The Current Status of Crypto Adoption in Ecuador
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Ecuador's stance on cryptocurrency is well-defined when compared to other countries in Latin America. The country employs a rigid regulatory framework while also exploring state-backed alternatives.
Ecuador's cryptocurrency regulation was developed by the Organic Monetary and Financial Code, which helps the government distinguish between the legality of trading in cryptocurrencies and the outright prohibition of their use as a means of payment.
This means any transaction related to cryptocurrencies is strictly blocked in the formal banking system. Ecuadorian financial entities cannot perform any type of transaction using cryptocurrencies, and the financial system has also taken severe measures regarding this prohibition.
It is illegal to distribute or make use of any currency that has not been issued and approved by the Central Bank of Ecuador.
In spite of the enactment of laws forbidding using such digital currencies as a means of payment, the buying and selling of these currencies is still permitted in Ecuador.
Most experts believe that the ban on the use of cryptocurrency in Ecuador is simply part of the policy of the authorities to keep the US dollar as the only currency. Years later, Ecuador’s cryptocurrency stance reflects the country's delicate balancing in handling the potential risks and ensuing disruptions brought about by virtual currency, and here's why.
In the year 2000, Ecuador adopted the U.S. dollar as its official currency, right after the country suffered from a severe period of economic instability that led to hyperinflation of its national currency.
While this financial movement fixed the currency and brought normality to the economy by keeping inflation in check, Ecuador has since then sought various means of updating its monetary system. One of which includes introducing a state-backed electronic money system.
In 2014, Ecuador embarked on a project to create and issue a state-controlled digital currency making it the first jurisdiction ever to engage in such. The Sistema de Dinero Electrónico or Electronic Money system was launched in Ecuador which enabled the citizens to pay their bills or keep the money in variable digital wallets that are accessible through mobile phones.
The e-money, which is also referred to as the mobile money service, and issued by the Central Bank of Ecuador was however fully backed by the US dollar reserves. This digital currency was intended to serve as an addition to the dollarized economy existing in the country.
The aim was to decrease the use of physical cash for transacting and increase the level of financial inclusion of the unbanked people in the economy.
Still, this innovation remained limited in scope due to the low uptake, embedded distrust, and inherent complications of adopting a new system alongside existing financial services. By early 2018, thanks to all the issues described, the electronic money initiative was being phased out, with the program discontinued.
The state-sponsored experiment with digital currency underlined both an interest of the Ecuadorian government to explore digital solutions and also the thorny nature of such undertakings in the context of dollarization.
While the Ecuadorian government forbade cryptocurrency from being used as legal tender, crypto trading has grown steadily, especially among tech-savvy and expatriate communities. Several Ecuadorians have increasingly seen cryptocurrencies not only as an alternative investment but also as a hedge against economic uncertainty.
Novel programs implemented by CARE Ecuador and Umoja Labs have demonstrated the potential of blockchain technology for solving real-world problems. With support from the Celo Foundation, CARE Ecuador is partnering with Umoja Labs to test how crypto-vouchers might help vulnerable groups, like Ecuadorian women and Venezuelan refugees, access critical health services.
The ambitious project is scaling up to reach out to as many as 10,000 Venezuelan and Colombian refugees, most of whom are women and children, with important services made possible through a decentralized financial system.
This shows the heightened capacity in which cryptocurrencies can be influential in humanitarian responses, particularly in places where economic instability and a lack of access to more traditional means of financial services are present.
Crypto Law in Ecuador
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Ecuador is one of the most restrictive countries regarding cryptocurrency adoption in Latin America. This attitude is spearheaded by the Organic Monetary and Financial Code, which governs the Financial, Monetary, and Credit Systems of Ecuador, as well as the insurance and securities markets.
The code operates under the authority of the Central Bank of Ecuador and other entities and clearly articulates that the use of cryptocurrencies not issued by the state is forbidden.
No currency other than that authorized by the Central Bank of Ecuador may be in circulation throughout the territory of Ecuador.
This legislation practically makes it illegal for any form of decentralized digital currency to be used as a medium of exchange, thereby barring all Ecuadorian nationals from participating in and trading in cryptocurrencies or using any digital assets for domestic transactions.
Ecuador's economic structure is highly regulated, and any transfers related to digital currencies via formal banking methods are prohibited. These limitations are imposed by the Superintendency of Banks (SB) in conjunction with the Central Bank of Ecuador (BCE) and ensure that cryptocurrencies do not disrupt the domestic payment system. This level of control demonstrates the fears of the government regarding the usage of digital currencies, which are beyond central control in the dollarized economy, where the U.S. dollar has been the official currency since the year 2000.
The Ecuador Fintech Law is another important pillar of Ecuadorian legislation for companies dealing with digital currency and financial technologies. Companies willing to enter the fintech market, including the cryptocurrency ones, need to go through the proper licensing procedures under the Ecuadorian legal system.
In Ecuador, the Foreign Investment Law provides some of the trademarks, and inevitably, all trademarked activities are subject to the fintech law, which requires an entity seeking a fintech license to be legally established.
