Law on Crypto approved in third debate defining aspects and operations of Cryptocurrency Exchange Platforms (CEP).

By: Erick Rincón Cárdenas.

The sixth committee of the Senate of the Republic, after the approval in the third debate, presented Law number 267 of 2022 "recognizing Cryptocurrency Exchange Platforms (CEP) that offer exchange services for these virtual assets, creating a regulatory framework, and dictating other provisions." Currently, the project is undergoing the legislative process for its final approval.

This legislative progress is the result of the industry's efforts, which have led to the possibility of having a law that allows users to have guarantees and identify a single secure and simple system for cryptocurrencies.

The objective of this bill is to establish a special legal framework to give legal recognition to cryptocurrency exchange platforms, also known as exchanges. This involves establishing regulatory conditions that enable them to provide safe and legal intermediary services, protecting the rights of users who transact with these intangible virtual assets. It is important to note that this initiative does not aim to regulate the market or the technology itself, nor does it grant official currency status to cryptocurrencies. Its focus is limited to regulating a commercial reality that arises as a result of advances in development, innovation, and technology, while also providing a secure and transparent environment for individuals who choose to exchange virtual assets through exchange platforms. It is interesting to note the shift in the definition of the object and scope of regulation that the bill underwent, as it establishes virtual asset platforms as the regulatory axis, significantly expanding the spectrum of regulation to include categories such as wallets, transnational asset platforms, and any other species that falls within the genre of virtual asset platforms.

The legal framework encompasses the following constitutional, regulatory, and state entity provisions:

-???????Constitutional Articles: 1, 2, 4, 6, 13, 14, 15, 16, 20, 25, 26, 27, 29, 38, 58, 61, 70, 71, 78, 93, 150, 189, 209, 333, 334, 335.

-???????Resolution 314 of 2021, dated December 15, 2021, "Imposing the reporting obligation to the UIAF on companies or natural persons providing virtual asset services in Colombia."

-???????The Central Bank of Colombia has reaffirmed its position on the Draft Law by issuing additional comments on the text of the report for the second debate and the modifications made during the plenary session. The Bank emphasizes the need for comprehensive and robust legislation that regulates the cryptocurrency ecosystem due to its impact on both the macroeconomic and microeconomic levels, as well as its rapid global growth. It also states that incomplete regulation can generate a misconception of state endorsement of cryptocurrencies and provide a false sense of security to users, investors, and the market in general.

The Bank considers that the text approved in the plenary session has two fundamental deficiencies. On the one hand, it only regulates a single type of cryptocurrency service provider, and on the other hand, it primarily focuses on the technology itself without considering its effects on the markets.

Regarding the specific provisions of the Draft Law, the Bank highlights the importance of incorporating definitions and recommendations from multilateral entities such as the FATF, BIS, and IMF. It recommends adopting a technical definition of digital assets that ensures technological neutrality. As a critical observation, following a recommendation in that regard, some voices, including ours, warn about the risks of establishing a rigid definition that could become obsolete and no longer applicable with technological advancements and changes in the ecosystem. Therefore, it is crucial to exercise careful judgment in terms of regulatory technique to avoid such situations, such as establishing a regulatory framework based on categories rather than fixed definitions with the highlighted risks. Additionally, it emphasizes the need for the legislator to determine the entity responsible for the inspection, supervision, and control of Virtual Asset Service Providers (VASPs), also known as exchanges. Regarding the powers of this entity, the Bank suggests aligning the regulatory objectives with consumer protection, anti-money laundering measures, risk management, and other relevant aspects.

-???????The Ministry of Finance and Public Credit explains that the proposed Law is not sufficiently comprehensive as it exclusively regulates digital asset service platforms and focuses on operational and technological aspects. Therefore, it emphasizes that the lack of comprehensive and suitable regulation tailored to the needs of the ecosystem could lead to situations such as the bankruptcy of FTX. Similarly, the Ministry points out that regulatory initiatives related to this type of asset should be based on a thorough analysis of the scope and impact of the cryptocurrency or digital asset industry, identifying in detail the advantages and risks that the incorporation of these technologies entails for the national economy.

In its observations and recommendations, the Ministry highlights the importance of adjusting the definitions contained in the draft Law and incorporating the guidelines established by organizations such as FATF, OECD, FSB, and BIS regarding virtual assets and virtual asset service providers. Additionally, the Ministry emphasizes the relevance of incorporating guidelines on anti-money laundering and counter-terrorism financing established by FATF.

