Crypto, Crime and Compliance in Latin America

September 2022 marked one year since Bitcoin officially became legal tender in El Salvador. While El Salvador continues to be a headliner, other Latin American countries are also taking their first steps to widen their adoption of cryptocurrency. For example, the Argentine province of Mendoza now allows taxpayers to pay in cryptocurrency; a Brazilian real estate developer accepts Bitcoin in payment; and Venezuela uses its state-run Petro to make social service payments.

Consequently, as the cryptocurrency industry in Latin America grows, without effective regulation, the risk of exploitation by illicit actors also becomes more prominent, including as an alternative vehicle for laundering illicit proceeds. This is particularly concerning in Latin America, as the US State Department has identified 20 Latin American countries on its list of high-risk states for money laundering.

This article will therefore assess the current state of cryptocurrency adoption in Latin America, identifying examples where abuse (either by states or by criminals) may occur, and outlining how domestic and global policymakers should respond.

When analysing the connection between cryptocurrency and criminal activity in the region from July 2019 to June 2020, Chainalysis reported that 2.4% of all cryptocurrency volume received and 1.6% of all volume sent was tied to criminal operations. This fraction indicates that although there is certainly not a wholesale shift to the use of cryptocurrency for criminal activity, the industry is still at risk of exploitation and needs to react accordingly.

Specifically, exploitation of cryptocurrency in the region is linked to Colombian Transnational Crime Organisations (TCOs), cybercrime and sanctions circumvention. Thus, without proper implementation of cryptocurrency-focused legislation, regulation and enforcement measures, the risk of exploitation of the cryptocurrency industry will inevitably increase as use and access grows.

What is Driving Cryptocurrency Adoption?

A number of economic and political drivers are linked to cryptocurrency adoption in the region. For instance, hyperinflation, a monthly inflation rate exceeding 50%, is cited as a factor in the Venezuelan cryptocurrency adoption rate. By the end of 2021, the country officially broke out of a four-year period of hyperinflation, but still held an inflation rate of 686.4% on an annual basis. A lack of faith in the ability of a country’s domestic currency to hold its value can result in a shift towards other value-holding assets. Although cryptocurrency volatility represents a risk for consumers, this may seem tolerable when compared to the loss of value caused by the hyperinflation rate of a country, thus driving citizens to invest in and move their savings into cryptocurrency.

For the government of El Salvador, the adoption of cryptocurrency may have been perceived as offering the potential to rejuvenate the economy, thereby providing an increased income to citizens. On top of legislating for the use of Bitcoin, the Salvadoran president announced in June 2021 that the government planned to develop Bitcoin mining facilities, taking advantage of cheap geothermal energy from volcanos in the country, with the hope that this might attract cryptocurrency mining companies, in return strengthening the economy by increasing job opportunities and earning revenue from the mining process.

Reduced transaction costs when sending remittances by cryptocurrency represent another important factor in the adoption rate in the region. For some countries, remittances represent a large fraction of their GDP. According to data from the World Bank, personal remittances received represented 24.1% of El Salvador’s total GDP in 2020.

As of September 2022, the Salvadoran government had installed 231 government-controlled cryptocurrency ATMs, known as Chivo ATMs, throughout El Salvador and the US. The goal of these Chivo ATMs is to increase access to sending and receiving remittances via cryptocurrency (hence their presence also in the US). Reducing or removing commission rates for transactions provides the added benefit of allowing users to put more remittance funds into the economy.

Finally, government incentives are also encouraging the integration of cryptocurrency into society. The impact of these measures ranges in scale depending on the extent to which they affect the day-to-day activities of the population. In El Salvador, the introduction of Bitcoin legislation was intended to encourage a shift in the use of Bitcoin across different sectors. In accordance with Article 7 of the Bitcoin Act, all economic agents in El Salvador are required to accept Bitcoin as a form of payment for goods and services when offered by a customer, regardless of their appetite. Despite this requirement, the project has received a mixed response.

In August 2022, Salvadoran newspaper La Prensa Grafica surveyed 1,506 people in the country to evaluate the population’s response to the decision to make Bitcoin legal tender, finding that less than a quarter (22.9%) approved, with nearly two-thirds (65.7%) disapproving (11.5% did not comment). Evidence of this disinterest is further reinforced by a survey published by the Chamber of Commerce and Industry in 2022, in which only 13.9% of businesses said that they had made sales in Bitcoin since it became legal tender.

What is the Scale of Criminal Activity?

As noted above, criminal operations in Latin America are estimated to account for 2.4% of all cryptocurrency volume received and 1.6% of the volume sent from July 2019 to June 2020. 61% of this criminal activity was associated with cryptocurrency scams. For example, the AirBit Club, a fraudulent cryptocurrency mining and trading company that operated in the region and abroad, stole tens of millions of dollars from victims. Along with scams such as this, evidence of cryptocurrency exploitation by Latin America-based criminal organisations for moving and laundering illicit proceeds also exists. This activity includes the use of cryptocurrency by TCOs and cybercriminals, as well as the potential use of cryptocurrency to circumvent sanctions.

