Central bank digital currency (CBDC) adoption in Latin America: From my report with the University of Cambridge

Posted on March 6, 2024March 6, 2024 by alexzarifis_j7wzwf

This research is on the state of central bank digital currencies (CBDC) in Latin America. This is the sixth chapter in my report with the University of Cambridge (Proskalovich et al. 2023). I have given a general overview of this report already, so I am just focusing on the chapter on CBDC adoption here.

A CBDC is essentially digital money, issued by a central bank. Unlike most cryptocurrencies that are decentralised, this currency is centralised. This is an important characteristic of the technology that has many implications. For example the central bank may be able to see all the user transactions.

CBDCs can be either wholesale and retail. The general public can use the retail version, while the wholesale version can move large amounts of money between banks. Our research findings suggest that Latin American central banks are focusing mainly on the retail version.

Retail CBDCs can operate with one tier or two tiers. A central bank can issue a one-tier retail digital currency directly to individuals. For the two-tier form, it issues the digital currency to a commercial bank who then offers them to individuals. Most existing implementations in Latin America are hybrid, offering both the one-tier and two-tier forms in parallel. In the hybrid scenario, the user has both a central bank digital wallet, and a retail bank digital wallet.

Figure 1: The motivations behind CBDC adoption in Latin America

These initiatives in Latin America are not completely new. There has been effort to develop and implement them for some time. The first initiative to explore CBDCs was actually back in 2014 in Ecuador. Most countries in Latin America have expressed interest in CBDCs, however, the extent of the engagement varies greatly from (1) exploring the opportunity, to (2) having concluded a pilot project, or (3) launched and available to the public.

There are several motivation behind creating this form of currency. The two main drivers are usually (1) financial inclusion, and (2) encouraging innovation in finance and improving the efficiency of payments. Other popular reasons are encouraging cross-border payments, monetary policy efficiency, reducing cash use, improving financial sector competition, de-dollarisation and reducing crime.

Challenges include (1) a large informal economy and the popularity of cash, (2) limited financial and digital knowledge, (3) lack of identity documents, (4) limited accessibility, (5) power outages and natural disasters, and (6) currency substitution and capital flight. Capital flight happens for several reasons including high inflation and unfavourable economic conditions.

If you want to learn more about this important part of the cryptoasset ecosystem, you can read the third chapter of the report.

Reference

Proskalovich R., Jack C., Zarifis A., Serralde D.M., Vershinina P., Naidoo S., Njoki D., Pernice I., Herrera D. & Sarmiento J. (2023) ‘Cryptoasset ecosystem in Latin America and the Caribbean’, University of Cambridge – Cambridge Center for Alternative Finance (CCAF). Available from: https://www.jbs.cam.ac.uk/faculty-research/centres/alternative-finance/publications/crypotasset-ecosystem-in-latin-america-and-the-caribbean/

The different speeds of cryptoasset regulation in Latin America: From my report with the University of Cambridge

Posted on March 6, 2024March 6, 2024 by alexzarifis_j7wzwf

This research is on the regulation of cryptoassets, such as Bitcoin, in Latin America. This is the fifth chapter of my report with the University of Cambridge, (Proskalovich et al. 2023). I have given a general overview of this report already, so I am just focusing on the chapter on regulation here.

Unlike a few years ago, most regulators in Latin America are now favourable towards cryptoassets. The prevailing belief is that cryptoassets, such as Bitcoin, are a valuable alternative to traditional finance, as they have different characteristics such as being decentralised. It is expected that cryptoassets can provide growth and a more inclusive financial landscape. They can provide easier cross-border payment, investments and loans. Cryptoassets can enable open-source collaboration reducing the barriers to entry for Fintech startups. Cryptoassets like NFTs can tokenise assets such as art, so that they can be offered to investors that may not be able to purchase the whole asset. In some scenarios, the way cryptoassets use blockchain can offer transparency in terms of what transactions have happened.

The main risks are believed to be misinformation, scams, and money laundering. Key challenges for regulators include (1) not enough staff with cryptoassets knowledge, (2) insufficient coordination between countries, and (3) lack of cooperation between the public and private sector.

Figure 1. Some countries in Latin America want to lead on crypto regulation, while others want to follow

There is an increase in regulators’ attention in the last few years with most countries either having or developing specialised rules. Despite most regulators agreeing that progress must be made, there is a large difference in the pace of progress. Some countries strategy is to lead with fast and comprehensive regulation to control the risk, and maximise the benefits. At the other end of the spectrum, some countries prefer to move more cautiously, keeping the uncertainty and risk low, and accepting that the benefit will also be lower. An example of a country leading is Mexico that is the first in Latin America to regulate cryptoasset trading platforms. Most local cryptoasset companies believe regulatory uncertainty is the biggest challenge preventing their growth.

Whether the regulators strategy is to lead, follow or something in-between, they need to follow the developments in the cryptoassets ecosystem both globally, and in Latin America, so that the right decisions are made at the right time, and friction between countries is limited.

