## wpiea2023037-print-pdf

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### Overview and scope
- Rapid technological innovations expanded into money, payments, and financial services, promising greater accessibility, lower cost, and faster cross-border transactions.
- Use of cryptography and distributed ledger technology (DLT) such as blockchains created digital assets and associated infrastructure (exchanges, wallet providers, miners), representing a departure from reliance on central bank money and established/regulated financial intermediaries.
- The paper provides an overview of the nature, pros, and cons of crypto assets and CBDCs, documents recent experience in LAC, and presents general lessons and policy recommendations for the region.

### Financial inclusion and remittances (key statistics)
- From the 2021 World Bank survey Findex:
  - "72 percent" of the adult population had an account in a financial institution (up from "54 percent" in 2017).
  - Mobile phone penetration is "about 90 percent".
  - "22 percent" of the surveyed population had a mobile money account.
  - Digital modes accounted for "17 percent" of total remittances in 2021 versus a global average of "24 percent".

### Definitions and taxonomy
- Crypto assets classified as: unbacked tokens/crypto assets, stablecoins, and other tokens (including utility and security tokens). Focus on unbacked tokens and stablecoins.
- Unbacked crypto assets:
  - No backing assets, usually issued in a decentralized manner, transferable, no redemption pledge, no direct claims on the issuer.
  - Volatile prices; mostly held for speculative purposes.
  - Transaction speed and scalability issues question usefulness as means of payment.
  - Fragmented proliferation prevents replacement of money as a coordination device with strong network effects.
- Stablecoins:
  - Centrally or de-centrally issued crypto assets aiming for price stability via reserve assets and/or algorithms.
  - Generally denominated in a monetary unit of account, such as the dollar, and may pledge to redeem into cash at par.
  - Vulnerable to runs if reserves are risky/illiquid or if no legal claim on issuer/reserve assets; example: collapse of the algorithmic stablecoin Terra in May 2022.
  - Google search interest in stablecoins in LAC highest in Brazil, Colombia, Dominican Republic, Ecuador, Mexico, Peru, and El Salvador.
- CBDC:
  - A digital form of fiat money issued by a central bank; can be "retail CBDC" (accessible to all domestic users) or "wholesale CBDC" (restricted to selected financial institutions).
  - Central banks in The Bahamas (since October 2020), the ECCU, and Jamaica are already issuing CBDCs.
  - Google Trends shows rising worldwide interest in CBDCs since 2019; notable LAC interest in Argentina, Brazil, Colombia, Mexico, and Peru.

### Potential benefits and risks
- Potential benefits (not yet materialized in many cases):
  - Cheaper and faster payment and settlement by reducing intermediaries via DLT (but in practice crypto transactions can be slow and very expensive due to validator compensation and congestion).
  - Potential to enhance financial inclusion for previously unbanked populations, conditional on digital literacy and internet connectivity.
  - Increased competition and design of tailored financial products.
  - Potential to simplify international payments and increase cross-border transaction efficiencies, including remittances.
- Categories of risks (following IMF 2022c):
  - a) Macroeconomic: reduced effectiveness of monetary policy; increased currency/asset substitution or “cryptoization”; increased volatility of capital flows and reduced effectiveness of capital flow management measures (CFMs); fiscal risks from tax avoidance and evasion and challenges to withholding taxes and third-party information.
  - b) Financial stability: including cyber risks.
  - c) Financial integrity: crypto assets can be misused to commit a range of crimes.
  - d) Legal: challenges in applying existing laws to crypto assets.
  - e) Consumer protection: lack of understanding of crypto assets’ risks.
  - f) Market integrity and contestability: issues like congestion or lack of interoperability.
- Legal tender adoption:
  - Declaring a crypto asset official currency or legal tender has negative economic and legal implications (IMF, 2022c).
  - Government revenues could be exposed to exchange rate risk if quoted in advance in a crypto asset.
  - Contingent liabilities arise if convertibility to fiat is guaranteed by the government and state entities operationalize e-wallets (case of El Salvador referenced).
  - Adoption as legal tender could complicate treasury single account functioning, weaken cash management, complicate fiscal reporting, and undermine fiscal reports’ reliability.

### Empirical associations and evidence
- Cross-country associations from IMF studies:
  - Corruption: "the more corruption, the more crypto usage."
  - Capital controls: "the more capital controls, the more crypto usage."
  - Macroeconomic conditions: higher inflation or exchange rate volatility/depreciation associated with higher crypto usage.
  - Population age structure: older population associated with lower Bitcoin trading.
- Size of remittances does not explain cross-country variations, though increases in remittances are associated with increases in crypto asset use.
- Results tentative due to low data quality and limited availability; consistent with crypto usage as hedging/speculative instrument or to bypass controls including corruption.

### Box 1 — The Collapse of FTX: key facts and implications
- Collapse and immediate causes:
  - Bahamas-based FTX and Alameda Research collapsed after a run on deposits exposed an initially estimated US$8 billion hole in the exchange’s accounts.
  - FTX had 1 million users and was valued at US$ 32 bn in January 2022; filed for Chapter 11 bankruptcy protection in the United States on November 11, 2022.
  - Contagion to wider financial markets was limited.
  - Root causes: liquidity mismatches, opaque intragroup funding, risky investments; Alameda held a significant portion of assets in artificially inflated FTT tokens issued by FTX.
  - Binance abandoned a proposed rescue deal; U.S. regulators opened an investigation into potential fraud.
- Structural and cross-border complications:
  - Complex ownership across jurisdictions: Bahamas, Antigua and Barbuda, British Virgin Islands; FTX Digital Markets’ assets frozen by Bahamas authorities and not part of the Chapter 11 entity list.
- Stablecoin implications highlighted:
  - Stablecoins share potential benefits/challenges with unbacked crypto assets but could be less volatile and more attractive as replacements for cash, increasing risks of currency substitution and financial disintermediation.
  - Vulnerabilities: poor disclosure on reserve composition, weak governance, lack of protections afforded to bank deposits and e-money.
  - Risk of runs with spillovers to the financial system, particularly credit-sensitive market segments.
  - Regulatory focus areas per FSB: strict rules on reserve asset management; adequate capital and liquidity buffers; mitigation of legal, operational and cyber risks; attention to duration, credit quality and concentration of a GSC’s reserve assets.

### CBDCs — motivations, benefits, and risks
- CBDC motivations and benefits:
  - Enable central banks to harness technological innovations while providing a safe means of payment and store of value serving as a common stable unit of account.
  - CBDCs should support, or at least not undermine: financial integrity (AML/CFT), financial stability, and monetary policy effectiveness.
  - BIS (October 2020) payment-system motivations: ensure access to central bank money as cash declines; ensure resilience of payment system including offline capabilities; encourage financial inclusion; support public privacy; facilitate fiscal transfers; enhance cross-border payments; increase competition; reduce cash provision costs.
  - Protect monetary sovereignty by offering a secure public digital currency—requires local currency stability and sound macroeconomic policies.
  - In emerging and developing economies, motivations primarily to enhance financial inclusion and improve payment efficiency.
- CBDC-related risks:
  1. Financial stability risks via bank disintermediation and potential for generalized bank runs; mitigations include central bank liquidity injection, deposit insurance and bank resolution frameworks.
  2. Financial integrity risks if CBDC offers full anonymity and large-value transactions; mitigations include transaction size limits and customer identity authentication.
  3. CBDCs issued by advanced countries could increase pressure for currency substitution in emerging markets.
  4. Cyber risks: operational and reputational risks from disruptions and cyberattacks.
- Design principles and elements:
  - BIS three principles: (i) Do not compromise monetary or financial stability; (ii) CBDC must coexist with and complement existing forms of money; (iii) CBDC should promote innovation and efficiency.
  - Converging design elements: domestic focus with early cross-border coordination; remuneration rarely favored by central banks to minimize disintermediation; many countries consider limits/caps on balances; on-line and off-line functionalities; limited anonymity preferred; focus on wholesale cross-border solutions; restrictions to reduce financial stability risks and crowding out banks.

