The concept of cryptocurrencies has made a significant global impact in recent years. Their constant evolution progresses in such ways that it continues to pose challenges for the countries that haven’t achieved, to a larger extent, comprehensive and adequate regulation to fully encompass and understand these entities in their entirety. This regulatory uncertainty is compounded by the fact that cryptocurrencies still do not inspire complete trust among users looking to enter the business or among investors, due to the risks they entail, like any new and technological product, cryptocurrencies must go through various stages within a regulatory and mass adoption process.
What are Cryptocurrencies?
Cryptocurrencies, also referred to as virtual or digital currencies, are payment instruments that use cryptographic encryption without a physical medium, based on a mathematical algorithm, with transactions conducted between users in a decentralized manner through blockchain technology.
Cryptocurrencies are a type of crypto asset. The European Union, through its Regulation (EU) of the European Parliament and Council, dated May 31, 2023, defines crypto-assets as “a digital representation of value or a right that can be transferred and stored electronically, using distributed ledger technology or similar technology.”
Among the most well-known cryptocurrencies, we can mention:
- Bitcoin, the pioneer. Created over 10 years ago, it is undoubtedly the most recognized and popular cryptocurrency. A fully decentralized digital currency that operates through distributed computers, commonly on a blockchain. Cryptocurrency values are volatile, but in Paraguay, the price of 1 Bitcoin typically exceeds PYG 700.000.000 (seven hundred million guaraníes).
- Ethereum, another highly popular cryptocurrency, operates as a decentralized platform that enables the creation of applications and the execution of smart contracts through blockchains applications. The price of 1 Ethereum typically exceeds PYG 25.000.0000 (twenty-five million guaraníes).
Other cryptocurrencies include Binance Coin, Tether, Solana, to name a few.
What are Cryptocurrencies used for?
Cryptocurrencies are primarily used in two ways: as a means of payment and as a means of investment.
- As a means of payment: Cryptocurrencies are used for commercial and industrial transactions, serving as a currency for the payment of goods or services. It could be said that they fulfill the functions of money; however, legally, they lack the essential requirement of being issued by an authority authorized to issue currencies of this nature with legal tender status and the power to discharge obligations. When used as a means of payment, cryptocurrencies facilitate transactions by eliminating intermediaries. On this point, various issues arise regarding their use as a payment method, particularly concerning the validity of transactions and their ability to extinguish obligations or guarantee contract fulfillment.
- As a means of investment: individuals invest in cryptocurrencies based on the value generated by supply and demand, nothing that one of the characteristics of these currencies is their volatility, which largely depends on the trust people place in them. Therefore, it is important to highlight that the value assigned to cryptocurrencies depends on the trust people place in them. Therefore, it is important to highlight that the value assigned to cryptocurrencies depends on factors such as supply and demand, user confidence, technological elements, and an adequate and comprehensive regulatory framework can be a determining factor. Without intermediation, supervision, traceability, or control, their value depends on the aforementioned factors.
Regulation of Cryptocurrencies in Europe and South America
In the European Union, through the regulation and the Markets in Crypto-Assets (MiCA) framework, efforts are being made to establish general frameworks to regulate crypto-assets.
In South America, Brazil is one of the most advanced countries in this area and is making significant efforts to regulate cryptocurrencies, in fact, in June 2024, it was reported that Itaú Unibanco, one of Brazil’s largest banks, would allow its clients to trade Bitcoin and Ethereum, two of the most popular cryptocurrencies. Additionally, the Central Bank of Brazil (BCB) has announced the launch of its virtual currency, “Drex”, which is still in the testing phase. Drex will enable secure financial transactions with virtual assets and smart contracts through duly authorized financial intermediaries, such as banks.
In this context, cryptocurrencies are closely linked to crypto mining, which is the fundamental process for creating new cryptocurrencies, verifying and recording transactions, enhancing security, and increasing the circulation of currencies, which impacts their value and supply. Crypto mining can be defined as a process that uses computational power to validate and record transactions on a blockchain, creating virtual assets and verifying the legitimacy of transactions on the blockchain.
How are cryptocurrencies regulated in Paraguay?
Now, we will address and comment on the regulatory framework in Paraguay regarding cryptocurrencies and their close connection to crypto mining.
- Cryptocurrencies: what is their regulatory status in Paraguay?
Given the global relevance and impact of cryptocurrencies and the widespread use of crypto-assets, which aim to transform the financial system in an increasingly digital world, countries, including Paraguay, have faced the need to address the regulatory challenges they pose. In Paraguay, there is still no specific regulation or legislation for cryptocurrencies, their issuers, or intermediaries, although the issue has been under study and analysis for several years with various sectors.
In Paraguay, transactions involving cryptocurrencies are neither controlled, supervised, nor regulated by the Central Bank of Paraguay (BCP, for its acronym in Spanish).
It is worth noting that there is a bill under consideration in the Legislative Branch that promotes the regulation of crypto-assets and involves the participation of ministries and entities such as the Ministry of Information and Communication Technologies (MITIC), the Secretariat for the Prevention of Monet or Asset Laundering (SEPRELAD), the National Electricity Administration (ANDE), the National Securities Commission, and the Central Bank of Paraguay (BCP). These entities’ competencies and functions are essential for the proper operation and supervision of this project related to the sector.
An interesting aspect of the bill is that it adopts “Bitcoin” as an experimental virtual asset of the State, recognizing it as the authorized cryptocurrency in the Republic of Paraguay, with limited State backing, until a national digital currency is mined under authentic cryptography. In other words, the State recognized the use of Bitcoin until a national digital currency is developed.