If you want to learn more about regulation of cryptoassets like Bitcoin in Latin America, you can read the fifth chapter of the report.

Reference:

Decentralised Finance (DeFi) in Latin America: My report with the University of Cambridge

Posted on March 6, 2024March 6, 2024 by alexzarifis_j7wzwf

This research is about the business models of Decentralised Finance (DeFi) in Latin America. This is the fourth chapter of my report with the University of Cambridge (Proskalovich et al. 2023). I have given a general overview of this report already, so I am just focusing on the chapter on DeFi here.

DeFi refers to several software solutions that operate on a blockchain. These decentralised systems, supported by blockchain technologies, enable various forms of financial services. DeFi currently operates alongside the traditional financial system, thriving where the traditional system is either inefficient, or expensive, for users. It is unclear whether DeFi and traditional finance will continue in parallel in the future, or merge.

Figure 1. The Decentralised Finance (DeFi) services becoming popular in Latin America

DeFi services

DeFi is constantly evolving, and new use cases will emerge in the coming years. Some use cases of DeFi already identified are decentralised stablecoins, exchanges, lending, derivatives, and asset management.

Payments are an important part of DeFi. Payment can be just with a cryptoassets such as Bitcoin, or they can change bitcoin to a traditional currency and vice versa. Some key areas of the decentralised payments ecosystem are (1) traditional fiat currency-to-crypto services on exchanges, (2) cryptoasset ATMs that exchange traditional currency for cryptoassets and vice versa, (3) cards allowing users to buy and spend cryptoassets, as well as receive them as rewards in loyalty schemes, (4) digital wallets that allow users to send, receive and store cryptoassets, enabling cheaper cross border payments, and (5) both e-commerce and physical shops are increasingly accepting cryptoassets.

DeFi adoption in Latin America

The use DeFi is increasing dramatically, but despite this growth, the activity is very small relative to the use of commercial banks. Digital solutions are vital to overcoming the challenges associated with financial inclusion in Latin America. For example, mobile money use has grown significantly. As cryptoasset adoption in Latin America increases and users become more familiar with the decentralised ecosystem, activity will likely increase. There is a-lot of decentralised financial innovation in the region, such as cryptocurrencies, crypto mining, blockchain and NFTs, with consumers eager to learn more about this ecosystem. So far, Brazil, Argentina and Mexico have the highest adoption of DeFi among Latin American countries.

If you want to learn more about this important part of the cryptoasset ecosystem, you can read the fourth chapter of the report.

Reference

The business models of crypto mining in Latin America: From my report with the University of Cambridge

Posted on March 6, 2024March 6, 2024 by alexzarifis_j7wzwf

Dr Alex Zarifis

I am going to talk to you about the business models, and ecosystems, of cryptomining in Latin America. This is the third chapter in my report with the University of Cambridge, Judge Business School (Proskalovich et al. 2023). I have given a general overview of this report already, so I am just focusing on the chapter on cryptomining here.

The blockchain consensus mechanism used in Bitcoin, and some other cryptocurrencies, requires mining for the proof-of-work process. Mining, helps verify transactions and create new cryptoasset tokens. Activity from companies and individuals in this area can positively impact the cryptoasset ecosystem, by encouraging cryptoasset adoption, and providing an income stream.

Figure 1: The factors making Latin America popular for crypto mining

Cryptomining in Latin America happens in registered mining companies, mining pools, and so called ‘ant farms’. Mining pools are a form of cooperation in which people share the risks and returns from mining. ‘Ant farms’ are created by hobbyist that install mining equipment in a residential area.

Latin America has some characteristics that support cryptomining and allow miners to be competitive internationally. These features include relatively cheap electricity and renewable power resources, such as solar, hydro and geothermal. The electricity price is one of the most significant factors determining the profitability of cryptomining, and whether a country will become a cryptomining hub. Despite this, Bitcoin mining in this part of the world is still only a small part of the global mining volume.

The popularity of cryptomining varies across Latin American countries. Some of the leading bitcoin mining countries in this part of the world are Brazil, Paraguay, Venezuela, Mexico and Argentina. In addition to electricity prices, other determining factors are regulation, subsidies, climate, the level cryptoasset adoption, and the general state of the economy. Mining is not widespread in the countries of this region where cryptocurrencies are partially, or entirely, banned.

The crypto mining industry seems to be very sensitive to regulation and electricity prices, and does not appear to be as ‘sticky’ to a geographic location as other parts of the crypto ecosystem. Some miners even have their IT hardware permanently in shipping containers when they are operating, so they can transport it to another country relatively easily. Changes in how countries regulate crypto mining often have a knock-on effect. For example, when Venezuela made regulation stricter, some mining activity moved from there, to Brazil.

If you want to learn more about this part of the cryptoasset ecosystem, you can read the third chapter of the report.

Reference