### Cross-border payments, remittances, and digital money
- Challenges and facts:
  - Cross-border payments often expensive, opaque, and slow due to multiple correspondent banks and settlement steps.
  - Remittances examples: amounted to 340 percent of receipts from exports of goods and services in Haiti in 2021; in El Salvador, Guatemala, and Honduras remittances amounted to more than 90 percent of receipts from exports of goods and services.
  - Cost to send US$200 to LAC estimated to be 5.5 percent in 2021 (SDG target is 3 percent).
  - Standard payment chain could take between 3 to 5 days.
  - Decline in correspondent banking has exacerbated issues; LAC more affected by fall in active correspondent banks.
- Digital money advantages:
  - Cheaper, faster, more transparent, more accessible cross-border payments via fewer intermediaries, greater competition, common standards, safety and integrity, and 24/7 instant settlement.
- Role of stablecoins and CBDCs:
  - Stablecoins credibly pegged to safe assets could be important vehicles for cross-border payments versus volatile crypto assets.
  - CBDCs promising because they are direct liabilities of central banks—the least risky and most liquid settlement assets.
  - Success requires design focus on access (retail CBDC availability to non-residents; wholesale CBDC access to foreign banks and PSPs) and interoperability between CBDC systems or with non-CBDC arrangements.
  - Facilitation likely to begin with wholesale CBDCs; mCBDC experiments tested DLT-based arrangements allowing transactions among CBDCs of different jurisdictions, potentially bypassing correspondent banks.
  - International collaboration is needed early to ensure interoperability.

### LAC experiences: crypto assets, stablecoins, and CBDCs
- Crypto regulation landscape:
  - LAC has high crypto adoption but regulatory approaches diverge widely, from acceptance to prohibition.
  - El Salvador adopted bitcoin as legal tender; Argentina, Brazil, and Colombia advanced toward regulatory frameworks; region lacks common comprehensive regulatory standards.
- El Salvador — Bitcoin as legal tender:
  - Adopted Bitcoin as legal tender on June 8, 2021, alongside the U.S. dollar (dollar used as reference currency for accounting).
  - Regulations for Bitcoin ecosystem and e-wallet Chivo adopted on September 7, 2021.
  - Chivo fully connected with banking system, allowing transfers between U.S. dollars and the platform, including via Visa/Mastercard; available to registered Salvadorans (individuals, businesses, government entities), including those abroad.
  - Government guaranteed automatic conversion from Bitcoin to U.S. dollars in Chivo via FIDEBITCOIN trust fund endowed with US$150 million to guarantee conversion and back Chivo’s convertibility services; covers costs related to instantaneous convertibility, transaction fees to Visa/Mastercard, and support for Chivo ATMs (over 200 nationwide).
  - Estimated recurring subsidy/incentive: as much as 0.1 percent of GDP annually assuming a rate of use by 20 percent of adult population; must be added to upfront fiscal costs promoting bitcoin as legal tender.
  - Context: by 2021, only 31 percent of El Salvador’s adult population had a bank account; requirements to open an account previously included having a tax identification number and a minimum starting balance of USD 150.
  - Preliminary evidence (nationally representative survey, Alvarez et al., 2022):
    - Only 20 percent of firms report accepting Bitcoin as a means of payment.
    - Only 5 percent of all sales are paid in Bitcoin.
    - 88 percent of businesses automatically convert Bitcoin sales into U.S. dollars.
    - 85 percent of adult population downloaded the Chivo e-wallet (just over half of survey respondents), but Bitcoin use was low and concentrated among the banked, educated, young, and male—misaligned with inclusion goals.
    - Operational use of Chivo-wallet averaged 5 thousand transactions daily (<2 percent of daily debit and credit card transactions).
    - Chivo-wallet remittances are about 1.6 percent of total remittances.
  - Additional context:
    - Cash is dominant: 70 percent of population are unbanked; 49 percent of employment is in the informal sector.
    - Two thirds of remittances are received in cash and immediately spent on consumption.
    - Salvadoran migrants in the U.S. largely cannot make electronic deposits to Chivo wallets (require bank account or debit/credit card); cash deposits through Chivo ATMs available in 57 locations in 7 U.S. states but Chivo remittances remain insignificant (1.6 percent of monthly received remittances).
  - Concern: granting legal tender status to bitcoin raises enforcement concerns given limited accessibility.
- Stablecoins regional developments and events:
  - After TerraUSD fallout in May 2022, U.S. Treasury Secretary called for stablecoins regulation by end-2022.
  - February 2022 U.S. House committee discussions raised questions about limiting stablecoin issuance to banks; draft proposals suggested issuance by federally insured banks or non-bank issuers maintaining 100 percent of reserves in U.S. dollars.
  - IMF working with FSB, CPMI/IOSCO, FATF and BCBS on stablecoin regulation; FSB to facilitate implementation of high-level recommendations for Global Stablecoin Arrangements.
  - CPMI and IOSCO consulted on relevance of PFMI for some systemic stablecoin models; IOSCO set principles for regulation of crypto asset exchanges; FATF AML-CFT standards apply to virtual assets and service providers.
- Facebook’s Novi pilot in Guatemala:
  - Pilot announced October 2021 for U.S. and Guatemala to enable instant, fee-free peer-to-peer domestic and cross-border payments; initially only Pax Dollar (USDP) could be held; Coinbase to provide custodian services.
  - Project announced to be shut down in September 2022 (announcement in July 2022), illustrating challenges of introducing and sustaining digital currencies in the region.
- Stellar-based stablecoins and Anclap:
  - Stellar ecosystem allows digitize/issue/redeem tokens representing underlying assets; Anclap established 2017 aimed to operate in Argentina, Peru, Colombia, Chile, Mexico, and Brazil.
  - Launched Digital Peso (ARS) in January 2020 and Digital Sol (PEN) in September 2021; planned launches of Digital Colombian (COP) and Digital Chilean (CLP) in October and November 2021 were delayed.
  - Anclap ecosystem features: faster transactions including cross-border remittances; relies on some trusted validators (federated consensus); greater vulnerability to security attacks versus networks with more validators; facilitates daily transactions for unbanked via prepaid debit card to access tokens; claims KYC/AML compliance; each token reportedly fully backed by same-currency deposit in a local financial institution.
- Reserve Dollar (RSV), Petro, AirUSD examples:
  - Reserve Dollar (RSV): launched in Venezuela in 2019 and in Argentina in 2021; pegged to U.S. dollar one-to-one; backed by other stablecoins: 1/3 USDC, 1/3 TUSD, and 1/3 USDP; users mainly in Argentina, Venezuela, and Colombia; used to preserve savings and protect remittances amid Bolivar depreciation.
  - Petro (Venezuela): issuance limited to US$5 billion; backed by oil reserves (Ayacucho field) and by gold and diamond reserves; value of one Petro fixed at 60 US dollars; traded sometimes at a heavy discount (20-50 percent below its face value); U.S. executive order in 2018 barred U.S. citizens from holding or trading any digital currency issued by the Venezuelan government.
  - AirUSD (Airtm): U.S. government used Circle’s USDC and Airtm to transmit U.S. aid to Venezuelan healthcare workers by converting received USDC on Airtm wallets into AirUSD; government pressures to block registration of beneficiaries and to control Airtm banking transactions hindered development.

### Crypto mining, energy, and Paraguay case
- Regionally, proof-of-work mining firms attracted to Paraguay by excess clean energy supply, low electricity rates, and legal certainty; China was source of 78 percent of crypto mining production before banning mining in September 2021.
- Paraguay specifics:
  - Congressional proposal to cap electricity tariffs for mining so they should not exceed industrial tariffs by more than 15 percent (vetoed by government).
  - Government noted mining’s high electricity intensity, intensive capital utilization, and minimal job creation.
  - Current growing internal demand could exhaust surplus of electrical energy by 2030-35; increased mining could exhaust excess capacity even earlier.
  - Potential consequences: lower exports, higher electricity prices for firms and households, increased use of polluting sources, harder to meet emissions reductions goals.
- Policy options:
  - Demand flexibility programs to shift miners’ demand to off-peak hours (implementation complex).
  - Selective tax vs. higher electricity rates for miners: selective taxes affect treasury allocation; higher tariffs affect utility company revenues; selective taxes usually require congressional approval.