If only accounting for the sale of drugs in the US, Central America and Mexico, Colombian TCOs generate $10 billion per year. Traditionally, the illicit proceeds associated with this business are laundered in the ‘offline’ world through the Black Market Peso Exchange and trade-based money laundering. However, the US Drug Enforcement Administration has noted that Colombian TCOs have also used cryptocurrencies to facilitate international transfers.

Criminal actors can exploit crypto infrastructure to convert criminal proceeds and move them across borders. Evidence exists, for example, of criminals exploiting cryptocurrency exchanges to convert and transfer illicit funds between Spain and Colombia. In 2017, Europol, the Spanish Guardia Civil and the National Police of Colombia found that a criminal organisation based in Spain exploited cryptocurrency exchanges to launder an estimated €2.5 million. The identified criminal organisation helped other criminal groups launder illicit funds associated with drug trafficking and other crimes in Spain. The laundering process involved converting these funds to cryptocurrencies via cryptocurrency exchanges, then transferring the funds to digital wallets controlled by a Colombian organisation.

Links also exist between local cartels and drug groups mining cryptocurrency. In 2019, as part of an ongoing drugs investigation, Brazil’s Department of Narcotics Investigation arrested an individual who operated a cryptocurrency mining facility. Along with the arrest of the operator, agents found 25 cryptocurrency mining machines believed to be smuggled from China that cost $65,000 each. Although this case does not specifically reveal why drug trafficking organisations use cryptocurrency mining, the revenue generated via mining may be one reason. Cryptocurrency mining also provides access to ‘clean’ funds, as miners receive newly minted coins that are not tied to any previous activity, meaning they can be used by criminals with a reduced likelihood of detection by an investigation.

Another dimension of cryptocurrency development has seen the emergence of state-issued cryptocurrencies as a potential method for reducing the impact of sanctions on an economy. Although prominent cryptocurrency blockchains are typically transparent, governments can issue their own digital currency via a permissioned blockchain through which only prespecified individuals can obtain full visibility of transactions. More generally, access to and the use of cryptocurrency infrastructure can facilitate some degree of sanctions circumvention by avoiding the use of the traditional financial system.

Although liquidity and price volatility typically place significant limits on the capacity of cryptocurrencies to facilitate sanctions evasion, the case of the Venezuelan state-issued cryptocurrency, the Petro, demonstrates this potential role in accessing the international financial system. The English version of the Petro white paper, released in January 2018 (one of several versions in different languages containing varied information), notes that the state commits ‘to promote the adoption of Petro, encouraging the growth of its national and international user base’, and that the state-issued cryptocurrency can aid in the process of overcoming limitations placed on the traditional financial system by sanctions.

To overcome adoption resistance and encourage the growth of its state-issued cryptocurrency as a cross-border means of payment, Venezuela tried to integrate the Petro into activities associated with its international trade. In 2018, the Venezuelan Ministry of Transport imposed a requirement on shipping companies using Venezuelan port services to make payments in euros or the equivalent amount in Petro. Another measure implemented by Venezuela required international airlines that fly to Venezuela to pay for fuel in Petro. The same year, Venezuela and Palestine formed a bi-national fund for industrial development with 20 million Petros as an initial stake.

The Petro white paper acknowledges the risks posed by price volatility, making the case that the link between the state-issued cryptocurrency and the country’s oil reserves provides a greater degree of stability and intrinsic value. The downside is, however, that it will have limited international appeal, similar to the limited appeal of a fiat currency from outside the group of major trading and reserve currencies.

At this point in time, the US dollar still acts as the primary reserve currency on an international scale. Therefore, to augment and enhance cross-border appeal, Venezuela has supplemented the Petro by developing an algorithmic stablecoin pegged to the US dollar together with financial services startup Glufco, which is likely to be a more reliable vehicle for value transfer and sanctions circumvention. According to Decrypt, Glufco’s stablecoin is traded on small international exchanges, proving that it can gain traction and be perceived as holding value.

What Needs to be Done?

That the rate of cryptocurrency adoption is accelerating in Latin America is undeniable, driven by a range of social and economic factors emanating from both states themselves and their populations. Significant gaps exist in legislation, regulation and enforcement capabilities, with few countries having developed, adapted or approved legislation to account for cryptocurrencies, which is key to effective regulation and enforcement.

In order to mitigate the criminal activity that accompanies this growth in cryptocurrency adoption, international policymakers should work with GAFILAT, the regional body of the Financial Action Task Force (FATF), to rapidly develop and implement appropriate and effective legislation, regulation and enforcement measures in line with the FATF’s standards. As things stand, countries in Latin America continue to progress to meet the FATF’s revised standards for Recommendation 15, which requires crypto firms to implement measures for countering financial crime.

On the enforcement front, donor governments should sponsor training on conducting cryptocurrency investigations and recovery for law enforcement based in Latin America, along with providing the necessary resources, such as blockchain tracing analytics.

In sum, Latin America provides fertile ground for the adoption of cryptocurrencies. The benefits to financial inclusion and remittances have been embraced in a number of ways by regional governments. But these attractions are also open to criminal actors, and as the adoption rate increases, local governments and international policymakers will have to work hard to ensure legislation, regulation and enforcement keeps pace.

The views expressed in this Newsbrief are the author’s, and do not represent those of RUSI or any other institution.

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