Crypto Adoption Around the World: Colombia

The State of Crypto Adoption in Colombia

Source: Chainalysis

As traditional financial systems fail to serve the underbanked adequately, more Colombians are turning to digital currencies to achieve financial freedom. This trend is not surprising, considering that approximately 6.1% of Colombians are estimated to own some form of cryptocurrency. 

Interestingly, Colombia also ranks as one of the highest countries in the world for Peer-to-Peer (P2P) crypto trading. This is partly due to strict tax policies on crypto transactions and unclear regulations surrounding exchanges and crypto businesses. 

Colombia is also home to the second-highest number of Bitcoin ATMs in Latin America, with most of them concentrated in Bogotá, the capital. As of 2024, there are nearly 40 cryptocurrency ATMs spread across the country. These machines work differently from regular ATMs, connecting users to a Bitcoin wallet or exchange rather than a bank account. 

More local businesses in Colombia are starting to accept crypto as payment, reflecting the country's growing interest in digital currencies. The average revenue per user in Colombia’s cryptocurrency market is projected to be around $64.5 in 2024, showing a steady increase in engagement. 

Although cryptocurrency adoption among businesses and institutions in Colombia is still in its early stages, interest is steadily growing. A growing number of companies are starting to accept cryptocurrency as a form of payment.

While full regulatory oversight has yet to be established, recent developments have sparked optimism. In October 2023, Finance Minister Ricardo Bonilla introduced a bill that aims to regulate the use of cryptocurrencies, along with plans to launch a Central Bank Digital Currency (CBDC). 

This bill is expected to provide clearer legal guidelines for individuals and organizations operating in the crypto space. Additionally, it will help encourage innovation and create a more supportive environment for entrepreneurs and startups.

Government and Regulatory Stance

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Colombia’s stance on cryptocurrency has been evolving, but the regulatory framework remains a work in progress. 

While the government has not imposed a ban on digital currencies, it doesn't recognize it as legal tender. The country also lacks comprehensive laws that provide clear guidelines for their use, taxation, and integration into the financial system.  

Below is an overview of the current government policies, regulations, and key initiatives:

Current Legal Framework

One of the key aspects of cryptocurrency regulation in Colombia is that cryptocurrencies are not recognized as legal tender. The only official currency recognized for unlimited payments is the Colombian peso, which is issued by the Central Bank (Banco de la República) in the form of bills and coins. 

Cryptocurrencies, or crypto-assets, don't meet the legal definition of money and aren't acknowledged as currency by any international bodies or central banks. Due to this, transactions involving cryptocurrencies are treated differently from those using official currency. Additionally, neither the Central Bank nor the Financial Superintendency (SFC) regulates or oversees them.

The Central Bank has clarified that under Colombian law, crypto-assets are not foreign currency and cannot be used to settle debts under the exchange rate regime. These digital assets also aren’t considered securities, which is why they’re excluded from the Colombian Stock Market. 

As a result, financial institutions under government supervision are prohibited from investing in or managing crypto assets. This restriction has limited the involvement of banks and other financial institutions in cryptocurrency activities.

While the Central Bank conceptually defines crypto-assets as digital units that can be used for payments, storing value, or as a unit of account, there’s no official legal definition for these assets. The government hasn't assigned any regulatory authority over them either. 

Similarly, the Financial Superintendency (SFC) has stated that crypto-assets don’t meet the criteria for securities under Law 964 of 2005. Consequently, this means they cannot be part of the securities market infrastructure. 

Consequently, regulated financial institutions are not allowed to provide advisory services or handle cryptocurrency transactions. Attempts to pass cryptocurrency legislation in Congress have also stalled, leaving Colombia without any active laws focused on crypto regulation.

This restrictive legal environment has made it challenging for cryptocurrency businesses to operate in the country. Since 2014, authorities have banned financial institutions from investing in or supporting cryptocurrency-related firms. Many banks have also closed accounts linked to crypto businesses, citing risks outlined by the SFC in its 2018 reports. 

AML and Anti-Fraud Regulations

The Colombian government is highly focused on preventing money laundering and fraud, which has influenced its cautious stance on cryptocurrency. Cryptocurrencies, due to their pseudonymous nature, are often seen as potential tools for illicit activities. In response, Colombian regulators have implemented strict anti-money laundering (AML) measures that apply to crypto exchanges and other digital asset platforms operating in the country. 