### Regional dollarization, “cryptoization”, and drivers of demand
- Dollarization context:
  - Full/official dollarization examples: Ecuador and El Salvador.
  - De facto dollarization types: currency substitution (means of payment/unit of account) and asset substitution (store of value).
- Cryptoization:
  - Crypto assets could constitute a new form of currency substitution, replacing domestic currencies as means of payment, store of value, and unit of account, affecting monetary policy, financial stability, fiscal risks, and capital flow volatility.
  - Current use small relative to money circulation, but extensive stablecoin adoption could pose significant challenges.
- Drivers of stablecoin and crypto demand in LAC:
  - Banknote shortages (Venezuela), protracted elevated inflation (Argentina, Venezuela), capital controls or sanctions disrupting access to hard currencies, reduced transaction and switching costs, interoperability with smart contracts, stringent capital controls, and unbacked crypto assets as speculative investments.
- Empirical associations:
  - Crypto adoption positively correlated with inflation and negatively correlated with capital account openness and remittances-to-GDP ratio.
  - Googletrend search of Bitcoin tends to be higher in countries with more stringent capital account restrictions and higher inflation.
  - Within-country drivers over time: currency depreciation, increases in inflation, and increase in remittances tend to increase interest in Bitcoins; relationship may be sensitive to more recent data.

### CBDC regional survey and country experiences (Q2 2022 survey highlights)
- Out of seventeen central bank respondents, only two (Costa Rica and Panama) claimed not to be working on a CBDC.
- Work focus:
  - Half considered both retail and wholesale CBDC.
  - 40 percent focusing only on retail CBDC.
  - Only two were looking only at wholesale CBDC.
  - Most researching; slightly less than half working towards experiments/proofs of concept; one-fifth working on pilots; two reported plans towards issuing (Jamaica and Mexico).
- Legal authority: only Paraguay claimed to have legal authority to issue a CBDC; Jamaica in process of changing law.
- Regional implementations and pilot summaries:
  - Bahamas (Sand Dollar): launched October 20, 2020; as of end-January 2022 CBDC in circulation was less than 0.1 percent of currency in circulation and of broad money; wallet tiers with specific balance/transaction limits and design features to limit risks.
  - ECCU (DCash / DXCD): pilot introduced March 2021; pilot extended through June 2022 and planned until June 2023; private blockchain, two-tier system, small-value retail instrument, outages and slow/uneven adoption.
  - Jamaica: announced March 2021; pilot in 2021; Bank of Jamaica (Amendment) Act 2022 made BoJ sole issuer and recognized CBDC as legal tender; BoJ projects to replace some 5 percent of Jamaican dollars’ currency in circulation with CBDC each year.
  - Uruguay (e-Peso pilot): November 2017 to April 2018; total issuance limited to 20 million pesos (about US$670,000); wallet size limits; pilot ended and e-Peso bills destroyed.
- Country-specific ongoing work: Argentina, Brazil, Chile, Colombia, Peru, Ecuador described with varying research/pilot/status details.

### Policy implications and governance recommendations
- Framework dimensions (per IMF, 2022c):
  - Macro-financial considerations:
    - Maintain strong monetary and fiscal policies/frameworks.
    - Avoid declaring privately issued crypto assets as legal tender due to potential negative fiscal and financial implications.
    - Clarify legal status of crypto assets to protect against erosion of capital flow measures (CFMs).
  - Domestic regulatory, supervisory, and oversight responsibilities:
    - Establish legal certainty by updating classification and treatment of crypto assets in private and financial laws.
    - Develop and enforce prudential requirements and implement FATF standards on AML/CFT.
    - Key regulatory requirements across ecosystem:
      - Crypto asset issuers: publish clear, accurate, and understandable explanations of the crypto asset issued.
      - Stablecoins’ issuers: strict rules on reserve assets management; capital and liquidity buffers to absorb credit, liquidity, market, and legal risks relevant to the stabilization mechanism.
      - Service providers: licensing processes.
      - Regulated financial institutions: clear limits on exposure and engagement with crypto ecosystem.
      - Wallet providers: segregation of investors’ holdings, robust cybersecurity requirements, timely recordkeeping.
      - Exchanges: robust governance, prudential requirements, transparency standards.
  - Global coordination:
    - Cross-border nature requires comprehensive, consistent, coordinated global standards to prevent regulatory arbitrage.
    - Global framework should be risk-based, comprehensive, and flexible, with a globally consistent taxonomy and coordinated implementation.
- Short-run measures and cautions:
  - Complete bans unlikely effective long-run; temporary measures could slow adoption if severe immediate risks exist.
  - Focus on addressing main drivers of crypto demand: weak macroeconomic conditions and unmet digital payment needs.
  - Promote transparent recording of crypto asset transactions in official national statistics.
- Enhancing cross-border payments with digital money and CBDCs:
  - Recommend establishing a Task Force/Committee from a small group of LAC countries heavily reliant on cross-border payments (e.g., Mexico, Peru, Colombia, Guatemala, Honduras) and the United States to propose measures addressing cost, speed, access, and transparency.
  - Initial focus areas (drawn from BIS Focus Areas):
    - Coordinate regulatory, supervisory, and oversight frameworks to advance consistent international rules while preserving jurisdictional discretion.
    - Improve existing payment infrastructures and arrangements (harmonization, interoperability, reciprocal liquidity arrangements, interlinking payment systems).
    - Increase data quality and straight-through processing by promoting common message formats and protocols for data exchange.
  - CBDCs can play a promising role in cross-border payments if designed with interoperability, consistent standards, and coordination in mind; otherwise risk further fragmentation.

### Principles to guide CBDC introduction and Fund role
- Principles:
  - Identify main goals and assess domestic demand considering digital/mobile payments and the potential impact of upgrading payment infrastructure or introducing open banking.
  - Determine stakeholders and evaluate market infrastructure and capacity of central bank and market participants.
  - Review domestic legislation and identify legal amendments required to consider CBDC as currency.
  - Develop an oversight framework to ensure safety, efficiency, and resilience.
  - Prepare a public feasibility study describing domestic payment system and potential advantages of a CBDC over other options and strategies to manage risks.
- Regional coordination and Fund role:
  - LAC authorities should consider setting up regional working groups to coordinate crypto assets’ regulation, cross-border payment solutions, and peer-learning on domestic payments (CBDCs, fast payment systems).
  - The Fund could contribute as a catalyzer for regional initiatives and provide capacity development support for implementing policy recommendations.

*Source: wpiea2023037-print-pdf*

### introduction of Bitcoin as legal tender in El Salvador to their prohibition in many other countries worried about

### Introduction — Crypto Assets and CBDCs in Latin America and the Caribbean: Opportunities and Risks

### Overview
- Rapid technological innovations have expanded into money, payments, and financial services, promising greater accessibility, lower cost, and faster cross-border transactions.
- Use of cryptography and distributed ledger technology (DLT) such as blockchains has created digital assets and associated infrastructure (exchanges, wallet providers, miners), representing a departure from reliance on central bank money and established/regulated financial intermediaries.
- The paper provides an overview of the nature, pros, and cons of crypto assets and CBDCs, documents recent experience in LAC, and presents general lessons and policy recommendations for the region.

### Financial inclusion and remittances in LAC (key statistics from introduction)
- According to the 2021 World Bank survey Findex:
  - "72 percent" of the adult population had an account in a financial institution (up from "54 percent" in 2017).
  - Mobile phone penetration is "about 90 percent".
  - "22 percent" of the surveyed population had a mobile money account.
  - Digital modes accounted for "17 percent" of total remittances in 2021 versus a global average of "24 percent".

### Definitions and basic taxonomy
- Crypto assets can be classified as: unbacked tokens/crypto assets, stablecoins, and other tokens (including utility and security tokens). This paper focuses on unbacked tokens and stablecoins.
- Unbacked crypto assets:
  - No backing assets, usually issued in a decentralized manner, transferable, no redemption pledge, no direct claims on the issuer.
  - Volatile prices; mostly held for speculative purposes.
  - Transaction speed and scalability issues question their usefulness as a means of payment.
  - Fragmented proliferation prevents them from replacing money as a coordination device with strong network effects.
- Stablecoins:
  - Centrally or de-centrally issued crypto assets aiming for price stability via reserve assets and/or algorithms.
  - Generally denominated in a monetary unit of account, such as the dollar, and may pledge to redeem into cash at par.
  - Vulnerable to runs if reserves are risky/illiquid or if no legal claim on issuer/reserve assets; example cited: collapse of the algorithmic stablecoin Terra in May 2022.
  - Google search interest in stablecoins in LAC is highest in Brazil, Colombia, Dominican Republic, Ecuador, Mexico, Peru, and El Salvador.
- CBDC:
  - A digital form of fiat money issued by a central bank; can be "retail CBDC" (accessible to all domestic users) or "wholesale CBDC" (restricted to selected financial institutions).
  - Central banks in The Bahamas (since October 2020), the ECCU, and Jamaica are already issuing CBDCs.
  - Google Trends shows rising worldwide interest in CBDCs since 2019; notable LAC interest in Argentina, Brazil, Colombia, Mexico, and Peru.

