Why is Latin America’s crypto economy so significant?
The International Monetary Fund (IMF) issued a statement on the use of cryptocurrency in the Latin American and Caribbean market, and about the rising interest in blockchain-based central bank digital currencies (CBDCs).
The IMF ended its statement noting that a ban on crypto “may not be effective in the long run” in the region.
Countries like Argentina, Chile, and Columbia have experienced devaluation of their currency against the U.S. dollar.
To preserve the value of their savings, some residents have explored converting their funds to U.S. dollars.
However, there are legal restrictions controlling this.
Others have chosen to convert their assets to stablecoins — cryptocurrencies designed to reflect the value of fiat currencies such as the U.S dollar.
Brazil, Argentina, Colombia, and Ecuador are among the top 20 in Chainalysis’ 2022 Global Crypto Adoption Index.
Separately, a number of central banks in the Latin American market are considering CBDCs, meaning that more people could soon be exposed to blockchain-based infrastructure.
Why does El Salvador stand out among crypto economies?
El Salvador is the first country in the world to adopt Bitcoin (the largest cryptocurrency by market capitalisation) as its legal tender.
El Salvador uses a digital wallet known as Chivo to regulate users’ crypto transactions.
However, there have been complaints about the wallet causing funds to disappear and enabling identity fraud.
Bitcoin reached an all-time high of over $67,000 in November 2021.
During this time, Bukele (President of El Salvador) made ambitious plans to issue Bitcoin bonds, build a ‘Bitcoin City’ and start the volcanic mining of Bitcoin.
As on June 29, the country’s Bitcoin investment value is down 26.3% in total.
How did the IMF react to El Salvador’s Bitcoin adoption?
The IMF said it was against El Salvador’s move, citing fiscal risks and consumer protection issues.
IMF’s executive directors “urged the authorities to narrow the scope of the Bitcoin law by removing Bitcoin’s legal tender status.”
They were further concerned by Bitcoin-backed bonds idea.
What is the difference between cryptocurrency and Central Bank Digital Currencies (CBDCs)?
Cryptocurrencies and CBDCs are both blockchain-based digital currencies.
Ownership:
Cryptocurrencies are generally run by private companies or individuals.
CBDC is controlled and tracked by a country’s central bank and corresponds to that country’s fiat currency.
Value variation:
Bitcoin’s price may vary by hundreds or even thousands of dollars in a short period of time, and its founder is a mystery.
A CBDC such as the eNaira, issued by the Central Bank of Nigeria, would (ideally) be worth as much as its physical counterpart.
While investors often buy large quantities of Bitcoin or other cryptocurrencies and hold them in the hope of making a profit.
This doesn’t make sense in the case of CBDCs as they are not meant to be investment vehicles.
CBDC in countries
China’s government, meanwhile, has energetically promoted its digital renminbi (e-RMB).
Transactions with its CBDC crossed $13.9 billion last year.
China has however banned crypto mining and unregulated virtual assets in the country, prompting a large section of the mining population to flee to other countries.
The Bahamas in the Caribbean was one of the first countries to officially introduce its Sand Dollar CBDC.
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