Cryptocurrency regulation in Costa Rica
Country of stability
Digital technologies, blockchain, cryptocurrencies have been introduced into the global financial system over the past decade. As the population supports virtual currencies, the governments turn their attention to the regulatory measures of new technologies. Some governments have fully implemented cryptocurrency into their financial systems, while others have completely banned their use, seeing this as a threat to the centralized system of state institutions.
But there are countries that do not yet have appropriate legislative measures in place, including Costa Rica. The country is known for its openness to fintech technologies, combined with political and economic stability, the tax regime – Costa Rica is considered one of the best jurisdictions for opening offshore business in Latin America.The purpose of this article is to shed some clarity on the legal status of cryptocurrency in Costa Rica.
The Central Bank of Costa Rica (hereinafter: – “BCCR”) oversees the monetary system in Costa Rica. The BCCR sets, regulates and oversees the policies of the Costa Rican monetary system. In order to indicate the government’s position on the status of cryptocurrencies, the Central Bank has issued three directives from 2017, 2019 and 2021. For now, the directives are laying the foundation for a possible legal definition of cryptocurrencies.
BCCR uses the term “crypto asset” to refer to all types of cryptocurrencies, and they may be classified as “quasi-money” or as a “means of payment” under Costa Rican law. The Central Bank in the directive from 2019 adheres to the position that a crypto asset is a type of digital asset that can be used as:
Moreover, in line with CBCR mandate, digital currencies are not “foreign currency”, thus they are not issued by foreign central banks. Thus, they can not be protected by the free currency convertibility provisions of articles 48 and 49 of the Central Bank Organic Law. Hence, crypto-fiat/fiat-crypto transactions might be subject to transaction fees in the country.
Cryptocurrencies are not legal tender in Costa Rica, no one is obliged to accept cryptocurrencies as payment for goods / services. However, virtual currencies are widely accepted by many citizens. Although Cryptocurrency transactions can not be made through the National System of Electronic Payment (SINPE), lot’s of local businesses accept cryptocurrency as a medium of exchange.
Using сrypto assets in Costa Rica is not directly prohibited by law, so their exchange and circulation is permitted. BCCR pointed to the lack of support for the use of cryptocurrencies. The circulation of crypto assets is not subject to banking regulations or payment mechanisms authorized by the BCCR. Operations with crypto assets are outside the jurisdiction of the Central Bank, everyone should be aware of the possible financial risks. Thus, the local media outlined the Central Bank’s approach as “vigilant tolerance”.
Nevertheless, there are facts reflecting the positive attitude of the government towards cryptocurrencies. For instance, it is allowed to pay a salary in cryptocurrency, as it follows from the possibility of paying wages with “commonly accepted assets” under article 166 of Costa Rica’s Labor Code, which indeed, cryptocurrencies are. This is practiced by many companies in Costa Rica, while paying their employees in cryptocurrency it should be noted that:
- employers must pay a portion of their social security based on the cryptocurrency’s value on the payment’s date;
- the minimum wage established by the law must be paid in fiat currency, the remaining amount may be paid in virtual assets.
BCCR understands the importance of cryptocurrency and monitors the legislative incentives in neighboring countries. In particular, El Salvador, a regional neighbor of Costa Rica, As of 2021, this year allowed the use of bitcoin in the country’s payment system, which caused a resonance and public discussion in Costa Rica. The head of the BCCR assured that the government is developing a bill that will become the basis for the regulation and taxation of operations with cryptocurrencies.
The main anti money laundering regulation of Costa Rica is the law (“Ley sobre Estupefacientes, Sustancias Psicotrópicas, Drogas de Uso no Autorizado, Legitimación de Capitales y Actividades Conexas” (hereinafter:- “Law 8204”)). It is noteworthy that the norms of Law No. 8204 regulate transactions in currencies / foreign currencies. The central bank has indicated that crypto assets are not a currency, for this reason Costa Rican lawyers point to the possibility of non-compliance with the general AML rules for cryptocurrency transactions.
The legal status of the cryptocurrency is still uncertain, which causes different interpretations of the consideration of cryptocurrency by Costa Rican legislation. Nowadays, the government is carefully studying the practice of foreign countries and international organizations (for example, the FATF) with a view to adopting appropriate regulation.
Costa Rica is a favorable place for foreign investment due to its flexible tax regime and political stability. Costa Rica’s tax system is based on the principle of territoriality, according to which only income derived from a source in Costa Rica is taxed.
According to the Technical Note of the Central Bank of Costa Rica 01-2019, Taxation details among the recitals of the resolution, cryptocurrencies can be understood as an asset that does not have physical representation, they are put into circulation by private agents using a global platform, in which which there is no participation of a central authority as guarantor of the legality of the transactions that are carried out and that have their own unit of account, different from any fiduciary currency issued by a government or central bank.
According to the Minister of Finance, Elián Villegas, since cryptocurrencies are an exchange mechanism, which even generate profits for those who use them, therefore they must be subject to the payment of Value Added Tax (VAT) and income tax, like any other asset when they are bought / sold by natural persons and legal persons, as positive profits from operations with crypto assets, according to the Ministry of Finance, should be subject to capital gains tax.
The General Directorate of Taxation consulted the Union of Chambers and Associations of the Private Business Sector (Uccaep) for a resolution in which it proposes to levy 13% of the value added tax (VAT) on the purchase of crypto assets, and with 15% on capital gains, which are obtained by buying them at one price and selling them at another. The General Director of Taxation, Carlos Vargos argues that if cryptocurrencies are assets, then they must be taxed like any other asset.
At the same time, there is a polarizing position of the head of the BCCR. The head of the Central Bank points out the inexpediency of taxing cryptocurrencies due to their volatility. In the near future, the Ministry of Finance intends to consider a draft law on taxation of transactions with cryptocurrencies. Officials should consider providing guidance on how virtual currencies fit into the existing tax framework. The framework would be useful to promote clarity and certainty for taxpayers.
All in all, the popularity of cryptocurrencies is forcing the government of Costa Rica to adopt appropriate regulation. Until now, the BCCR has treated crypto assets as virtual assets, although 2022 is promised to be the time of a change to introduce a clearer legislative status of cryptocurrencies and digital assets, taxation and might also determine the future development of blockchain in Costa Rica.
Author: Valerii Katurha, lawyer at Manimama Legal&Growth Agency