### Potential implications and risks
- Potential benefits (not yet materialized in many cases):
  - Cheaper and faster payment and settlement by reducing intermediaries via DLT (but in practice crypto transactions can be slow and very expensive due to validator compensation and congestion).
  - Potential to enhance financial inclusion for previously unbanked populations, conditional on digital literacy and internet connectivity.
  - Increased competition and design of tailored financial products.
  - Potential to simplify international payments and increase cross-border transaction efficiencies, including remittances.
- Categories of risks (following IMF 2022c):
  - a) Macroeconomic: reduced effectiveness of monetary policy; increased currency/asset substitution or “cryptoization”; increased volatility of capital flows and reduced effectiveness of capital flow management measures (CFMs); fiscal risks from tax avoidance and evasion and challenges to withholding taxes and third-party information.
  - b) Financial stability: including cyber risks.
  - c) Financial integrity: crypto assets can be misused to commit a range of crimes.
  - d) Legal: challenges in applying existing laws to crypto assets.
  - e) Consumer protection: lack of understanding of crypto assets’ risks.
  - f) Market integrity and contestability: issues like congestion or lack of interoperability.
- Special note on legal tender adoption:
  - Declaring a crypto asset official currency or legal tender has negative economic and legal implications (IMF, 2022c).
  - Government revenues could be exposed to exchange rate risk if quoted in advance in a crypto asset.
  - Contingent liabilities arise if convertibility to fiat is guaranteed by the government and state entities operationalize e-wallets (case of El Salvador referenced).
  - Adoption as legal tender could complicate treasury single account functioning, weaken cash management, complicate fiscal reporting, and undermine fiscal reports’ reliability.

### Empirical associations and evidence
- Empirical studies at the IMF indicate cross-country associations of crypto usage with:
  - Corruption: "the more corruption, the more crypto usage."
  - Capital controls: "the more capital controls, the more crypto usage."
  - Macroeconomic conditions: higher inflation or exchange rate volatility/depreciation associated with higher crypto usage.
  - Population age structure: older population associated with lower Bitcoin trading.
- Size of remittances does not explain cross-country variations, though increases in remittances are associated with increases in crypto asset use.
- These results are tentative due to low data quality and limited availability, but are consistent with crypto usage as a hedging/speculative instrument or as a means to bypass controls including corruption.

### Policy implications and governance needs
- Given the variety of risks and events such as the collapse of the crypto exchange FTX, an adequate regulatory framework for the crypto asset ecosystem is necessary.
- Enhanced global cooperation is required to address regulatory gaps and prevent regulatory arbitrage.
- Aside from AML/CFT issues (where FATF expanded standards to cover virtual assets and virtual asset providers), financial sector regulators have taken varied and uncoordinated approaches in the absence of international standards.

*Appendino, M., O. Bespalova, R. Bhattacharya, JF. Clevy, N. Geng, T. Komatsuzaki, J. Lesniak, W. Lian, S. Marcelino, M. Villafuerte, Y. Yakhshilikov, 2023, “Crypto Assets and CBDCs in Latin America and the Caribbean: Opportunities and Risks”, IMF Working Paper 23/37*

### Box 1. The Collapse of FTX

### Box 1. The Collapse of FTX

### Collapse of FTX and immediate causes
- The Bahamas-based exchange FTX and its sister trading house, Alameda Research, collapsed after a run on deposits exposed an initially estimated US$8 billion hole in the crypto asset exchange’s accounts.
- FTX was the third largest crypto exchange in the world before its downfall, had 1 million users, and was valued at US$ 32 bn in January 2022.
- FTX filed for Chapter 11 bankruptcy protection in the United States on November 11, 2022.
- Contagion to wider financial markets was limited.
- Root causes and amplification channels:
  - Liquidity mismatches, opaque intragroup funding, and risky investments.
  - A Coindesk report pointed to liquidity imbalances in Alameda Research and a significant portion of its assets held in artificially inflated FTT tokens issued by FTX.
  - Investor concern about FTX mishandling customer deposits to backstop Alameda’s trading losses; U.S. regulators opened an investigation into potential fraud.
  - Binance abandoned a proposed rescue deal, undermining hopes for recovery.
- Structural and cross-border complications:
  - Complex ownership: FTX domiciled in Bahamas, incorporated (not licensed) in Antigua and Barbuda, affiliated with about 130 entities.
  - Alameda established in the British Virgin Islands as a large crypto-asset hedge fund.
  - The Bahamas’ decision to freeze FTX Digital Markets’ assets created tension with the Chapter 11 process; FTX DM is not part of the Chapter 11 bankruptcy entity list.

### Potential implications of stablecoins
- Comparative risks and benefits:
  - Stablecoins share many potential (yet unrealized) benefits and challenges with unbacked crypto assets but differ because their values would, in principle, be less volatile.
  - Implied lower volatility could make stablecoins more attractive as replacements for cash and as a medium of exchange, increasing risks of currency substitution and financial disintermediation and reducing monetary policy effectiveness.
  - Stablecoins may offer a false sense of security due to poor disclosure—particularly on the composition of reserve assets—and weakly regulated governance (liquidity and auditing requirements).
  - Stablecoins lack regulatory framework and protections afforded to bank deposits and e-money.
  - Concerns about the quality of reserves and liquidity could make stablecoins more prone to “runs,” with potential spillovers to the financial system, specifically to more credit-sensitive market segments (like commercial paper).
- Regulatory state and recommendations:
  - Regulation of stablecoins is at an early stage despite recent expansion.
  - IMF is working with standards-setting bodies (FSB, CPMI/IOSCO, FATF and BCBS).
  - FSB high-level recommendations (focus areas) include:
    - Strict rules on reserve assets management.
    - Adequate capital and liquidity buffers to absorb credit, liquidity and market risks.
    - Mitigation of legal, operational and cyber risks relevant to the stabilization mechanism.
    - Particular attention to degree of risk-taking in duration, credit quality and concentration of a GSC’s reserve assets.

### Potential implications of CBDCs

#### i) CBDC motivations and benefits
- CBDCs can enable central banks to harness technological innovations while providing a safe means of payment and store of value that serves as a common stable unit of account.
- CBDCs should support, or at least not undermine:
  - Financial integrity (AML/CFT rules, customer due diligence, measures to fight corruption and foster good governance).
  - Financial stability.
  - Monetary policy effectiveness.
- CBDCs will not, by themselves, solve underlying problems affecting credibility of national currencies and could exacerbate them (e.g., by facilitating monetary financing of the government and increasing the supply of base money).
- BIS (October 2020) and Soderberg (2021) list payment-system motivations for CBDCs:
  - ensure continued access to central bank money, particularly where access to cash is in decline;
  - ensure resilience of the payment system as an additional payment method, particularly under severe circumstances (e.g., requiring offline capabilities);
  - encourage financial inclusion (access to appropriate and affordable financial services);
  - support public privacy, a key feature of cash holdings;
  - facilitate fiscal transfers (e.g., rapid mobilization during the pandemic);
  - enhance cross-border payments by lowering costs and facilitating access for households and small firms;
  - increase competition in payment systems to avoid concentration and monopolies by large PSPs or big tech services;
  - reduce costs associated with provision of cash.
- Additional policy goal: protect monetary sovereignty by offering a secure public digital currency to reduce currency substitution risk—but this requires stability of the local currency and sound macroeconomic policies.
- In emerging and developing economies, CBDC motivations are primarily to enhance financial inclusion and improve payment efficiency.
  - Context for LAC: large share of population unbanked; World Bank Findex cites lack of sufficient funds, high interest rates and payment service costs, limited trust in financial institutions, long distances, and lack of proper documentation as main impediments.
  - CBDC could complement instant retail payment systems settling transactions between end users and/or competing private PSPs on the central bank’s balance sheet in near real time on a 24/7 basis.
  - CBDC could formalize some cash-based informal enterprises, reducing accounting costs and improving access to banking credit.

