This is an excerpt from The Future of Fintech in Latin America 2023 report.

Adoption of blockchain use cases are growing fast across Latin America. A breadth of use cases including bitcoin, stablecoins and other cryptocurrencies (as stores of value against inflation, banking the unbanked, low-fee remittances, DeFi applications, play-2-earn games, and more are all gaining traction across Latin American region.

According to Sherlock Communications, distrust of governments across the region has laid a fertile ground for crypto to gain a foothold. The combination of high inflation rates, large unbanked populations, and instable governments means that there is a strong appetite for access to currency which can circumvent these pressures. Additionally, as Latin American economies experienced a rapid period of digitalisation over the Covid-19 pandemic, allowing for more widespread onboarding of people into financial systems, particularly the crypto economy.

Research from Chainalysis shows that Latin America’s crypto industry saw a 40% increase ($562 billion) in the amount of crypto the region’s citizens received between July 2021 to June 2022. The region also includes give of the top 30 countries in Chainalysis’ crypto index, including: Brazil (7, Argentina (13, Colombia (15, Ecuador (18, and Mexico (28, making the Latin American region the seventh largest cryptocurrency market.

Wariness of Latin American governments lays fertile ground for crypto

A strong increase in preference toward cryptocurrency can be seen as a result of citizens attempting to sidestep the region’s economic conditions, according to a report from Deel Lab for Global Employment. In fact, the report found that most remote workers across Latin America prefer to be paid in cryptocurrency, allowing them to move this liquidity into non-fiat-based saving assets or more profitable options.

Alexandre Magnani, CEO of PagBank PagSeguro, agrees that one of the main reasons why crypto is so popular in Brazil, Argentina and other Latin American countries is because it gives people a way out of the traditional banking system, despite prices still being correlated with FED monetary policies and investor sentiment.

“In Brazil and in other countries, there ’s a general lack of trust in government institutions ,” Magnani explains. “Perception of corruption is very high among the population and it ’s not hard to understand it: several countries in the region have had top-tier politicians connected to corruption scandals .” When considering crypto ’s long-term existence in Latin America, he furthers that crypto can be seen as a gateway for people who never got the chance to interact with banking accounts to enter and contribute to the economic system and even to protect themselves from inflation, which tends to run high in the region.

The issue of access to financial services is echoed by Gabriel Siler, data director for BB VA Mexico, who explains that there are still many people in Latin America with limited or no access to traditional banking services. “This means they can't open a bank account or use services like loans or credit cards. And even though technology and financial services have improved, a lot of people are still unbanked or underbanked, which means they don't have easy access to these services. Furthermore, a lot of people in the region still use cash to buy things, so they don't use digital payment methods like credit cards or mobile payments very often.”

This openness toward transacting and more broadly adopting new forms of currency can also be seen in the region ’s progress toward central bank digital currency (CBDC. While this may not entirely solve for citizens’ caution around fiat currencies, it presents a wealth of opportunities for governments to explore ways that blockchain technology and digital assets could begin to solve financial challenges across Latin America.

A recent paper published by the International Monetary Fund (IMF) explains that the inception of crypto assets, and their associated technologies, provides the region with both opportunities and challenges.

On the positive side, these technologies could help overcome Latin America ’s relatively low levels of financial inclusion and help reduce the cost of crossborder transactions like remittances as illustrated in the figure below.

However, many Latin American countries face significant challenges including:

• macroeconomic vulnerabilities,
• a history of macroeconomic instability,
• low institutional credibility,
• sizable capital flows,
• corruption,
• large informal sectors.

The emergence of crypto assets can accelerate currency and asset substitution, facilitate informal and even illicit transactions, and undermine tax collections and the implementation of exchange and capital control restrictions.

As a response to these opportunities and concerns, central banks are contemplating the issuance of their own CBDCs. The IMF states that “a CBDC could help central banks to take advantage of technological innovations underpinning the development of crypto assets while continuing to provide a safe means of payment and secure store of value that also serves as a common (and stable) unit of account.”

Referencing a paper from the Bank for International Settlements (BIS), the IMF adds that if a Latin American central bank were to introduce a CBDC, it should consider three overall principles in its design, including: i) a central bank should not compromise monetary or financial stability by issuing a CBDC; (ii) a CBDC would need to coexist with and complement existing forms of money; and iii) a CBDC should promote innovation and efficiency.

