A few weeks ago, Paraguayan Congressman Carlitos Rejala sent us a translated version of a law intended to clarify the legal status of Bitcoin and other cryptocurrencies in his country. Shortly after lawmakers in El Salvador – just 3,000 miles away – introduced Bitcoin as legal tender, many in the room were optimistic that this legislation would seek to give BTC a similar status in Paraguay.
That was not the case. While the final El Salvador bill consisted of just a few pages of text, which was by far the cheapest and most accommodating bitcoin legal doctrine ever passed, the early draft Paraguay legislation set a different tone. It seeks to establish Bitcoin as property rather than legal tender; it would require bitcoin miners to obtain government licenses for their operations, an obvious restriction on the free use of power to create permissive value; and it detailed sanctions and penalties for those who would violate the proposed rules, which included measures to protect cryptocurrency investors.
But two of the architects behind the proposed legislation argue that this bill and its detailed regulatory framework are necessary for their country to fuel bitcoin innovation. While the lack of any federal regulation may be the Cypherpunk vision for many bitcoiners, they feel that the bitcoin industry cannot thrive in their home country without them.
Is Regulation the Best Way to Promote Bitcoin in Paraguay?
“Bitcoin will not be legal tender in Paraguay at the moment,” said Juanjo Benitez Rickmann, the managing director of a Paraguayan cryptocurrency mining company that is also active on state fintech councils. “We’re a really stable country, a really stable economy, we have an inflation rate of three or 4%, we have a strong currency that is the guarantor, so we’re fine. We thought we had the time to come up with a really good suggestion for everyone. “
An agricultural investor in the country recently reported that Paraguay’s economy has grown by more than 4% each year since the early 2000s, with the middle class expanding as well. Since then, foreign investment in the country has also grown. It is likely that this economic status will mean that the government there, as in most parts of the world, does not have to surrender to Plan B as in El Salvador. However, Rickmann believes that changes will be needed if these foreign investments expand to include bitcoin companies, especially miners.
“Everything in the bill is about creating a healthy environment for an investor who wants to come to Paraguay and do bitcoin mining,” he said. “We focus on Bitcoin mining because we know that anyone here in Paraguay can build a data center … [But for] someone who wants to come to Paraguay to invest, not a million dollars, maybe 30 million dollars … he has to be really safe and familiar with a law, a framework that will help him work with confidence. “
” wrote about 90% “of the bill. As a next step, the responsible ministries are expected to meet with the drafters of the bill and exchange their thoughts over the next ten days.
Will This Regulation Help Paraguay Seize Its Bitcoin Mining Opportunity?
“There is also a geopolitical factor in the submission of this bill,” added Arza, referring to two hydropower plants that Paraguay operates with its neighbors Brazil and Argentina. “These massive hydropower plants generate roughly … 5.5 gigawatts of excess energy that we can use up. That energy is pretty much lost. Part of it is sold to Brazil for almost zero. And the other part of that is being sold to our other financial partner Argentina, who hasn’t paid us in the last five years. So there is a general optimization of energy use that is needed here, and mining is a great opportunity for the country to use that energy. “
However, it would take billions of dollars in investment to seize this opportunity, Arza said. Like Rickmann, he believes it is crucial to attract overseas Bitcoin mining companies.
“We thought it advisable to create a clear framework for international investors, especially for investors from countries that have banned this,” he said, referring to the bitcoin miners based in China who are now looking for a new home.
A key aspect of this framework is that, according to a translated version of a draft law, it would “recognize the mining of virtual assets as an industrial activity within the Ministry of Industry and Commerce”. Arza believes that this is key to navigating Paraguay’s legislative structure.
“This is supposed to be an industrial bill … we don’t want cryptocurrency mining to be seen as a financial service,” he said. “If we go into regulation for our industrial sector with the Ministry of Industry, the central bank is not involved and the financial authorities are not involved. And that’s our main concern because in Paraguay, when tax authorities are involved, they’ll put this bill in a nice, small, neat folder and put it somewhere we won’t see it for five years. “
Control versus freedom
While this regulatory framework goes far beyond the Bitcoin mining industry, this is clearly the focus for Rickmann and Arza. And the mining license requirement proposed in the bill appeared to be one of the most difficult and cumbersome provisions. Similar rules in Iran, for example, seem to discourage rather than encourage a decentralized bitcoin mining industry.
And it should also be noted that Rickmann and Arza, as entrenched cryptocurrency miners, would likely benefit from a government mining license. But when they pressed on the fact that many in the Bitcoin community view regulation as the antithesis of technology and movement, they argued that a libertarian approach would be untenable in their country.
“Things are different in Paraguay,” said Arza. “The things we asked for in the license are the things the government requires you to do in order to start any type of operation.”
Arza also pointed to a significant criminal presence in Paraguay – which he believes is the second largest producer of cannabis in Latin America, despite being an illegal substance – as a reason that laws are needed if Bitcoin can find a legitimate foundation will.
“If we don’t have a legal framework that protects us business owners and international investors from this type of hatred and crime, then we will never have a truly civilized endeavor here,” he said. “We will never grow.”
Still, the couple seemed to feel that their proposed bill and regulation are generally unpopular with the international Bitcoin community, and they were eager to clarify its purpose. Rickmann acknowledged that some changes might be needed to better support the Bitcoin adoption.
“And we think … we have to add to the proposal that if you spend 50 kilowatts in your home or office, for example, you don’t need a license,” he said.
To date, Bitcoin has seen remarkable growth around the world due to a lack of regulation. While favorable rules like those of El Salvador are celebrated, regulations around a permissionless, censorship-resistant, distributed money network are largely meaningless and impossible to enforce. But they at least offer a tangible measure that shows the prevailing attitude of any government towards this financial revolution.
With this bill, Paraguay appears to be a place for regulators to see the immense commercial potential of Bitcoin. But whether this potential can be promoted in the way they hope it will remain to be seen.