#### ii) CBDC-related risks
- Mancini-Griffoli et al. (2018) highlight financial stability, financial integrity, and monetary policy effectiveness risks; additional risks include cross-border and cyber risks.
- Identified risks:
  1. Financial stability risks via disintermediation of banks through deposit substitution → lower credit and negative impact on growth. Mitigations: central bank liquidity injection; improved payment infrastructure and enhanced financial inclusion via CBDC. Additional concern: CBDC could facilitate generalized bank runs under macro-financial stress by offering a safe, liquid alternative to deposits. Counterargument: deposit insurance and bank resolution frameworks limit this scenario.
  2. Financial integrity could be undermined if CBDC offers full anonymity and large-value transactions. Conversely, integrity could be strengthened by imposing strict transaction size limits and designing CBDC to facilitate effective customer identity authentication, tracking of payments and transfers, transaction monitoring, and other AML/CFT risk-based measures.
  3. CBDCs issued by advanced countries could increase pressure for currency substitution in emerging markets, reducing scope for monetary policy and hindering enforcement of exchange restrictions and capital flow management.
  4. Cyber risks: operational and reputational risks from disruptions and cyberattacks.
- BIS (October 2020) three design principles for CBDCs:
  - (i) Do not compromise monetary or financial stability by issuing a CBDC.
  - (ii) CBDC must coexist with and complement existing forms of money.
  - (iii) CBDC should promote innovation and efficiency.
- Design elements with growing convergence (Soderberg 2021):
  - Predominantly focused on domestic use, but cross-border coordination should be considered early.
  - Remuneration is advocated academically but less by central banks to minimize disintermediation risks.
  - Many countries considering limits or caps on balances in digital wallets and transactions to minimize disintermediation risks.
  - Availability of both on-line and off-line functionalities.
  - Limited anonymity is preferred for financial integrity.
  - Focus on cross-border solutions for wholesale CBDCs.
  - Restrictions aimed at reducing financial stability risks and crowding out banks.

### Cross-border payment issues
- Cross-border payments are often expensive, opaque, and slow due to multiple correspondent banks and settlement steps.
- Importance for LAC: remittances are a significant source of FX and income; examples:
  - Remittances amounted to 340 percent of receipts from exports of goods and services in Haiti in 2021.
  - In El Salvador, Guatemala, and Honduras remittances amounted to more than 90 percent of receipts from exports of goods and services.
- Remittance frictions and costs:
  - Cost to send US$200 to LAC estimated to be 5.5 percent in 2021 (almost double the SDG target of 3 percent).
  - Standard payment chain (messaging, settlement, disbursement) could take between 3 to 5 days.
  - Frictions include fragmented/truncated data formats, complex compliance checks, limited operating hours, legacy platforms, high funding costs, long transaction chains, and weak competition.
  - Decline in correspondent banking has exacerbated these issues, with LAC more affected by fall in active correspondent banks.
- Digital money advantages:
  - Cheaper, faster, more transparent, and more accessible cross-border payments via fewer intermediaries, greater competition, common standards, safety and integrity, and 24/7 instant settlement.
- Policy initiatives:
  - G20 and FSB have prioritized enhancing cross-border payments and endorsed a roadmap developed by the FSB and other organizations.
- Observations for LAC:
  - Despite wide mobile internet access, cash remittances remain large (80 percent of total remittances); uptake of digital remittances is limited due to low financial inclusion and high informality.
  - Regulatory gaps may hinder digital remittance penetration; GSMA Mobile Money Regulatory Index finds LAC scores lowest globally, particularly in Know Your Customer Regulation.
  - Declining remittance fees observed across countries at all levels of digitalization, though fees remain higher for Central America and the Dominican Republic.
- Role of stablecoins and CBDCs in cross-border payments:
  - Stablecoins credibly pegged to safe assets could be important vehicles for cross-border payments versus volatile crypto assets.
  - CBDCs might be more promising because they are direct liabilities of central banks—the least risky and most liquid settlement assets.
  - Success requires careful focus on design: (i) access (retail CBDC availability to non-residents; wholesale CBDC access to foreign banks and PSPs) and (ii) interoperability between CBDC systems or with non-CBDC arrangements.
  - Facilitation likely to begin with wholesale CBDCs.
  - Given governance challenges and high upfront costs, interlinking CBDC systems may be implemented mainly at regional level or between countries with large bilateral/multilateral trade volumes.
  - mCBDC (multiple CBDC) experiments have tested DLT-based arrangements allowing transactions among CBDCs of different jurisdictions, potentially bypassing intermediaries such as correspondent banks.
  - International collaboration is needed early to ensure interoperability.

### Relevant experiences in Latin America and the Caribbean (LAC)

#### Crypto assets: regulation landscape in the region
- LAC has high crypto adoption but regulatory approaches diverge widely, from acceptance to prohibition.
- El Salvador adopted bitcoin as legal tender (see below).
- Over the last three years, several LAC countries (notably Argentina, Brazil, and Colombia) have advanced toward regulatory frameworks; legislators are presenting bills and appointing supervisory bodies.
- The region lacks common, comprehensive regulatory standards to address inherent risks while reaping crypto market benefits.

#### El Salvador’s introduction of Bitcoin as legal tender
- El Salvador adopted Bitcoin as legal tender on June 8, 2021, alongside the U.S. dollar (dollar used as reference currency for accounting).
- Regulations for the Bitcoin ecosystem and the e-wallet Chivo were adopted on September 7, 2021.
- Chivo is fully connected with the banking system, allowing transfers between U.S. dollars and the platform, including via Visa/Mastercard. It is available to registered Salvadorans (individuals, businesses, government entities), including those abroad.
- Government guarantees automatic conversion from Bitcoin to U.S. dollars in Chivo via a trust fund, FIDEBITCOIN, endowed with US$150 million to:
  - guarantee conversion from Bitcoin to U.S. dollars; and
  - back Chivo’s automatic and free convertibility services.
- FIDEBITCOIN covers costs related to instantaneous convertibility, transaction fees to Visa/Mastercard, and support for Chivo ATMs (over 200 ATMs nationwide).
- Estimated recurring subsidy/incentive: as much as 0.1 percent of GDP annually assuming a rate of use by 20 percent of adult population; must be added to upfront fiscal costs promoting bitcoin as legal tender.
- Motivations for Chivo launch: slow financial inclusion progress and promotion of digital transactions in U.S. dollars and Bitcoin.
- Contextual constraints:
  - By 2021, only 31 percent of El Salvador’s adult population had a bank account.
  - Requirements to open an account previously included having a tax identification number and a minimum starting balance of USD 150.
  - Central bank launched Transfer365 in June 2021 for instantaneous online banking for the banked population.
- Preliminary evidence (nationally representative survey, Alvarez et al., 2022):
  - Only 20 percent of firms report accepting Bitcoin as a means of payment.
  - Only 5 percent of all sales are paid in Bitcoin.
  - 88 percent of businesses automatically convert Bitcoin sales into U.S. dollars.
  - 85 percent of adult population downloaded the Chivo e-wallet (just over half of survey respondents), but Bitcoin use was low and concentrated among the banked, educated, young, and male—misaligned with inclusion goals.
  - Operational use of Chivo-wallet averaged 5 thousand transactions daily (<2 percent of daily debit and credit card transactions).
  - Chivo-wallet remittances are about 1.6 percent of total remittances.
- Additional context and constraints:
  - Cash is dominant: 70 percent of population are unbanked; 49 percent of employment is in the informal sector.
  - Two thirds of remittances are received in cash and immediately spent on consumption.
  - Salvadoran migrants in the U.S. largely cannot make electronic deposits to Chivo wallets (require bank account or debit/credit card); cash deposits through Chivo ATMs available in 57 locations in 7 U.S. states but Chivo remittances remain insignificant (1.6 percent of monthly received remittances).
- Concerns: granting legal tender status to bitcoin raises enforcement concerns given limited accessibility.