-???????The Banking and Financial Entities Association of Colombia (ASOBANCARIA) highlights that this project represents an opportunity to regulate digital asset service platforms by creating a regulatory framework that provides investors with the security to operate on a platform that meets quality standards. It also emphasizes the importance of this economic reality, as transactions in these assets amount to more than 70,000 million pesos per month, according to Colombia Fintech data. Regarding the recommendations presented by ASOBANCARIA, the need to adjust the proposed definition of crypto assets and designate a supervisory entity is emphasized. The importance of establishing mechanisms to protect consumers regarding liquidity, taking into account the case of FTX, is also highlighted. It further emphasizes the importance of considering the lessons learned in the framework of the Financial Superintendence of Colombia's (SFC) Sandbox regarding alliances between financial institutions and exchanges. Additionally, the work carried out by the Central Bank of Colombia regarding the necessary criteria for the issuance of a Central Bank Digital Currency (CBDC) is mentioned.

-???????The justification for the proposed bill lies in establishing a regulatory framework in Colombia to define and regulate digital asset exchange services. This aims to address a legal gap surrounding these transactions, promote markets arising from the fourth industrial revolution, and prevent the misuse of these digital transactions and the financing of illicit activities. The fourth industrial revolution has brought a structural changes in the global economy, driving advancements in technological development and innovation that have given rise to new digital means for the exchange of assets, goods, and services. In this context, virtual assets have emerged as digital representations of value that can be traded or transferred digitally and used for payments or investments. The Central Bank of Colombia has emphasized in its Technical Document on Cryptoassets that the global economy is adapting to new computational innovations that can transform the way goods, services, and assets are exchanged in the economy. Among these innovations are cryptocurrencies like Bitcoin, Ethereum, among others, operated by private agents, which enable the transfer of digital assets and information through a public ledger of shared and synchronized transactions among participants in the scheme, without the need for centralized systems of issuance, registration, clearing, and settlement. The Central Bank has stated that digital assets have the capacity to fulfill functions as a medium of payment, store of value, and unit of account but lack the attributes of legal tender and cannot be considered as money. Within these virtual assets, there are cryptoassets, whose supply, demand, and associated means of payment have undergone structural changes due to the development of new technologies. The Central Bank uses the concept of cryptoasset to refer to those assets that are held and transferred in digital systems that utilize advanced cryptographic technology to ensure the integrity of the system.

-???????The considerations mentioned by the National Tax and Customs Directorate (DIAN) adhere to the provisions set forth by the Financial Action Task Force (FATF) in its document on "Virtual Currencies: Key Definitions and Potential ML/TF Risks" and define virtual currencies as digital representations of value that can be exchanged digitally and function as a medium of exchange, unit of account, and store of value but do not have legal tender in any jurisdiction. In terms of crypto asset adoption in Colombia, the country holds a relevant position both regionally and globally in terms of crypto asset-related operations. According to the Global Crypto Adoption Index developed by Chainalysis, Colombia ranked 15th worldwide in crypto asset adoption in 2022.

Colombia has indeed experienced significant growth in cryptocurrency usage. The country has witnessed an increase in the number of users and a rapid recovery of Bitcoin and other cryptocurrencies. In the first half of 2023, Bitcoin has seen an 81% increase in value, outperforming traditional investment options such as gold, silver, NASDAQ, and bonds. This growth has propelled cryptocurrency adoption in Colombia. In terms of peer-to-peer (P2P) transactions, Colombia ranks tenth globally in terms of the value received for services. The country has maintained a prominent trend in cryptocurrency adoption, ranking 11th in the Global Crypto Adoption Index for 2021. Furthermore, according to Statista, in 2020, Colombia ranked seventh in terms of transaction volume.

In addition to the above, it is worth mentioning the prominent role played by stablecoins in the current regulatory initiative. In a context characterized by the inability to save in US dollar-denominated accounts and a lack of alternative safe havens to protect against purchasing power loss, USDC and other stablecoins have emerged, setting transactional records.

Regarding cryptocurrency usage, the majority of people see them as an investment (82%), and a significant percentage seeks protection against inflationary effects (23%). Colombia ranks fourth in Latin America, with an estimated $40 billion between September 2021 and September 2022, according to Chainalysis. These data reflect that Colombia is following global cryptocurrency market trends, showing an increase in adoption despite recent ecosystem crises. Emerging markets like Colombia have been driving cryptocurrency adoption worldwide, particularly in contexts with high volatility of national currencies. These factors highlight the importance of establishing clear regulations and standards to protect Colombian consumers and promote orderly growth of the digital economy in the country.

