Can Cryptocurrency Save Colombia From an Economic Downturn?

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The violence in Colombia associated with anti-government protests in April and May serves as a warning sign that the Colombian government might not have the power or authority to avoid a serious economic downturn – or worse, a debt crisis. This scenario is causing Colombians to reconsider how to manage their assets.

The country’s financial regulator, Superfinanciera, recently authorized a 12-month pilot program that will allow Colombians to operate cash-in and cash-out actions via Movvi and Bitpoint. Users of the platform will be able to exchange, transfer and operate using either Colombian Pesos or crypto.

How Colombia is accelerating crypto adoption in the country

The Chilean crypto exchange Buda.com reported that crypto trading volume in Colombia during the first quarter of 2021 surpassed the entire volume traded in 2020. Additionally, Chainalysis ranked Colombia at number 9 out of the 10 countries likely to adopt crypto.

Twenty-three percent of Colombia’s population remains unbanked, or outside the formal financial ecosystem. In the past, Colombian crypto-adoption has been led by migrants interested in digital currencies for efficiently transferring cash through non-traditional channels. With rising debt and an ever-increasing fiscal deficit, a paradigm shift is underway as more Colombians consider parking their assets into cryptocurrency spaces.

Colombia is a prime example of a country with a weak government where crypto adoption can be disruptive and revolutionary. Thus, Colombians may very likely view crypto as a hedge to traditional currency and its uncertainties. As socioeconomic fear drives interest in cryptocurrencies, those fears are also manifesting in the form of protests and even violent clashes between Colombian citizens and military forces.

Colombia, like other Latin American nations, was hit hard by Covid-19 and, with a limited cash transfer program in place, the government found it nearly impossible to provide relief when the pandemic hit.

The straw that broke the proverbial camel’s back? President Iván Duque’s support of tax reform.

Ingreso Solidario’s impact drove more Colombians to use crypto

Although Duque’s 2018 center-right populist platform campaign appeared fairly vanilla, Covid-19 forced him to do the unthinkable with the rollout of “Ingreso Solidario,” a government financial support program designed to help the country’s poorest population of three million people, which amounts to roughly 6% of the country’s total population. The issue involved how the government was going to pay for the proposed financial support.

The President’s tax proposal to cover the financial support program increased taxes by 1.5% – the exact opposite of his presidential campaign promise. Colombia’s worsening debt and fiscal deficit led to a drop in its S&P Global Ratings from BBB-minus to BB-plus, forcing Duque to withdraw the bill.

Which brings us back to why Colombia is a potentially fast-growing market for cryptocurrency adoption. The widespread protests and violence in Colombia are warning signs that the Colombian government might not possess the power or authority to stave off a serious economic downturn or debt crisis. Indeed, in May and June, the Colombian government couldn’t even keep the country’s most important Pacific-facing port at Buenaventura – through which 32% of Colombian exports (mainly coffee and sugar) passed last year – open. If the people have lost faith in the government, how soon till they lose faith in the currency?

As more Colombians use crypto, the government is creating rules and issuing crypto tax guidelines and anti-money-laundering regulations. Additionally, Colombia’s Superintendencia Financiera de Colombia recently launched a year-long experiment that allows nine firms to deposit and withdraw resources on behalf of crypto platforms. This is a clever and necessary move by the Colombian government, which may serve as a model for other nations as the trend toward cryptocurrency continues to grow. Whether it is enough, however, remains to be seen.

In this sense, Colombia is a microcosm of a much broader story about Latin America’s affinity for cryptocurrencies. A recent Visa survey found that 25% of credit card users in Latin America are eager to use cryptocurrencies. Stock market darling Mercado Libre is even letting customers buy real estate with Bitcoin. The difference is that in Colombia, crypto might be more than a trendy fad, as Colombians look for ways to protect their wealth in a deteriorating political environment.

Sune Hojgaard Sorensen, co-managing director & member of the board for The Strategic Funds, Sune brings 20 years of business and professional investment experience across asset classes, investor segments and geographical locations to his work with The Strategic Funds. Sune is the founder of an independent macro research company that provides distinct insights on global trends and related investment risks and opportunities. He is a partner with a US-based think tank focused on research and advice for leaders in both the public and private sectors.

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