#### Stablecoins: regional regulatory developments and events
- After TerraUSD fallout in May 2022, U.S. Treasury Secretary called for stablecoins regulation by end-2022.
- February 2022 discussions in U.S. House committee raised questions about limiting stablecoin issuance to banks; draft proposals suggested issuance by federally insured banks or non-bank issuers maintaining 100 percent of reserves in U.S. dollars.
- U.S. Treasury undersecretary Nellie Liang urged Congress to enact legislation to ensure stablecoins are subject to appropriate and comprehensive regulation.
- Global responses:
  - IMF working with FSB, CPMI/IOSCO, FATF and BCBS on stablecoin regulation.
  - FSB to facilitate implementation of high-level recommendations for regulation, supervision, and oversight of Global Stablecoin Arrangements.
  - CPMI and IOSCO issued a consultation on relevance of PFMI for some systemic stablecoin models, particularly for cross-border payments and those considered as securities.
  - IOSCO set principles for regulation of crypto asset exchanges.
  - FATF AML-CFT standards apply to virtual assets and service providers.

#### Facebook’s digital wallet (Novi) pilot in Guatemala — failed experience
- Guatemala remittances: inflows at 15 percent of GDP in 2020; U.S.-Guatemala corridor is second largest in Latin America after U.S.-Mexico.
- October 2021: Facebook announced a pilot for digital wallet Novi limited to users in the U.S. and Guatemala to enable instant, fee-free peer-to-peer domestic and cross-border payments with quantitative limits.
- Initially only Pax Dollar (USDP) could be held on Novi; Coinbase to provide custodian services.
- Project announced to be shut down in September 2022 (announcement in July 2022), illustrating challenges of introducing and sustaining digital currencies in the region.

#### Stellar-based stablecoins in the region
- The Stellar ecosystem (launched 2014, incorporated in Canada) is an open financial infrastructure secured by the Stellar Consensus Protocol (SCP) rather than proof-of-work.
- Stellar allows users to digitize, issue, and redeem tokens representing underlying assets (currency or gold); tokens traded and redeemed while underlying fiat may remain in depositors’ custody.
- Anclap: a Stellar-based digital payment network in Latin America issuing stablecoins.
  - Established in 2017, aimed to operate in Argentina, Peru, Colombia, Chile, Mexico, and Brazil.
  - Launched Digital Peso (ARS) in January 2020 and Digital Sol (PEN) in September 2021.
  - Planned launches of Digital Colombian (COP) and Digital Chilean (CLP) in October and November 2021 were delayed.

*Italicized source: Box 1. The Collapse of FTX — wpiea2023037-print-pdf*

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### wpiea2023037-print-pdf - introductions. Mexican authorities have put regulation in place to avoid this from happening in Mexico, e.g., by

### Stablecoins, use cases, and country examples
- Reserve Dollar (RSV)
  - Launched in Venezuela in 2019 and in Argentina in 2021.
  - Pegged to U.S. dollar one-to-one.
  - Backed by other stablecoins: 1/3 USDC, 1/3 TUSD, and 1/3 USDP.
  - Users mainly in Argentina, Venezuela, and Colombia.
  - Used to preserve savings and protect remittances amid Bolivar depreciation.
- Petro (Venezuela)
  - Issuance limited to US$5 billion.
  - Backed by oil reserves (Ayacucho field) and by gold and diamond reserves.
  - Value of one Petro was fixed at 60 US dollars.
  - Traded sometimes at a heavy discount (20-50 percent below its face value).
  - U.S. executive order in 2018 barred U.S. citizens from holding or trading any digital currency issued by, or on behalf of, the Venezuelan government.
- AirUSD (Airtm)
  - U.S. government has used Circle’s USDC and Airtm to transmit U.S. aid to Venezuelan healthcare workers by converting received USDC on Airtm wallets into AirUSD.
  - Government pressures to block registration of beneficiaries and to control Airtm banking transactions hindered development.

### Anclap and digital payment network design and risks
- Anclap’s ecosystem features:
  - Faster transactions including cross-border remittances.
  - Relies on some trusted validators in consensus (characteristic of a federated consensus algorithm).
  - Greater vulnerability to security attacks compared to networks that use more validators and charge higher fees.
  - Facilitates daily transactions for unbanked individuals: buy prepaid debit card to access tokens, 24/7 availability, requires government-issued ID.
  - Claims compliance with KYC and AML through dedicated protocols.
  - Each stablecoin (token) in the system is reportedly fully backed by same-currency deposit in a local financial institution.
  - Users can send stablecoins, save/sell them, and transfer funds to bank accounts; can withdraw cash from any ATM.

### Drivers of stablecoin and crypto demand in LAC (cryptoization)
- Demand drivers identified:
  - Citizens seeking solutions to banknote shortages (Venezuela) and protracted elevated inflation (Argentina, Venezuela).
  - Capital controls or international sanctions disrupting access to hard currencies (e.g., U.S. dollar) create demand for dollar-pegged accessible savings vehicles.
  - Reduced transaction and switching costs facilitate currency substitution.
  - Interoperability and compatibility with smart contracts and financial applications.
  - Stringent capital controls in some countries (Argentina, Venezuela).
  - Unbacked crypto assets as speculative investment vehicles.
- Empirical associations and findings:
  - Crypto adoption positively correlated with inflation and negatively correlated with capital account openness and remittances-to-GDP ratio (Figure 5 discussion).
  - Googletrend search of Bitcoin tends to be higher in countries with more stringent capital account restrictions and higher inflation (Table 1).
  - Within-country drivers over time: currency depreciation, increases in inflation, and increase in remittances tend to increase interest in Bitcoins (Table 2).
  - Note: relationship could be sensitive to inclusion of more recent data (increase in inflation and decrease in crypto prices could reduce crypto adoption in 2022).

### Crypto mining, energy costs, and Paraguay case
- Context and regional actions:
  - Some proof-of-work crypto mining companies started operating in Paraguay attracted by excess supply of clean and renewable energy, low electricity rates and income tax rate, and legal certainty.
  - China was the source of 78 percent of crypto mining production before banning mining in September 2021.
  - Iceland suspended granting new crypto mining licenses in December 2021 due to excess demand.
- Paraguay-specific details and tradeoffs:
  - Congressional proposal to cap electricity tariffs for mining so they should not exceed industrial tariffs by more than 15 percent (vetoed by government).
  - Government noted crypto mining is characterized by high electricity intensity, intensive capital utilization, and minimal generation of jobs.
  - Current growing internal demand could exhaust surplus of electrical energy by 2030-35; increased mining could exhaust excess capacity even earlier.
  - Potential consequences: lower exports, higher electricity prices for firms and households, increased use of polluting sources (biomass or fuel), harder to meet emissions reductions goals.
- Policy options discussed:
  - Demand flexibility programs to shift miners’ demand to off-peak hours; implementation complexity due to alignment of incentives and bitcoin price volatility.
  - Selective tax vs. higher electricity rates for miners:
    - Would not change miners’ incentives but would affect allocation of additional revenues (selective taxes to treasury; higher tariffs to utility company).
    - Selective taxes usually require congressional approval; electricity rates usually set by companies or Executive Power.
  - Need to weigh complex tradeoffs across energy supply, fiscal allocation, environmental goals, and employment.

### Regional dollarization, “cryptoization”, and policy implications
- Dollarization context:
  - Full or official dollarization examples: Ecuador and El Salvador.
  - Two types of de facto dollarization: currency substitution (use as means of payment/unit of account) and asset substitution (store of value).
  - Currency substitution associated with inflation; financial dollarization with risk differentials and institutional factors.
- Cryptoization concept:
  - Crypto assets could constitute a new form of currency substitution if they replace domestic currencies as means of payment, store of value, and unit of account.
  - Potential impacts: affect monetary policy implementation, create financial stability and fiscal risks (facilitating tax evasion), and make capital flows more volatile.
  - While current use remains small relative to money circulation, more extensive adoption of stablecoins can pose significant challenges.