The proposed bill allows for the strengthening of standards and regulatory compliance of approved initiatives, along with the validation and management of the onboarding process and audits conducted by participating supervised entities to enable operations, demonstrating that the industry complies with the voluntarily implemented requirements. However, it is important to note that currently, cryptocurrencies are not prohibited in Colombia. Consequently, it can be said that the exchange of cryptocurrencies is a legal activity, and citizens can invest, trade, and transact with these types of assets, of course, assuming the corresponding risks. Each individual or legal entity must sufficiently inform themselves beforehand and act diligently when investing their resources. Among other risks, it should be noted that cryptocurrency operations are not backed by central banks, they can be volatile, it is an unregulated market, they can be used as instruments for money laundering, financing of terrorism, and other criminal activities, or they can constitute illegal collection of public funds.

The various international financial authorities classify cryptocurrencies as a subset of digital currencies, which are defined as digital representations that seek to be a peer-to-peer alternative to government-issued currencies. They do not depend on central banks, are backed by cryptography, and can be converted into legal tender. Cryptoassets go beyond the financial system and have applications in smart contracts, justice, dispute resolution, peer-to-peer networks, energy, art, retail, real estate, among others. Regarding the proposed bill and in line with international regulatory experience, the following is mentioned:

-???????The recommendations of the Financial Action Task Force (FATF), of which Colombia is an integral part through GafiLat, have established several recommendations in this regard:

I.????????????????The risks of money laundering and terrorist financing that the digital asset sector faces should be understood.

II.????????????????Licenses should be established for providers of virtual asset services.

III.??????????????The digital asset sector should be supervised in the same way as other institutions.

-???????Last February 2023, the International Monetary Fund (IMF) mentioned that digital assets have been present in the economy for over a decade. However, they have recently started to have a more "traditional" presence due to their use as investments, potential payment instruments, and their increased interaction with the financial system. This has generated a greater interest from authorities in regulating these assets. The interest in regulating digital assets has been driven by various factors:

I. Scandals and crises related to providers of digital asset services, such as the case of FTX, have raised concerns and the need to establish regulatory measures to protect users and prevent similar situations in the future.

II. The current banking crisis in the United States has also contributed to this regulatory trend. Problems in the banking system have led to increased scrutiny of financial activities in general, including digital assets. Authorities aim to avoid systemic risks and ensure financial stability in an environment where digital assets play an increasingly important role.

-???????The Global Crypto Regulation Report 2023 by PWC (PricewaterhouseCoopers) highlights global trends and regulatory developments regarding crypto assets, emphasizing the need to establish risk management criteria. It also notes that regulators recognize the importance of setting criteria to ensure robust consumer protection, especially due to recent crises caused by certain actors in the crypto asset ecosystem.

-???????International cooperation is emphasized as crucial in the realm of crypto asset regulation. The cross-border nature of these technologies and assets requires collaboration between countries to effectively address regulatory challenges.

-???????Regarding the approval of the Markets in Crypto-Assets Regulation (MiCA) in the European Union on April 20, 2023, this regulation aims to protect consumers, ensure market integrity and financial stability, and overcome the fragmentation of national regulations. The traceability of crypto asset transfers under the MiCA Regulation seeks to guarantee the traceability of transfers of crypto assets such as Bitcoin and electronic money tokens. A "travel rule" will be implemented, covering crypto asset transfers similar to traditional finance, where information about the origin of the asset and its beneficiary must be present in the transaction and stored both at the origin and destination of the transfer.

-???????The approval of Law 14,478 in Brazil on December 21, 2022, establishes guidelines for the provision of virtual asset services and regulates the providers of such services.

-????????The New Fintech Law 21521 of December 22, 2022 in Chile, aims to promote competition and financial inclusion through innovation and technology in the provision of financial services, establishing clear rules for the operation of businesses with digital assets in the country.

These regulatory developments reflect the growing attention and efforts by governments and regulators to address the challenges and risks associated with crypto assets while also seeking to foster innovation and protect consumers in this field. This regulatory progress would complement the existing regulatory framework applied to cryptocurrencies in the country, which currently includes legal definitions related to taxation and the prevention of money laundering and the financing of terrorism.

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