Cryptocurrencies are reaching an inflection point in Latin American payments, as multiple players – from global payment networks to central banks – embrace digital money as a lower-cost way of transferring funds. And while clear regulation would further boost the sector, the financial industry is not waiting for the blessing of supervisors to experiment with the technology.
Digital money is expected to offer multiple advantages for e-commerce and physical commerce, and market players are preparing for growth that they say could boom in the next two years.
“We are realizing that people are seeing cryptocurrencies as real money. We are already over that line of collective uncertainty about their use,” says Erick Padilla, COO of Dapp Payments, a Mexican fintech that integrates payments among networks and wallets.
“It’s a matter of a few years – one or two – before we see a crypto-enabled payment method becoming more common,” he adds.
While cryptocurrencies are gaining trust among users and are being adopted in their portfolios by large companies and investors, including Tesla and Morgan Stanley, the issue of regulation is still an obstacle to their growth, in the region and the world.
While virtual currencies are generally decentralized and do not depend on government tax regulations, as they become used as a method of payment they will require regulatory endorsement.
“In Latin America we have extremely relevant players in the blockchain and crypto spectrum that are asking for regulation. They are not against it,” says Padilla.
According to the crypto fintechs iupana has spoken with, regulators and the industry should move at the same pace and agree to develop an agile regulatory framework to provide the market with the certainty it needs, and without detracting from its dynamics.
“The need for regulation is important, but we also need to understand that it is the users who decide the demand and supply, and that with the blockchain system the transparency and storage of the currency will be guaranteed,” says Filomena Ruffa, general manager of Crypto.com for Latin America, warning that the ecosystem wants to avoid the regulatory “inflexibility” that banks have experienced to date.
Although Ruffa predicts a promising future for crypto-based payments, the success of cryptocurrencies in this vertical will depend on the economic context of each country, particularly the stability of their currencies.
“In some countries, it is possible that Bitcoin, for example, will be used to make purchases; however, in others, it is possible that the cryptocurrency will remain as an investment tool,” explains Ruffa.
Trust: the key to crypto payments growth
As well as progressive regulation, experts list other aspects that could make cryptocurrencies a common method of payment.
For Mastercard, two important factors for cryptocurrencies to become a regular shopping tool will be consumer protection and currency stability, especially digital currencies issued by central banks, also known as CBDCs (Central Bank Digital Currencies), and stablecoins issued by the industry.
“This is essential, as consumer and merchant trust is a key factor in the incorporation of innovative payment methods,” explains Walter Pimenta, senior VP of product and innovation, Mastercard LAC.
“It is important to guarantee [the consumer] protection and security: a defined value, guaranteed payment and also the security of their personal data, to protect them from possible theft or fraud. A process similar to the one we experienced years ago with the first card payments,” he adds.
InBestGo, a Guatemalan fintech that supports blockchain, argues that another key factor for mass adoption is association with strategic partners. This provides greater clarity and security to the transactions.
In this regard, InBestGo has partnered with Banco Industrial and Interbanco, large Guatemalan institutions, to facilitate the dissemination and adaptation of ABRA, a Canadian cryptocurrency app.
“We work closely with two large banking partners in Guatemala in the [user] approval process. They have a compliance system where people have to be approved before opening an account or making a transaction. All of that gives security to the end user,” says David Aw, founder and CEO of the fintech.
Education is also key for Bitso, a cryptocurrency platform with operations in Brazil, Argentina and Mexico. According to the fintech, there is still a long way to go in terms of information on this topic.
“It is our responsibility to make the crypto world more accessible, increase the curiosity of skeptics and continue to educate about this technology,” says Regina Puca, senior public policy and regulatory analyst at Bitso Mexico.
“The more progress we make on this point, the closer we will be to making cryptocurrency a universal method of payment,” she adds.
So while e-commerce is a natural channel for crypto payments to expand in, experts say brick-and-mortar shops are also adopting digital currency payments.
“We thought it would be massive in digital commerce, but it wasn’t so much […] The local demand has been more in affiliated establishments because businesses were pushing it that way, offering benefits if they pay with crypto,” explains Aw regarding the use of the ABRA wallet, which facilitates payments with more than 100 cryptocurrencies in restaurants, bars, retailers and 60 other affiliated businesses in Guatemala.
Crypto-based payments present lower commissions for each transaction, data protection for the user, reduced fraud and fraud mitigation costs for the business, and fast transactions, he says.
ABRA’s technology converts the cryptocurrency so that the seller receives quetzales or dollars, Aw explains.
“[Merchants] don’t know that they are using cryptocurrency. In the near future, people are going to use blockchain technology without knowing it’s there,” the director adds.
At Dapp, e-commerce is a clear route for growth – but the fintech is deploying and testing systems to be able to transact with cryptos in physical points of sale.
“We can think of e-commerce solutions that range from real-time payments, no matter the currency, and with lower commissions [than cards], greater security, and the elimination of chargebacks,” says Padilla.
Bitso, through its Bitso Transfer feature, also facilitates commission-free digital payments with cryptocurrencies. This solution is already enabled in physical businesses and websites in Mexico.
“At the moment, our base of establishments is focused on entrepreneurs and small businesses, which find it very useful to receive digital payments, but without the need to pay commissions, which often affects them directly,” says Puca.
Stablecoins, facilitating crypto growth
Given the volatility of cryptocurrencies, such as Bitcoin, specialists point to the use of stablecoins – digital currencies linked to fiat money or other assets – as key for growth.
“Stablecoins represent a great opportunity for the entire industry, since they have the advantages of a traditional asset. Their value is not volatile and they also have all the advantages of a cryptocurrency, since they are 100% digital, without borders and intermediaries,” explains Puca, of Bitso.
Padilla agrees that the simultaneous work with stablecoins and other cryptos is the missing link to get the trading machine going.
“Being able to have this connection between traditional money and the new money, which is crypto, and stablecoins, is going to be a key factor for any new player that wants to enable crypto payments to any entity or commerce,” he says.
This is also how Mastercard sees it, mentioning that stable and regulated digital currencies will be, in the near future, one more option in its payment network; something they expect to enable this year.
“We are evaluating which currencies we will accept, but we estimate that CBDCs and stable cryptocurrencies are the strongest candidates, because they are the most useful and the most secure for our customers,” says Pimenta.
In 2020, the payment processor enabled a sandbox for central banks to connect and evaluate use scenarios for their CBDCs. And last month Mastercard launched the “Bahamas Sand Dollar” prepaid card, allowing residents of the Caribbean island to convert the digital currency issued by its Central Bank into traditional Bahamian dollars to pay for goods and services anywhere in the world.
“The payments industry follows the pulse of market needs and this is a principle that also applies to virtual currencies: once the regulatory challenges are overcome, their incorporation as a means of payment will depend on the acceptance and demand of our customers,” says Pimenta.