In this third installment of our series on Fintech regulation in Paraguay, we delve into the response of Paraguayan state agencies to the challenges posed by the emergence of cryptocurrencies and crypto assets. We also review attempts to regulate these assets and the current state of affairs in the process to establish a regulatory framework ensuring the safety of those involved in such businesses and/or operations.
- Cryptocurrencies and Crypto Assets
In Paraguay, the market for crypto assets and cryptocurrencies is still in its beginning stages. In previous years, attempts were made to formalize this market through the presentation of a bill aimed at regulating it.
However, although activities related to crypto assets and cryptocurrencies are not yet fully regulated, certain aspects have already been subject to regulation by the Secretariat for the Prevention of Money and Property Laundering (the “SEPRELAD”), following recommendations from the Financial Action Task Force (the “FATF”). Additionally, the Central Bank of Paraguay (the “BCP”) has publicly stated its position on cryptocurrencies.
- 1. Communications issued by the BCP
On May 31, 2019, the BCP issued a statement to investors and the general public, warning about the use of cryptocurrencies. It emphasized that, as they are not issued by a Central Bank, cryptocurrencies have no legal tender or canceling force.
In this statement, the BCP also stated that "[…] their value is mainly based on the trust that people place in them, deciding to use and accept these currencies at their own risk, and their price fluctuates according to supply and demand, usually with significant variability. The future price of these cryptocurrencies can both rise and tend to zero."
The statement further reminded that the Organic Law of the Central Bank of Paraguay, in its articles 38 and 39, designates the guaraní as the monetary unit of the Republic of Paraguay. This law designates the Central Bank of Paraguay as the sole issuer of banknotes and coins in circulation, establishing the legal tender and unlimited canceling force of the guaraní. Consequently, the BCP affirmed, "Bitcoin and other similar cryptocurrencies are not considered as banknotes or coins, have no mandatory canceling force in Paraguay, and therefore, are not guaranteed by the State."
The BCP also warned that individuals buying or investing in these currencies "assume significant risks, such as the possible total loss of the value of their investment (due to high volatility in their price, possibilities of fraud or hacking, and difficulties in selling or exchanging them)." It further asserted that "[…] cryptocurrencies are also often used as instruments of payment in illicit transactions."
Finally, the BCP indicated in this statement that it would continue studying cryptocurrency operations, both regionally and globally, and their potential impact on the financial system, "following the recommendations of best practices according to specialized international organizations."
A little over a year after the issuance of the statement, the BCP issued a new statement on virtual currencies or cryptocurrencies, simply reaffirming its position from the previous year.
When questioned by the local press on subsequent occasions, the BCP simply announced that it "has [already] communicated its institutional position."
- 2. Resolutions issued by SEPRELAD
On the other hand, SEPRELAD has issued specific regulations related to activities involving crypto assets or virtual assets.
Following recommendations issued by FATF regarding "new technologies," SEPRELAD issued Resolution No. 8/20. This resolution designated individuals or entities engaging in mining or its equivalent, exchange, transfer, storage, or administration of virtual assets, or participating and providing financial services related to these, as Obligated Subjects.
Obligated Subjects before SEPRELAD are individuals or legal entities engaged in sectors considered susceptible to being used as a vehicle for money laundering or terrorist financing. Thus, Obligated Subjects have certain obligations to fulfill before SEPRELAD, such as registration with this institution, reporting of operations, conducting due diligence on clients and suppliers, and having structures in place to mitigate the risks of money laundering and financing mentioned.
Subsequently, SEPRELAD issued Resolution No. 9/20, through which it resolved that Obligated Subjects with clients designated as "Providers of Virtual Asset Services" must analyze their profiles, including specific due diligence, to manage exposure to money laundering and terrorist financing and mitigate associated risks.
This analysis and due diligence thus became necessary procedures to carry out operations, whether initiating or continuing a business relationship with Providers of Virtual Asset Services.
Finally, SEPRELAD issued Resolution No. 314/21, which establishes the Regulation for the Prevention of Money Laundering and Terrorism Financing for individuals or legal entities established or domiciled in the country engaging in activities associated with virtual assets.
This regulation is mandatory for individuals and legal entities engaged in activities associated with virtual assets, namely those mentioned in Resolution No. 8/20. It establishes that Obligated Subjects must implement a comprehensive system for the Prevention of Money Laundering and Terrorism Financing, whose scope covers the entity’s entire operation.
Obligated Subjects must conduct a self-assessment of the risks of money laundering and terrorist financing to which they are exposed at least every two years and review the methodology associated with them at least every four years. This self-assessment must be made available to SEPRELAD.
Likewise, Obligated Subjects must have a Compliance structure, led by a Compliance Officer, appointed by the Board or equivalent of the company, or by the owner, in the case of a sole proprietorship. This appointment must be communicated to SEPRELAD within the established period.
The Compliance Officer reports directly to the highest authority of the company or sole proprietorship and is responsible for implementing the prevention policies of money laundering and terrorist financing of the venture or entity, as well as reporting suspicious operations to SEPRELAD.
Finally, the Subject Obligor must have an Anti-Money Laundering and Terrorism Financing Manual and a Code of Ethics and Conduct.
- 3. Proposed bill
In December 2022, the Paraguayan House of Representatives finally archived the Bill that had been presented in 2021, with the aim of regulating the activities of mining, marketing, intermediation, exchange, transfer, custody, and administration of crypto assets.
This Bill had been presented and approved by the Senate in December 2021. The Bill was then modified by the House of Representatives, and in August 2022, the modified Bill was sanctioned by the Senate.
However, through Decree No. 7.692/22 of December 2022, the Executive Branch vetoed the Bill in its entirety. This veto was rejected by the Senate, but the House of Representatives did not support the rejection and, as a result, the Bill was finally archived.
The rejection by the Executive Branch was based on a recommendation from the National Electricity Administration (the “ANDE”). In this regard, the Bill aimed to apply a preferential tariff to the electricity consumption required for mining activities, based on the tariff for industrial activities.
Regarding this, ANDE stated, through Note No. P.3179/2022, that "the activity of crypto-asset mining [...] is characterized by high electricity consumption, intensive use of capital, and scarce use of labor, [so] it is appropriate to characterize it as electro-intensive consumption and not as industrial consumption." Thus, ANDE asserted that the tariff approved by Congress could not cover the costs of providing electricity in which it would incur.
On the other hand, the Undersecretary of State for the Economy also recommended the veto by the Executive Branch, categorizing the activity as short-term and responsible for environmental damages. This position, as well as the aforementioned position of the BCP, was mentioned in the explanatory memorandum of Decree No. 7.692/22, which vetoed the approval of the Bill.
Arguing the need to regulate this activity to address the current reigning informality of this market, the Paraguayan Fintech Chamber is currently drafting a new Bill, which aims to reach a consensus with the various government stakeholders.