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Crypto Market In Latin America UPSC NOTE

 


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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