As outlined in subsection 4.2.6 of the AML/CFT circular from December 2020,  digital asset companies are subject to the Comprehensive Risk Management and Self-Control Regime (LA/FT/FPADM). 

They must undertake several processes, such as:

• Enhanced due diligence,
• Flagging unusual and suspicious activities,
• Training staff on updated regulations,
• Submitting KYC/KYT reports to the UIF, among others.

Colombia is also actively participating in regional discussions on the regulation of digital assets. The country is also part of The Financial Action Task Force of Latin America (GAFILAT). This intergovernmental organization is aimed at combating money laundering and financing terrorism. 

Through its membership in GAFILAT, Colombia is working toward harmonizing its cryptocurrency regulations with international standards.

Sandbox Program

Colombia has made notable strides in trying to regulate the crypto market, with its most recognized initiative being the regulatory "sandbox." It was launched by the Financial Superintendency (SFC) in 2020 and this pilot program aimed to pair banks with cryptocurrency exchanges to provide regulated services. 

However, its effectiveness was limited due to the country's high rate of unbanked citizens, resulting in low participation from the general public. The sandbox allowed crypto businesses to operate within a controlled legal environment while the SFC assessed the implications of digital assets. 

Although the program concluded in 2023, it played a crucial role in shaping a more structured regulatory framework. This initiative enabled the SFC to create guidelines that promote innovation while ensuring compliance and security in the market.

Ultimately, the sandbox reflects Colombia’s commitment to fostering a safe and transparent environment for cryptocurrency. It has laid the groundwork for more comprehensive regulations, which are anticipated to be established by 2025.

Taxation of Crypto in Colombia

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Colombia is steadily developing its approach to regulating cryptocurrencies, even though no specific legal framework has been finalized.  In the absence of clear regulations, cryptocurrencies are not considered legal currency for tax purposes. 

This is because they lack backing from any government authority. Instead, crypto-assets are viewed as intangible assets, and authorities have provided guidelines for their taxation.

Colombia’s tax system includes several taxes that could impact crypto transactions. Income tax applies to any profits from selling crypto or earning staking rewards, while VAT may be triggered by crypto-related services. There’s also a wealth tax for individuals with large net assets, which includes crypto holdings. 

While simply holding crypto isn’t taxable, any income earned from it, such as interest or staking rewards, must be declared as income. When it comes to reporting, crypto assets should be valued at their market price either at the time of a transaction or at the end of the fiscal year. 

Residents holding crypto must include these assets in their annual declarations as either intangible investments or inventory, depending on how they are used. Though Colombia is still working on clearer regulations, the current approach requires taxpayers to treat crypto-assets as intangible assets. 

Key Drivers of Crypto Adoption in Colombia

Several factors have positioned Colombia as one of the more active players in Latin America's cryptocurrency space. Some of the factors driving crypto adoption in Colombia include: 

Regulatory Framework and Government Initiatives

Colombia has taken steps toward formalizing crypto activities by establishing a regulatory sandbox in 2021. The Financial Superintendence of Colombia (SFC) introduced this initiative to allow crypto exchanges to operate in a controlled and regulated environment. 

This initiative has helped increase public trust and create a safer landscape for cryptocurrency transactions.  

Banking Sector Involvement

One of Colombia’s largest banks, Bancolombia, has launched new platforms for crypto trading, such as Wenia, to provide safe and accessible cryptocurrency exchange services. 

The involvement of mainstream financial institutions is a significant boost for crypto adoption. Their involvement signals confidence in the future of crypto and provides secure channels for consumers to explore digital currencies.

Remittances and Financial Inclusion

Cryptocurrencies play a crucial role in cross-border transactions. With many Colombians living abroad, the ease of transferring funds via cryptocurrencies has made them an attractive option for remittances. 

Cryptocurrencies also contribute to financial inclusion by providing access to digital financial services for the unbanked populations.

Response to Economic Challenges

Economic uncertainties, inflation, and a volatile national currency have driven Colombians to explore alternatives such as Bitcoin and stablecoins to preserve the value of their assets. 

Like other Latin American countries, people in Colombia turn to cryptocurrencies as a hedge against economic instability.

