Cryptocurrencies, new political tool of Latin America’s rebel governments

RIO DE JANEIRO, BRAZIL – The three Latin American governments that have adopted cryptocurrencies so far have something in common: a strained relationship with the United States. No one is more accommodating to virtual currencies reaching the masses than countries that want the benefits of global economic integration while bypassing the dollarized banking system.

On Tuesday, the Bitcoin Law will come into effect in El Salvador, thus becoming the first country in the world to make Bitcoin its national currency. In Cuba, the central bank recently announced that it will legalize cryptocurrencies in light of the increased use of Bitcoin, Ethereum, Litecoin, and Tether. For its part, Venezuela was one of the first countries to issue its own virtual currency, the petro, although it has not been as widely used as the government had hoped.

“This technology’s innovation came very quickly, but regulation did not, and in the United States we still don’t have it,” says Amanda Wick, head of regulatory affairs at Chainalysis, a company that specializes in blockchain technology (the backbone of all cryptocurrency). “The advantage of these countries is that they can be very agile, make decisions, agree on legislation very quickly, a luxury that developed countries can’t afford. This comes with great potential and great risks.”

President Biden’s administration has been critical of the role of cryptocurrencies, which do not report to a central authority, in the ransomware attacks that have hijacked the infrastructure and citizens’ personal data. In a recent initiative, the White House proposed to increase regulation of these digital assets, arguing that they “already pose a significant detection issue by facilitating overall illegal activities, including tax evasion.”

This is why Salvadoran President Nayib Bukele’s decision to make his country the first sovereign Bitcoin experiment has been interpreted by a number of experts not only as another sign that he is willing to go too far, but also as a head-on challenge to U.S. authorities. The Central American country is now dollarized and making Bitcoin an alternative national currency is a way to “de-dollarize” itself without doing so completely.

Cuba and Venezuela are operating under U.S. economic and financial sanctions. Venezuelan President Nicolás Maduro has no access to state assets held in the U.S. so he has resorted to informal barter networks to bypass sanctions and receive funds from abroad.

U.S. sanctions limit Cuba’s involvement in the international financial system. “Through the use of cryptocurrencies, the island could circumvent some aspects of the blockade, albeit very slightly. But it remains to be seen how it will use the regulation,” says Emily Parker, author and editor-in-chief of Coindesk, an information website specializing in cryptocurrencies.

“There are also internal motivations: it has recently become more difficult to use dollars in Cuba,” she adds. On the island “there is interest in cryptocurrencies,” she says, “and if the industry remains in the parallel market, it will be much more difficult for the government to raise taxes or be part of this financial revolution,” Parker adds.

Governments’ motivations are political and economic. In El Salvador, cryptocurrencies can be a tool to more efficiently send remittances – which contribute some 20% to the country’s gross domestic product – and the government hopes the new law will attract tourism and investment.

The use of cryptocurrencies increased by 880% between 2019 and 2020 globally, according to data from Chainalysis. The boost occurred mainly in emerging countries, where trust in authorities and banks is low and where their fiat currency tends to depreciate, the company said. For millions of Latin Americans, cryptocurrencies represent a quick way to receive funds sent by relatives working abroad, as well as a way to bypass the system.

The governments of these 3 countries know this and want to make sure that they can also benefit from the trend.

The controversy lies in the risks. Although well-known figures and celebrities such as Twitter founder Jack Dorsey and Tesla founder Elon Musk have spoken out in favor of using the new monetary technology, cryptocurrencies continue to split opinions. Their high volatility makes them a very uncertain investment; the fact that there is no authority means that no one can guarantee the investment; and the fact that they are used to make illegal purchases and cybercrime has earned them a bad reputation.

“I don’t believe that anti-Western governments are promoting cryptocurrencies,” Wick argues. “I believe that anti-western or anti-democratic policies and practices lead citizens to seek autonomy over their money.” Like Venezuela, the communist government of Vietnam in July announced that it is preparing a pilot cryptocurrency of its own, addressing the rapid increase in the use of global cryptocurrencies. China is also developing its own.

“There is no clear trend among the emerging markets, but there are definitely things in common among them,” Wick notes. “Vietnam, Nigeria, Kenya, Venezuela, all are up on our adoption index and this is partly because transactions are occurring in huge volumes. This is not necessarily derived from governments, it’s more a consequence of the lack of access to banking financial products,” she adds.

“When you think about the cases where this technology is best leveraged, we think about refugees or those who don’t trust their authorities,” Wick says. “In many cases it’s not a coincidence that the government is anti-Western or that they have anti-democratic tendencies, because that leads people to seek ways to gain control over their money.”

Source: El Pais