In this piece, we look at the current landscape of cryptocurrencies and CBDCs in Central America. Some countries have boldly embraced cryptocurrencies, while others have taken a more cautious or outright hostile stance. Here’s a breakdown of the current situation across the region.
The global financial landscape is rapidly evolving, with digital currencies gaining increasing prominence. At the forefront of this transformation are two distinct yet interconnected concepts: cryptocurrencies and Central Bank Digital Currencies (CBDCs). While this article primarily focuses on the latter, it’s essential to understand the distinction between these two digital asset classes.
Cryptocurrencies
Cryptocurrencies are decentralized digital assets that operate on blockchain technology, enabling secure peer-to-peer transactions without the need for intermediaries. Bitcoin, the first and most well-known cryptocurrency, was introduced in 2009 and has since spawned a vast ecosystem of alternative cryptocurrencies (altcoins). These digital tokens are not issued or regulated by central authorities and rely on complex cryptographic algorithms to secure their networks and verify transactions. In Central America, many enthusiasts have reviewed and compared promising crypto pre-sales and are bypassing traditional financial systems with them, as they try to solve their real-world financial challenges, including real estate transactions.
CBDCs
Central Bank Digital Currencies (CBDCs) are digital forms of a country’s fiat currency, issued and regulated by the nation’s central bank. Unlike cryptocurrencies, which operate on decentralized blockchain networks, CBDCs are centralized and backed by the full faith and credit of the issuing government. CBDCs are designed to coexist with physical cash and serve as a digital complement to traditional forms of money. They offer several potential benefits, including increased financial inclusion, improved payment efficiency, reduced transaction costs, and enhanced monetary policy implementation.
By providing a secure, digital alternative to physical cash, CBDCs aim to facilitate financial transactions, particularly in an increasingly digitized economy. They may also help central banks maintain their role as providers of money in an era where private digital currencies are gaining traction.
The implementation of CBDCs, however, is controversial and raises concerns around privacy (the reach of governments and central banks into the consumers life), cybersecurity, and the potential disruption of existing financial systems. Central banks must strike a delicate balance between harnessing the advantages of digital currencies while mitigating potential risks.
The rise of cryptocurrency adoption in Central America might defy traditional perceptions of the region. In this article, we explore how Central America is becoming a crypto-friendly hub.https://t.co/8LJ0IMljfB
— Central America Living (@VidaAmerica) July 25, 2023
Cryptocurrencies and CBDCs in Central America
Belize
Belize is actively pursuing the development of a Central Bank Digital Currency (CBDC). In 2021, the country’s central bank partnered with fintech firm Bitt to integrate an eWallet (eKyash) into its mobile payment services. While Belize has not yet officially launched a CBDC, its collaboration with Bitt indicates a strong interest in implementing a digital currency. This positions Belize as a potential early adopter among Central American nations.
Regarding cryptocurrencies, Belize currently lacks specific regulations governing their use. However, cryptocurrencies are increasingly used for financial transactions by individuals and businesses within the country. As this market grows, establishing a regulatory framework may become a priority.
Costa Rica
In Costa Rica, the use of cryptocurrencies is legal, albeit unregulated. The country’s central bank has warned about the potential financial risks associated with crypto, such as price volatility and fraud. Despite these concerns, Costa Rica’s cryptocurrency market is projected to grow in 2024, with Statista estimating a market size of US$16.8 million. In terms of CBDCs, Costa Rica has not expressed an immediate need for them, as the existing National Electric Payment System (SINPE) efficiently handles digital payments and cross-currency transactions.
El Salvador
El Salvador became the first country globally to adopt Bitcoin as legal tender in September 2021. This decision aimed to promote financial inclusion for the country’s largely unbanked population. However, surveys reveal low utility of Bitcoin among Salvadorians, with concerns over its lack of anonymity compared to cash. Consequently, El Salvador has not prioritized the development of a CBDC due to its focus on Bitcoin adoption.
Guatemala
Cryptocurrencies aren’t legal tender in Guatemala, with authorities citing money laundering risks. However, their popularity is undeniable. While Guatemala initially explored a CBDC called “iQuetzal,” there haven’t been recent developments, suggesting a possible shift in priorities.
Honduras
Honduras has become quite hostile towards crypto, enacting a blanket ban on cryptocurrencies within its financial system in February 2024. The National Banking and Insurance Commission (CNBS) now prohibits financial institutions from any activities involving “cryptocurrencies, crypto assets, virtual currencies, tokens, or similar virtual assets” not issued by the central bank.
The CNBS cited risks of fraud, money laundering, and terrorist financing as reasons for the ban. It stated cryptocurrencies lack support, restrictions, borders, or protections as they operate outside the central bank’s supervision. Financial institutions must also educate users on the risks of using crypto.
While the central bank previously announced studies into a potential central bank digital currency (CBDC), the fate of those plans remains uncertain following this hardline stance against cryptocurrencies.
Nicaragua
Nicaragua has no regulatory framework for cryptocurrencies. This absence of clear regulations, coupled with rising internet and mobile connectivity, has fueled an increase in crypto usage among some Nicaraguans. Regarding CBDCs, the Nicaraguan government is in the research stage, exploring possible future feasibility.
Panama
Panama lacks a legal framework regulating cryptocurrency activities. In 2022, a proposed legislation to allow the use of cryptocurrencies as a means of payment across the country was vetoed by the president due to concerns over anti-money laundering controls. Later, an amended law was struck down by the supreme court. Despite the lack of regulation, crypto use persists through informal channels. Panama has yet to show significant interest in developing a CBDC.
Central America presents a fascinating mix of approaches towards cryptocurrencies and CBDCs
While countries like El Salvador and Belize have embraced innovation, others like Costa Rica leverage existing digital payment systems. The recent ban on crypto activities in Honduras might trigger reevaluations across the region. As the landscape continues to evolve, the development of regulations and potential CBDC projects will be interesting to monitor.
