable that the pace of cryptocurrency adoption is accelerating in Latin America, driven by a series of social and economic factors arising from both the states themselves and their populations. There are significant gaps in legislation, regulation, and law enforcement capacity, and few countries have developed, adapted, or approved cryptocurrency legislation, which is key for effective regulation and enforcement.

To mitigate the criminal activity accompanying this growth in cryptocurrency adoption, international legislators should work with the Financial Action Task Force of Latin America (GAFILAT), the regional body of the Financial Action Task Force (FATF), to rapidly develop and implement appropriate and effective legislation, regulation, and enforcement measures in line with FATF standards. Currently, Latin American countries are advancing in compliance with the FATF’s revised standards for Recommendation 15, which requires cryptocurrency businesses to implement measures to counter financial crimes.

Regarding law enforcement, donor governments should sponsor training in cryptocurrency investigation and recovery for law enforcement agencies based in Latin America, along with providing necessary resources such as blockchain tracing analysis.

In summary, Latin America offers fertile ground for cryptocurrency adoption. Regional governments have leveraged the benefits of financial inclusion and remittances in various ways. However, these attractions are also open to criminal actors, and as the rate of adoption increases, local governments and international legislators will need to work hard to ensure that legislation, regulation, and law enforcement keep pace.

Author: Allison Owen, research analyst, Center for Financial Crime and Security Studies at the Royal United Services Institute (RUSI).

December 2, 2022.