Convergencia Research, Consultoría especializada en Latinoamérica y Caribe
Wednesday, January 19, 2022

Regulation of crypto assets: interest grows in tax aspect and in creation of own digital currencies

2021 witnessed various initiatives by countries in the region to control flows and apply taxes on transactions. Central bank digital currency initiatives, which already exist in two Caribbean countries, move forwards.

Latin American states increased their attempts to regulate crypto assets and digital assets in general in 2021. The motivations of governments and central banks are repeated in all countries: to prevent operations with crypto assets -known as digital currencies, although they do not fulfill that role- from being used both to launder money of illegal origin and in scams against the population, at a time when it is bombarded with misleading advertising about how easy it is to make money betting on crypto assets.

Governments are also beginning to be interested in another regulatory aspect: taxation. As operations with crypto assets add up more and more volume, they attract more attention from the tax authorities, who begin to see there a source of new resources.

This approach is not to the liking of crypto advocates, who would prefer an approach of the type that has been carried out by El Salvador, whose government converted bitcoin, one of the crypto assets with the greatest global deployment, into legal tender. They also assure that the regulatory and tax attempts are a demonstration of the lack of understanding of what blockchain and digital currencies are.

At the same time, the strongest countries in the region are studying the implementation of their own digital currencies or Central Bank Digital Currency (CBDC). The objective is to fill the gap that exists in that asset market, which could be filled by both private crypto assets and a CBDC from another country. And the Latin American nations have shown that they deposit a good part of their sense of sovereignty in their local currencies.

Regulation. Brazil has been the latest to join the regulation trend. At the beginning of December, the House of Representatives gave preliminary approval to a bill that advances in this direction. In the debate it was reported that the movement of crypto assets in Brazil added about US$23 billion this year. The norm, which still has to pass the approval of the Senate and the promulgation of President Jair Bolsonaro, defines as a "virtual asset" the digital representation of value that can be transferred or negotiated by e-means for use in investments or as a payment means. In this way, it differentiates virtual assets from e-money denominated in reais or foreign currencies. According to the project, the Central Bank of Brazil will be in charge of authorizing the operation of companies dedicated to operating with virtual assets. In addition, it establishes prison sentences for the crimes committed in these operations, variable according to their seriousness.

The text approved by the Brazilian representatives was one of the three that were in that House; in the Senate there are three others. Some of the projects that have not yet been dealt with aim at different directions. For example, one of those in the Upper House establishes rules for the issuance of cryptocurrencies and regulates marketplaces that accept them as a means of payment.

The financial sector applauded the preliminary approval of the project because it considers that it is a "light" text that limits the intervention of the Central Bank and other financial control authorities and gives legal certainty to operations. Now Chile is on the way to imposing legislation along the same lines.

But beyond this interested vision, the truth is that Brazilian regulation points to what are the deepest global trends in the use of crypto assets. According to the latest report by Chainalysis, a firm that provides information on the sector, 2021 was the year of the global takeoff of crypto assets, although this movement showed divergences between developed and emerging countries. In the former, operations on P2P platforms fell and those carried out from professional platforms grew. This has been the case in the United States and China, where the ban on crypto mining last summer hit the entire market. In contrast, in less developed countries the opposite phenomenon occurs. Chainalysis assures that Vietnam, Nigeria, Kenya and Venezuela are among those with the highest level of transactions in relation to the purchasing power parity of the population (PPP) and finds the explanation in the magnitude of their unregistered economies and in the flight currency.

                  The possibility of charging taxes on transactions with crypto assets and the profits derived from them is a matter of debate,                          although in 2021 firm progress was made in this regard. The reason may be in the volume of operations in the region:                                Chainalysis calculated that they moved about US$350 billion in the year from June 2020 to the same month of 2021.

One of those who walked in that direction was Argentina, which on November 17 decreed that transactions involving cryptocurrencies will be subject to the tax on non-cash bank transfers, which implied a change in status since they were previously considered in equality of conditions with him. This tax, 0.6% on each transaction, is added to the income tax that has been applied since 2017.

In Colombia, income tax is also imposed on transactions. The same tribute falls on mining activities since cryptocurrencies are considered income in kind.

In Chile the same criterion exists: the gains obtained from the purchase and sale of these assets pay income tax. But it is added that the use of crypto assets as a means of payment also pays taxes. In Peru, their purchase-sale must be registered for the purposes of paying income tax.

                   The exchanges (portals for carrying out transactions with crypto assets) claim against the levy on transactions because they                         ensure that many of them are not profitable and show losses, even more so in the current framework of volatility in prices.

Precisely, the rise and fall in prices is one of the elements that indicates that crypto assets are not yet mature enough to act as a reserve of value, which is one of the characteristics of the currency.

But states have found uses for crypto assets in which they successfully and advantageously supplant fiat currencies. This is the case of the Bahamas with the sand dollars issued by the Central Bank of that country, and of the D-Cash, of the Banco Central del Caribe Oriental (BCCO) for four of its eight member states: Antigua and Barbuda, Saint Kitts and Nevis, Granada and Santa Lucia. In both cases, transactions with crypto assets replace physical money, whose transfer and movement between the islands is logistically expensive and sometimes inefficient. “In the Bahamas, with population centers on more than 20 islands, the distribution of physical money is a complex and costly task for the authorities. For their part, in the Eastern Caribbean, authorities seek to reduce domestic financial transaction costs (POS fees, check clearing fees, or transfer fees) that deter and often exclude small businesses and families in the financial system”, explains Oswaldo López, chief economist for CAF in Brazil.

These CBDC initiatives are part of a more general trend, to the point that, according to the Bank for International Settlements of Basel, Switzerland, 80% of central banks are considering launching their CBDC. Mexico was the last one to officially announce its foray into this field: on December 30, the Mexican government announced: “Banxico (Bank of Mexico) reports that by 2024 it will have its own digital currency in circulation, considering these new Next-generation payment technologies and infrastructure as high-value options to move forward financial inclusion in the country”.

The CBDC is still a fiat currency, although with blockchain technology, which allows each unit to be unrepeatable. These are experiments that economists evaluate: how much impact do they have on the monetary base? Is your issue inflationary? Can governments create artificial wealth with their issuance? All questions that in the region make a lot of sense.

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