Latin American financial services and fintech are embracing blockchain optimisation

Magnani observes that many Latin American fintechs which already offered traditional payments/banking services are currently offering crypto, or planning to do so in the near future. “Even traditional banks are currently involved with blockchain solutions. This opens a whole new frontier of possibilities to these companies, such as crypto investing and trading, staking, yield farming, and other DeFi services.”

One of the most impressive things related to crypto, Magnani believes, is the rapid increase of users when companies start to offer crypto in their portfolios: “As crypto is not regulated in most countries, there are fewer requirements for it to be available to customers, when compared to stocks and other securities. Crypto is in such demand in Latin America that most financial institutions will have a hard time ignoring it.”

Notwithstanding this observation, a recent paper published by Ripple indicates that merchants across the Latin American region will be slower to adopt crypto payments compared to merchants in other regions. This is despite the dramatic surge in interest and uptake by retail crypto users. The paper which was conducted in partnership with the Faster Payments Council also found that this widespread retail adoption of digital currencies will solidify in three years’ time. As seen in the graphic below, Latin America sits behind other regions such as Europe, Asia Pacific and the Middle East.

Gabriel Siler, data director in BBVA Mexico: Given the lack of access to financial services for large segments of Latin American populations, Siler notes that evidently, there is an opportunity for companies that use or develop blockchain technology to offer new payment options for people who don't have traditional banking services.

“Blockchain technology could potentially provide a safer and more secure way for people to make transactions vs cash exchange. But this is not as straightforward as it sounds.”

Siler continues that in order for blockchain technology to present a viable alternative for transactions, there must be strict regulations in place to ensure that blockchain-based payment solutions are safe and secure. “Additionally, people and businesses need to be educated and aware of the benefits of using blockchain technology for payments. By doing this, more and more people in Latin America may be encouraged to adopt digital payment and potentially gain access to financial services that they previously couldn't use.

Why Latin America will be a hub for blockchain investment

LAVCA’s 2022 analysis of trends in tech across Latin America found that venture capital (VC) investment in blockchain/crypto firms reached $653 million in 2021, up from $68 million in 2020, which was in keeping with rising consumer interest for digital assets and Decentralised Finance (DeFi). Investment capital was concentrated in consumer-facing asset exchanges and retail trading platforms.

In a follow up report for 2023, LAVCA found that while overall VC investment was down compared to 2021, fintech continues to dominate the region as the sector attracting the most investment. As seen in the graph below, fintech captured 43% of all VC dollars during 2022, an increase from 39% in 2021 showing growing appetite for technology targeting the transformation of financial services.

Referring to his earlier comments around blockchain technology presenting an attractive alternative for transactions, Siler explains that the combination of these incredibly practical, highly demanded features of crypto are what makes Latin America an attractive destination for blockchain investors. These investors “see the potential for growth and opportunity in this emerging market. As an example, BBVA México launched the first Investment Fund specialized in Blockchain and Digital Economy."

Magnani argues that there are several reasons why the crypto ecosystem in Latin America is attractive for both investors and companies:

• Hedge against inflation: local currency is subjected to high devaluation, according to historical data. Nothing suggests it is going to change in the future and locals are very much aware of that; that's why BTC and stablecoin use is so popular in the region.
• Unbanked population: despite this being improved with the arrival of fintechs, millions of people do not have access to the traditional banking system, which mainly affects the poorer levels of society. With crypto, these people can now send and receive payments and even start businesses without the need for support from traditional banks.
• Remittances: millions of people - especially in Central America - depend on money sent by their relatives who live in the US and Europe. This makes for the majority of income in some countries. With crypto, one can easily send money abroad and avoid taxes and fees.
• Opportunities: different from the US, where almost every single problem has a solution and a company to provide it, there's a lot of room for new companies to offer products and services in the region. Brazil has a solid payments system, but neighbouring countries sometimes do not - and that's where investors and venture capital comes in.

Latin America presents a fertile ground for blockchain adoption and cryptorelated advancements. The region's high inflation rates, distrust in governments, and limited access to traditional banking services drive the growing adoption of cryptocurrencies.

Latin America’s crypto industry has witnessed remarkable growth, with increased usage and significant inflows of crypto, and blockchain technology offers opportunities to address financial inclusion challenges and facilitate secure transactions. CBDCs could help governments and central banks to leverage technological innovations while ensuring monetary and financial stability.

Despite slower adoption by merchants, Latin America’s financial services and fintech sectors are embracing blockchain optimisation. The region's attractiveness for blockchain investors lies in the potential for growth, the opportunity to serve the unbanked population, and the demand for crypto as a hedge against inflation.