### CBDC regional survey results and country experiences
- Survey overview (second quarter of 2022):
  - Out of seventeen central bank respondents, only two (Costa Rica and Panama) claimed not to be working on a CBDC.
  - Half of respondents considered both retail and wholesale CBDC; 40 percent focusing only on retail CBDC; only two were looking only at wholesale CBDC.
  - Work stages: most researching; slightly less than half working towards experiments/proofs of concept; one-fifth working on setting up a CBDC pilot; two reported plans towards issuing (Jamaica and Mexico).
  - Legal authority: only Paraguay claimed to have legal authority to issue a CBDC; Jamaica was in the process of changing the law.
- Motivations flagged by respondents:
  - Improve payments system efficiency and access; financial inclusion and monetary sovereignty for retail CBDC; resilience and digitization acceleration.
- Regional implementations and pilots:
  - Bahamas (Sand Dollar)
    - Officially launched October 20, 2020.
    - Objectives: boost financial inclusion in remote islands; strengthen payments resilience.
    - Issuance to date limited; as of end-January 2022 CBDC in circulation was less than 0.1 percent of currency in circulation and of broad money.
    - Wallet tiers and limits:
      - Basic wallet: only email/phone required; restricted to a $500 balance and $1500 in monthly transactions.
      - Second level: requires government photo ID; limits $5,000 balance and $10,000 transactions.
      - Third level: businesses provide license and tax filings; holding limit $8,000 to $1,000,000 with unlimited transactions.
    - Design features to limit risks: no interest on holdings, ceilings on wallet balances, linkage of level 2/3 wallets to bank accounts, circuit breaker to prevent massive flows, e-KYC register, multi-factor authentication, offline usability attempts (encountered difficulties).
    - Sand Dollar exclusively for domestic use; foreigners can register with limits; Mastercard and Island Pay Sand Dollar prepaid cards launched February 2021.
  - ECCU (DCash / DXCD)
    - Pilot introduced March 2021 in four ECCU countries; pilot extended to additional member states through June 2022; pilot planned to continue until June 2023.
    - Design: private blockchain with most services stored at Google Cloud; ECCB sole issuer; two-tier system (central bank + private sector AFIs).
    - Limits: small-value retail instrument; no interest; holding and transaction limits; no use for FX transactions; transfers only within the ECCU.
    - Cybersecurity and integration: pilot limited in system integration (not linked to RTGS or Automated Clearing House); outage mid-January to mid-March 2022 due to certificate renewal issue; balances guaranteed by ECCB.
    - Adoption slow and uneven: as of end-April 2022 participation included 22 financial institutions, 11 agencies, 292 merchants, and 4,039 end-users.
    - Lessons: need for public education, operational resilience, clear governance between central banks and vendors, and business cases for private sector participation.
  - Jamaica
    - Government announced CBDC March 2021; pilot in 2021 involving four merchants and National Commercial Bank.
    - Jamaican Parliament amendments in June 2022 (Bank of Jamaica (Amendment) Act 2022) to make BoJ sole issuer and recognize CBDC as legal tender.
    - BoJ projects to replace some 5 percent of Jamaican dollars’ currency in circulation with CBDC each year.
    - Technical design uses existing centralized RTGS (JamClear) rather than DLT; wallet onboarding requires tax registration number and government-issued photo ID for unbanked users.
    - Privacy and AML/CFT: encryption, digital signatures, multi-factor authentication; tracking of payments allowed under Proceeds of Crime Act (POCA).
    - Governance: internal BoJ oversight committee established.
  - Uruguay (e-Peso pilot)
    - Pilot November 2017 to April 2018; token-based, non-DLT, linked to phone number; no internet required.
    - Total issuance limited to 20 million pesos (about US$670,000); wallet size limited to 30,000 pesos for individuals (about US$1,000) and 200,000 pesos for businesses.
    - Transactions anonymous but traceable; pilot ended, e-Peso bills destroyed.
    - Lessons: merits of simple tech solutions, importance of central bank reputation and security, complementarity with other payment means.
- Country-specific ongoing work (short summaries)
  - Argentina: BCRA proposed digital peso to President in February 2021; not prioritizing issuance but continuing research; relies on Transferencias 3.0 for payments speed/access.
  - Brazil: BCB exploring Digital Real since August 2020; Pix instant payments launched November 2020; Pix transactions surpassed credit and debit card transactions by end-2021; Digital Real pilots/projects expected in 2023 with final characteristics decision in 2024; likely online and non-interest bearing; BCB engaged on interoperability and cross-border considerations.
  - Chile: BCCh published white paper and public survey; second report expected first half of 2023.
  - Colombia: BanRep researching retail CBDCs since 2017; continuing cost-benefit analysis.
  - Peru: initial assessment with IMF technical assistance; 48 percent of population unbanked as of mid-2021; options include reinforce existing payment instruments or issue tokenized CBDC; identified critical enablers and factors for successful introduction.
  - Ecuador: 2014 digital wallet offered by central bank in fully dollarized economy; total issuance not successful and abandoned in 2018 due to distrust and concerns about de-dollarization.

### Lessons and policy recommendations
- Framework for policy and regulation (three dimensions per IMF, 2022c):
  - Macro-financial considerations:
    - Maintain strong monetary and fiscal policies/frameworks.
    - Avoid declaring privately issued crypto assets as legal tender due to potential negative fiscal and financial implications.
    - Clarify legal status of crypto assets to protect against erosion of capital flow measures (CFMs).
  - Domestic regulatory, supervisory, and oversight responsibilities:
    - Establish legal certainty by updating classification and treatment of crypto assets in private and financial laws.
    - Develop and enforce prudential requirements and implement FATF standards on AML/CFT.
    - Key regulatory requirements across ecosystem (examples):
      - Crypto asset issuers: publish clear, accurate, and understandable explanations of the crypto asset issued.
      - Stablecoins’ issuers: strict rules on reserve assets management; capital and liquidity buffers to absorb credit, liquidity, market, and legal risks relevant to the stabilization mechanism.
      - Service providers: licensing processes.
      - Regulated financial institutions: clear limits on exposure and engagement with crypto ecosystem.
      - Wallet providers: segregation of investors’ holdings, robust cybersecurity requirements, timely recordkeeping.
      - Exchanges: robust governance, prudential requirements, transparency standards.
  - Global coordination:
    - Cross-border nature of crypto assets requires comprehensive, consistent, coordinated global standards to prevent regulatory arbitrage.
    - Global framework should be risk-based, comprehensive, and flexible, with a globally consistent taxonomy and coordinated implementation.
- Short-run measures and cautions:
  - Complete bans unlikely to be effective long-run; temporary measures could slow adoption if severe immediate risks exist.
  - Focus on addressing main drivers of crypto demand: weak macroeconomic conditions and unmet digital payment needs.
  - Promote transparent recording of crypto asset transactions in official national statistics.
- Enhancing cross-border payments with digital money and CBDCs:
  - Recommend establishing a Task Force/Committee from a small group of LAC countries heavily reliant on cross-border payments (e.g., Mexico, Peru, Colombia, Guatemala, Honduras) and the United States to propose measures addressing cost, speed, access, and transparency.
  - Initial focus areas (drawn from BIS Focus Areas):
    - Coordinate regulatory, supervisory, and oversight frameworks to advance consistent international rules while preserving jurisdictional discretion.
    - Improve existing payment infrastructures and arrangements (harmonization, interoperability, reciprocal liquidity arrangements, interlinking payment systems).
    - Increase data quality and straight-through processing by promoting common message formats and protocols for data exchange.
  - CBDCs can play a promising role in cross-border payments if designed with interoperability, consistent standards, and coordination in mind; otherwise risk further fragmentation.

*Source: wpiea2023037-print-pdf (introductions), https://www.imf.org/-/media/files/publications/wp/2023/english/wpiea2023037-print-pdf.pdf*

### Introduction of a CBDC

### Introduction of a CBDC

### Rationale and potential benefits
- Having central bank money (the economy’s unit of account) in a digital form, taking advantage of the central bank critical roles in credibly intermediating resources across financial institutions and providing sufficient liquidity for settlement, can help unleash further financial inclusion and innovation with active participation of the private sector (BIS, June 2022).
- Risks from CBDC adoption seem manageable and there is a case for introducing it if properly justified.