Regional Growth in Crypto Use

Colombia's adoption of cryptocurrencies is also part of a broader trend in Latin America. Here, countries like Argentina, Venezuela, and Brazil have embraced crypto for remittances, inflation hedging, and even government-related initiatives. 

Latin America has become one of the fastest-growing regions for crypto, reflecting a regional shift towards alternative financial solutions.

Challenges Facing Crypto Adoption in Colombia

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Despite the growing interest in cryptocurrencies, several challenges hinder further growth. Let’s look at some of these challenges in detail:

Regulatory Uncertainty

One of the most pressing challenges facing crypto adoption in Colombia is the lack of clear regulatory guidelines. While the Colombian government has not outrightly banned cryptocurrencies, the regulatory environment remains vague. 

This uncertainty discourages wider adoption, especially among more risk-averse individuals and institutions. Likewise, this lack of clarity leaves users vulnerable to potential legal risks. Also, businesses struggle to operate without knowing what restrictions or regulations they may face in the future.

Volatility of Cryptocurrencies

Cryptocurrency is known to be notoriously volatile, which poses a significant challenge to its adoption as a reliable form of payment or investment. Bitcoin, for instance, can fluctuate wildly within a short period. Consequently, it makes it difficult for businesses and individuals to use it for everyday transactions. 

The fear of losing money due to sudden price drops keeps many Colombians away from the crypto market. This volatility also discourages the use of cryptocurrencies for savings or long-term investments. 

Security Concerns and Scams

Security is a significant concern in Colombia’s crypto landscape. As the popularity of digital currencies grows, so does the number of scams and hacking incidents. From phishing attacks to Ponzi schemes, many Colombians have fallen victim to fraudulent schemes promising high returns on crypto investments.

The decentralized nature of cryptocurrencies also means that transactions are irreversible. Thus, there is no governing body to offer refunds or dispute resolutions in the case of fraud. This has led to many losing trust in crypto platforms, especially those with no established reputation or that operate without proper security protocols.

Banking Restrictions 

Although Colombia has not outright banned cryptocurrency use, many local banks are hesitant to work with crypto-related businesses. Some banks refuse to process transactions involving cryptocurrencies or provide services to exchanges. 

This banking resistance creates difficulties for crypto startups and individuals wishing to use their cryptocurrency for everyday transactions. Without proper support from the banking sector, the path to mainstream adoption becomes much harder. 

Future Prospects for Crypto Adoption in Colombia

Colombia is set to become a significant player in Latin America's cryptocurrency ecosystem due to its increasing adoption and growing interest from businesses. 

Here are some prospects for crypto adoption in Colombia:

Potential Legal Reforms

The Colombian government has already shown an interest in regulating crypto through the Financial Superintendence's regulatory sandbox. Through the Sandbox, the government saw how businesses operated within a controlled environment. In the future, Colombia may develop more comprehensive legal frameworks for cryptocurrency, offering greater clarity and security to users and investors. 

Likewise, as awareness of the benefits of cryptocurrencies increases, there is a growing push for clear legislation that addresses consumer protection, taxation, and anti-money laundering measures. If implemented, such reforms could provide a solid foundation for businesses and investors.

Growth of Blockchain Technology and Startups

Colombia has seen a surge in blockchain-based startups, crypto wallets, and projects, fueled by the active entrepreneurial scene. These companies develop innovative solutions across various sectors such as supply chain management, agriculture, and finance. Thus, they are likely to contribute to the overall adoption of cryptocurrencies. 

The growth of the blockchain industry could also lead to increased investment in research and development. Additionally, this could lead to greater collaboration between startups, government, and academic institutions, creating a conducive environment for crypto expansion.

Potential for Cross-Border Transactions

Colombia's geographical position and its extensive diaspora provide a unique opportunity for cryptocurrencies to facilitate cross-border transactions. 

With remittances playing a significant role in the Colombian economy, cryptocurrencies can offer a faster and more cost-effective solution compared to traditional methods.

Conclusion

The state of crypto adoption in Colombia is evolving rapidly, driven by several factors. However, the government does not recognize cryptocurrencies as legal tender or securities. This uncertainty makes it difficult for businesses and individuals to engage confidently with digital assets.

Despite this, the fintech sector is growing, and there is increasing curiosity about the use of crypto, particularly in areas like remittances and cross-border transactions. With the right balance of regulation, education, and innovation, Colombia may position itself as a significant player in the global crypto ecosystem.