How Colombia’s Crypto Regulations Might Look

The country’s financial regulatory body has published guidelines for the regulation of the use of crypto assets in a bid to garner feedback from potential players in the segment

Crypto regulations vary across Latin America.
July 20, 2022 | 10:55 AM
Reading time: 4 min.

Bogotá — Colombia continues to worki on defining a regulatory framework to govern the use of crypto assets in the country, and the first step will be the issuance of the rules for platforms for the trading of such assets.

To that end, the country’s financial regulatory body, Superintendencia Financiera, has published a draft circular in a bid to garner public comments from potential players in the sector, and in which it sets forth the rules that would govern the linking and provision of services to virtual asset service providers.

The draft regulation is based on the results of a pilot project developed within the framework of a sandbox concerning deposit and withdrawal operations with crypto asset exchange platforms, and which seeks to explore the possibility of managing the risks inherent with such transactions.

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This pilot project was carried out in coordination with a slew of government departments, such as the Presidential Council for Economic Affairs and Digital Transformation, the Finance Ministry, the Information and Communication Technologies Ministry, the Central Bank, the Financial Regulation Unit (URF), the Superintendence of Companies, the Superintendence of Industry and Commerce, the Special Administrative Unit of the National Tax and Customs Directorate (DIAN) and the Financial Information and Analysis Unit (UIAF).

Managing risks

The draft circular takes into account the guidelines established by the Financial Action Task Force (FATF), aimed at ensuring that the country’s authorities understand and develop regulatory responses that allow transactions with virtual assets to be carried out, with adequately managed risks.

The draft circular addresses the elements to be considered by supervised entities in the evaluation of clients when dealing with virtual asset service providers, and the strengthening of the provision of information to financial consumers when establishing commercial alliances with such providers.

It also sets out which are the supervised entities and products through which transactions with virtual assets may be carried out, in compliance with the legal provisions already in force.

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The draft circular also states that the Financial Superintendency (SFC) does not currently exercise any type of supervision over virtual asset service providers, or the activities they carry out.

The proposed rules provide a framework so that the entities supervised by the SFC that wish to develop alliances with or link to virtual asset service providers must carry out a prior assessment to verify that they have access to the UIAF reporting system, a risk-management system in place to avoid money laundering, the financing of terrorism and proliferation of weapons of mass destruction that complies with FATF guidelines.

Potential players in the sector must also demonstrate that they have the technological and operational conditions for the traceability of transactions with virtual assets, and the ability to provide their clients and the general public with information on their corporate name, available service channels, assets for which they provide their services, the risks inherent to them, and the costs and fees associated with the services.

Transparency

In addition, crypto service providers must also demonstrate transparency by establishing mechanisms by which they can inform clients about the execution of their operations, account statements and balances, and have in place an operational and cybersecurity risk management system, as well as the appropriate technological tools to manage such risk.

The draft circular also states that, within the framework of operations and alliances with virtual asset service providers, the entities supervised by the SFC are not responsible for the risks or results of the operations carried out by consumers with such providers, and they must therefore clearly and timely inform consumers of the scope of their competence regarding the risks inherent to such operations, such as the market and liquidity risks of virtual assets and money laundering and terrorist financing.

Other risks that must be conveyed to users are the possibility of cybersecurity breaches or operational failures in the platforms of virtual asset service providers.

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The draft regulation clarifies through which supervised entities and products operations with virtual assets may be carried out, in compliance with the legal provisions in force, while providing clear and timely information to financial consumers, as well as the characteristics of such assets and their inherent risks.

These entities and products are:

  • Managers of collective investment funds and private equity funds that contemplate in their investment policies the possibility for such vehicles to invest in foreign investment funds with crypto assets
  • Trust companies that enter into trust businesses whose trust assets are virtual assets or trust businesses that contemplate the execution of transactions with crypto assets
  • Supervised entities that carry out the distribution of foreign funds that contemplate the possibility of investing in virtual assets, or carry out operations with virtual assets
  • The representative offices of foreign financial and securities market institutions that promote and advertise products that include crypto assets

The draft circular also proposes the partial repeal of prior regulatory proposals (contained in circulars 029, from 2014, 078, from 2016, and 052 from 2017) that are contrary to the newly proposed regulations.

No legal changes

The draft regulations do not change the legal status of crypto assets, and the central bank and the SFC continue to underscore the volatility of crypto assets, the absence of backing, and that they are not recognized as legal tender, and they are not framed within the regulatory category of financial assets.

The proposed regulations also do not regulate virtual asset service providers, nor their activity, nor their operations, and do not assign to the SFC oversight of virtual asset service providers, and neither do they authorize entities to enter into transactions with crypto assets.