### Principles to guide a decision on introduction
- identify main goals and assess domestic demand taking into account the growing popularity of digital and mobile payments and the potential impact of (i) upgrading the payment infrastructure (e.g., 24/7 near real-time payments with low or no costs) and/or (ii) introducing “open banking” initiatives to make financial institutions’ data on their customers available to other financial services providers;
- determine main stakeholders and evaluate the availability of the necessary market infrastructure and capacity of the central bank and other market participants to support the CBDC;
- review domestic legislation and identify whether legal amendments are required for the adoption of CBDC, in particular to ensure the CBDC is considered currency;
- develop an oversight framework to ensure safety, efficiency, and resilience of the CBDC;
- prepare a detailed implementation plan building on a feasibility study that should be made public and that should describe the domestic payment system and the potential advantages of a CBDC over other options available to the Central Bank and its design options and strategies to manage potential risks.

### Regional coordination and Fund role
- To leverage resources and countries’ experiences on crypto assets and CBDCs, LAC authorities should consider setting up regional working groups that would help coordinate crypto assets’ regulation, solutions for cross-border payments, and to peer-learn on lessons from their explorations on domestic payments (CBDCs, fast payment systems).
- The Fund could contribute as a catalyzer for these regional initiatives, in addition to providing support in the implementation of policy recommendations through capacity development activities.

*IMF WORKING PAPERS Digital currencies in LAC: Opportunities and Risks — INTERNATIONAL MONETARY FUND*

### References

### wpiea2023037-print-pdf - References

### Central Bank Digital Currencies (CBDCs) and Digital Money
- Adrian, T., T. Mancini-Griffoli, July 2019, The Rise of Digital Money, IMF Fintech Note 19/01  
- Agur, I., Ari, A., Dell'Ariccia, G., January 2022, Designing Central Bank Digital Currencies, Journal of Monetary Economics Volume 125  
- Auer, R., P Haene and H Holden, Multi-CBDC Arrangements and the Future of Cross-Border Payments” BIS Papers No. 115, 2021  
- Bank of Canada, 2021, “Revisiting the Monetary Sovereignty Rationale for CBDCs”, Staff Discussion Paper 2021-17  
- Bank of International Settlements, October 2020, Central bank digital currencies: foundational principles and core features  
- Burlon, L., C. Montes-Galdon, M. Munoz, F. Smets, “The optimal quantity of CBDC in a bank-based economy”, CEPR Discussion Paper No. DP16995, February 2022  
- Lukonga, I., 2021, Oversight of CBDC Financial Market Infrastructures (FMIs), PowerPoint Presentation.  
- Mancini-Griffoli, T., M. S. Martinez Peria, I. Agur, A. Ari, J. Kiff, A. Popescu, C. Rochon, 2018, Casting Light on Central Bank Digital Currencies. IMF Staff Discussion Note

### Crypto Assets, Stablecoins, and the Crypto Ecosystem
- Alnasaa, M., N. Gueorguiev, J. Honda, E. Imamoglu, P. Mauro, K. Primus, and D. Rozkkov, 2022, Crypto Corruption and Capital Controls: Cross-Country Correlations, IMF Working Paper 22/xx  
- Alvarez, F, D. Argente, and D. Van Patten, Are Cryptocurrencies Currencies? Bitcoin as Legal Tender in El Salvador, NBER Working Paper 29968, April 2022  
- Bains, P., A. Ismail, F. Melo, and N. Sugimoto, 2022, Regulating the Crypto Ecosystem: The Case of Stablecoins and Arrangements, IMF Fintech Notes/2022/008  
- Chainanalysis, 2021, “2021 Geography of Cryptocurrency Report”  
- Cuervo, C., A. Morozova, N. Sugimoto, Fintech Note on Regulation of Crypto Assets, December 2019  
- For background on stablecoin mechanisms: Makiko, M., K. Ito, S. Ohsawa, and H. Tanaka, 2019, “What is Stablecoin? A Survey on Price Stabilization Mechanisms for Decentralized Payment Systems”  
- IMF, 2021, “Global Financial Stability Report” Chapter 2: The Crypto Ecosystem and Financial Stability Challenges.  
- IMF, 2022b, Fintech Note: Regulation of Crypto Assets: A Closer Look at the Crypto Asset Ecosystem.  
- IMF, 2022c, Elements of Effective Policies for Crypto Assets.  
- Sun, Z. 2021 “Stablecoin payment app Reserve helps individuals protect their savings against inflation in Latin America”  
- Lolly Crypto. Anclap launches Peru’s stablecoin on Stellar blockchain.  
- Wright, C., The Long Awaited Peruvian Stablecoin is all Set to Launch for Colombia and Chile. October 4, 2021. Timestamp Magazine

### Cross-Border Payments, Remittances, and Payment Infrastructures
- Bank of International Settlements, July 2022, Interlinking payment systems and the role of application programming interfaces: a framework for cross-border payments, Report to the G20  
- Bank of International Settlements, July 2020, Enhancing cross-border payments: building blocks of a global roadmap. Stage 2 report to the G20  
- Duarte, A., J. Frost, L. Gambacorta, P. Koo Wilkens, and H. S. Shin, 2022, “Central banks, the monetary system and public payment infrastructures: lessons from Brazil’s Pix”, BIS Bulleting 51, March 2022  
- Bersch, J., JF. Clevy, N. Muhammad, E. Pérez Ruiz, and Y. Yakhshilikov, “Fintech Potential for Remittance Transfers: A Central America Perspective”, IMF Working Paper 21/175  
- Carare, A., L. Franco, M. Hadzi-Vaskov, J. Lesniak, D. Vasilyev, Y. Yakhshilikov, “Digital Money and Remittances Costs in Central America, Panama and the Dominican Republic”, IMF Working Paper, 2022  
- Forbes 2021, “Facebook’s Novi Poses Fresh Challenges for Remittances”  
- DailyCoin, Central Bank of Peru Warns of Sol Digital Token as it Plans to Issue a CBDC (Dec 02, 2021).  
- Miccoli, M., 2022, Cross-Border Aspects of Digital Payments and Digital Money, PowerPoint Presentation

### Monetary Sovereignty, Dollarization, and International Currency Issues
- Brookings Institution, 2019, “Has the dollar lost ground as the dominant international currency?”  
- CEPR, 2010, “A Concise History of Exchange Rate Regimes in Latin America”  
- IADB, 2000, “Assessing Dollarization: An Application to Central American and Caribbean Countries”  
- Levy Yeyati, E., 2021, “Financial Dollarization and De-Dollarization in the New Millennium”  
- Savastano, M., 1996, “Dollarization in Latin America: Recent Evidence and Some Policy Issues” IMF Working Paper 96/4  
- The Economist. 2021. “Will the Dollar Stay Dominant? Digital Money May Pose a New Threat to Dollar Hegemony”

### Fintech, Regulation, Financial Stability, and Central Bank Risk
- IMF, 2020, “Digital Money Across Borders: Macro-Financial Implications”, IMF Policy Paper No. 2020/050.  
- IMF, 2022a, Capital Flow Management Measures in the Digital Age: Challenges of Crypto Assets.  
- International Monetary Fund 2021, “Fintech update: September 2021”, Monetary and Capital Markets Department  
- Khan, A., M. Malaika, Central Bank Risk Management, Fintech, and Cybersecurity. IMF, 2021  
- Soderberg, G. 2021, CBDC Behind the Scenes: Emerging Trends, Insights, and Policy Lessons, IMF Fintech Note  
- Biagio, B., Money and customer funds in the world of digital finance: Who really owns what? Journal of Payments Strategy & Systems, Vol. 15, number 1, Spring 2021. pp. 37-53 (17)  
- Makiko, M., K. Ito, S. Ohsawa, and H. Tanaka, 2019, “What is Stablecoin? A Survey on Price Stabilization Mechanisms for Decentralized Payment Systems”  
- Reserve, “About the Reserve Project”  
- Sun, Z. 2021 “Stablecoin payment app Reserve helps individuals protect their savings against inflation in Latin America”

### Data Sources, Reports, and Databases
- World Bank Group, 2022, “What Does Digital Money Mean for Emerging Market and Developing Economies”  
- World Bank Group, 2021, The Global Findex Database 2021  
- Chainanalysis, 2021, “2021 Geography of Cryptocurrency Report”  
- Svergies Riksbank. E-krona Pilot. Phase 1.  
- Miccoli, M., 2022, Cross-Border Aspects of Digital Payments and Digital Money, PowerPoint Presentation

*Source: wpiea2023037-print-pdf - References*

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_Source: https://www.imf.org/-/media/files/publications/wp/2023/english/wpiea2023037-print-pdf.pdf_