Prior to this bill, the BCP -the sole issuer of circulating banknotes and coins- issued several statements on cryptocurrencies (on 11/16/2022, 09/19/2022, 05/31/2019 among others), stating that the use of private virtual assets or currencies, known as cryptocurrencies, since they are not issued by the BCP, do not have legal tender status or the power to discharge obligations.
The statements note that the value of cryptocurrencies is primarily based on the trust people place in them (users who choose to use and accept these currencies at their own risk), and their price fluctuates based on supply and demand, often with significant variability, following high-risk investment parameters.
The BCP maintains that the risk of such investments is amplified in the buying and selling of cryptocurrencies. It also warns that cryptocurrencies are used as payment instruments in illicit operations.
For financial institutions, the use of cryptocurrencies poses significant risks due to their origin, traceability, trajectory, and purpose.
It is also worth mentioning that the Central Bank of Paraguay, through Resolution N° 7/21, approved the regulation of the Working Group on Central Bank Digital Currency (CBDC) to monitor various initiatives and their implications for implementation. They state that a CBDC could be a secure payment method in line with the broader digitalization of everyday life, with the advantages of technology and without the risks associated with private cryptocurrencies. The motivation for exploring a CBDC is its use as a payment method. A digital currency issued by the BCP could provide complementary money to the public, supporting the development of the national payment system if transactions are preserved.
The proposal to issue a digital currency-fully controlled and supervised-arises from the widespread impact of cryptocurrencies and the need to establish a regulatory framework that provides security and stability to the financial system.
Paraguay has strengthened the control and prevention of money laundering and terrorist financing in recent years through regulations and active monitoring by SEPRELAD. In 2020, SEPRELAD issued Resolution N° 8/2020, which includes individuals and legal entities engaged in activities related to virtual assets, such as mining, exchange, transfer, storage, or administration, under Law N° 1015/97.
Additionally, in 2021, SEPRELAD approved Regulation N° 314/2021, which establishes a risk management system to prevent money laundering and terrorist financing in activities associated with virtual assets.
Therefore, cryptocurrencies are not regulated, and since they are not issued by the BCP, they lack State backing.
- Crypto mining: Is it a permitted activity in Paraguay?
There is a close link between cryptocurrencies and crypto mining; however, Paraguay also lacks legislation regulating this activity. Crypto mining -particularly in Paraguay- represents a significant opportunity for investment and economic and technological development.
The lack of regulation for this activity allows for almost no State control and a high rate of illicit activities, with mining often conducted clandestinely. Clandestine mining not only results in lost revenue for the State but also poses risks to the stability of the energy supply and hinders sustainable development and environmental protection.
Paraguay has a high availability of electrical energy, which is a determining factor in crypto mining due to its high energy consumption, driven by the surplus energy generated by the Itaipú Binational and Yacyretá Binational hydroelectric dams. This attracts investment, especially considering Paraguay’s relatively low taxes compared to other countries in the region.
Paraguay can be considered fertile ground for adopting trends and new technologies, as electricity is a fundamental element in crypto mining activities to produce virtual assets and the validation of their accounting records.
On May 30, 2024, a bill was introduced -still under consideration- that regulates crypto mining to prevent illicit activities and operations associated with it, as well as money laundering and terrorist financing. It would also enable greater control over transactions and operations and ensure the efficient use of electrical energy. In 2022, a similar bill was vetoed due to concerns that energy consumption could affect the energy supply, among other reasons, involving the same actors, such as MITIC, ANDE, SEPRELAD, and the National Securities Commission (now the Superintendency of Securities). Although the vetoed bill aimed to regulate mining, commercialization, intermediation, exchange, transfer, custody, and administration of crypto-assets, as well as instruments to control these assets, its focus was broad, encompassing comprehensive regulation of their commercialization and control.
Another bill -also under consideration- proposes a temporary ban on crypto mining to consolidate controls and reduce clandestine activity. Many associations have stated that this could have the opposite effect, potentially increasing clandestine activity. Currently, several companies have contracts with ANDE, while others operate clandestinely, consuming energy through informal cryptocurrency mining farms. Efforts are underway to strengthen monitoring and control to prevent this.
In this regard, it is worth noting that Decree N° 7824 of September 16, 2022, classifies crypto mining as a special intensive consumption activity based on established indicators, but it is categorized under energy supply. Proper regulations would protect customers, reduce or prevent illicit activity, ensure energy supply stability, and promote market stability, among other benefits.
ANDE sets different tariffs (for energy supply chargers) based on consumption groups and establishes a Consumption Group for users with intensive electricity use for data processing, information storage services, and related activities, including crypto-asset mining, blockchain, tokens, and classified data centers. However, clandestine activity undermines the stability of ANDE’s energy supply and deprives the country of economic revenue.
In this context, the decree represents a formality for the legal supply of energy with the responsible entity, but it does not establish regulation of the activity itself, leading to a legal vacuum, lack of control, unverified technical conditions, absence of audits, lack of licenses or permits to operate, and non-payment of taxes related to the activity, among other issues.
Some final Reflections
Based on the above, the phenomenon of cryptocurrencies and crypto mining has gained significant relevance, posing challenges to all nations, including Paraguay. The lack of comprehensive regulation for these elements, which have already taken root, presents challenges, investigations, analyses, and proposals within our legal and financial system, as well as generating insecurity among users and investors looking to engage in the globalized digital world.
The possibility of BCP issuing a virtual currency would represent a significant step, paving the way toward a digital financial world that promotes financial inclusion and economic and social development.
The projections on these regulations in Paraguay must focus on two fundamental purposes and objectives: creating a secure, favorable, and comprehensive environment and ensuring strict compliance with existing regulations. It is essential that our country leverages its energy resources and potential, but always in compliance with the law.
Enzo Berino
Lawyer at Altra Legal