Taxation of Cryptocurrency in Ecuador
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In Ecuador, it is illegal to accept cryptocurrencies such as Bitcoin or Ethereum as a means of payment for any products purchased. While digital currencies cannot be used as currency, it is legal to trade and even possess them in Ecuador. As a result, individuals who trade and invest in cryptocurrencies such as Bitcoin, etc. can be taxed.
In the case of individual or corporate entities running cryptocurrency businesses, they may be charged capital gains tax on the earnings made upon selling the digital currencies. Ecuador's banks charge capital gains taxes for changing one cryptocurrency to another.
For example, an individual buys a cryptocurrency with the expectation of selling it at a profit soon. The moment profit is realized, it is subjected to capital gains tax.
Ecuador currently taxes its citizens and foreigners mostly on their Ecuador-source income, which is defined as any income derived from activities executed in Ecuador, regardless of where the income is received or paid.
For instance, if an individual or entity engages in buying or selling crypto assets as a functioning business, then profits generated from such activity can be taxed accordingly.
Ecuador has a progressive personal income tax system, which means that the personal income tax rates range from 0% to 35%. This depends on the taxable income earned by the individual. Corporations, in contrast, are generally subject to a corporate income tax of 25 percent on their net income, although certain industries/activities may be subject to lower or higher rates or allowances.
Factors Driving Crypto Adoption in Ecuador
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Ecuador is experiencing more pronounced adoption and interest in Bitcoin and cryptocurrencies in recent times. This is due to a combination of the following reasons:
Economic Instability
Ecuador has a long history of economic instability that has plummeted many into poverty. Cryptocurrency may serve as an alternative to hedge themselves against any impending economic crash, preserving their financial resources.
Oversea Remittances
Like many Latin American countries, Ecuador also depends heavily on international remittances from their loved ones in the diaspora. Claiming these remittances via the traditional banking system is slow, costly, and difficult. With cryptocurrency payments, Ecuadorians who solely or partially depend on overseas remittances can have access to them easily.
Expanding Tech Industry
In Guayaquil, the growth of IT services and tech companies has been impressive. This recent advancement has been an eye-opener to young Bitcoin enthusiasts who are willing to invest. In addition, bigger companies in the field have also started using Bitcoin to pay for services.
Dollarization of Ecuador's Economy
The country adopted the US dollar as its legal tender due to the turmoil and bank collapses of 1999-2000. The dollarization of their economy rendered the Ecuadorian monetary policy dependent on the U.S. In addition, there are also issues concerning the supply and demand of paper and coin currency. This has resulted in the recent interest in crypto.
Challenges Facing Crypto Adoption in Ecuador
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Though there are ongoing developments in the cryptocurrency space in Ecuador that are expected to generate revenue of US$42.4 million by the end of 2024, the country has quite several impediments when it comes to the adoption of cryptocurrencies.
Ecuador's Stance on Cryptocurrency
In Ecuador, there is a very complex legal system that makes it difficult for people to embrace cryptocurrencies broadly. Most consumers and businesses face challenges incorporating digital currencies into their financial activities due to the banking prohibition on transactions related to cryptocurrency.
Failure of Past State Alternatives
There is also quite a healthy dose of public skepticism about digital currencies within Ecuador, partly as a result of the failure of their own electronic money initiative laid forth by the government. The majority of Ecuadorians regard digital currencies as speculative assets rather than anything that may replace traditional financial systems.
Poor Technological Advancement
While many urban centers experienced a rise in Bitcoin adoption, several geographical regions of Ecuador did not have the technological framework to support this mass adoption. Hence, there is a digital gap between the urban and rural areas in Ecuador.
Potential Benefits of Crypto Adoption in Ecuador
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As Ecuador struggles to find ways towards economic innovation, a wide array of potential benefits come with the adoption of cryptocurrencies. Below are the key potential benefits of wide crypto adoption in Ecuador:
Economic Stability
Ecuador is no stranger to political instability that often affects the economy, devaluing the currency. Adopting cryptocurrencies will help expand Ecuador's monetary system and also reduce the effects of inflation.
Attracting Investment
The use of cryptocurrencies will increase cross-border investment in the country and enable growth in the Fintech sector. Blockchain and cryptocurrency-based start-ups and even more established companies will be able to function within such an environment.
Promote Small and Medium-sized Enterprises
By adopting crypto payment systems, local enterprises can cater to a growing clientele of crypto-enthusiasts. This can enhance the purchasing power and also create new revenue streams, especially in the tourism sector, as many tourists prefer cryptocurrencies.
Improving the Financial Liberty of Consumers
Cryptocurrency transactions give users total control over financial processes. Irrespective of the country, they can send money without waiting for the bank's clearance, borrow from apps, and also buy any assets without consulting the central financial system.
Conclusion
Various trends indicate that there might be a shift in Ecuador's position regarding cryptocurrencies in the near future. Andrade Giovanny, one of the candidates in the recent political elections, has also advocated for creating a cryptocurrency that would circulate within the dollarized economy. This proposition is, however, contentious because of fears that it may destabilize the dollarization regime.
Ecuador's Central Bank has also shown willingness towards modern technologies, and there has been talk of developing a Central Bank Digital Currency (CBDC). While this may come with risks in terms of overreliance on decentralized cryptocurrencies, a government-issued digital currency will ease the need for the government to regulate the financial sector entirely.
