As price rallies took cryptocurrency market caps to all-time-highs in recent weeks, Latin America's legacy banks started to take a closer look at an asset class that could soon be integrated into their products and services offering.

Adoption is surging — with Bitcoin leading the way — in countries like Venezuela and Argentina, where individuals and businesses seek to protect their income against inflation and currency controls. In more stable economies, such as Colombia's, migrants are turning to digital currencies to access faster and cheaper remittances than through traditional channels.

"This year we've seen an incredible increase in adoption in the region, and it's remarkable to see how confidence in cryptocurrencies as a means of investment has grown," Maximiliano Hinz, Latam Operations Manager at Binance, a global crypto broker, said.

Hinz expects that banks will be increasingly interested in competing within this segment, due to rising demand from their clients.

According to Chainalysis, a crypto-focused research firm, $49 billion worth of crypto transactions were registered in the region between July 2019 and June 2020. Latin America also reported the second-highest share of retail trades as a percentage of total activity, with such transactions defined as those worth less than $10,000 in cryptocurrency.

Venezuela and Colombia were also among the top 10 countries in the Chainalysis' Crypto Adoption Index, a ranking of nations with the highest proportion of residents that have moved the biggest share of their financial activity to cryptocurrency.

Awaiting a regulatory framework

In this context, crypto exchange providers, which charge commissions for transactions, have been thriving. While some banks are already exploring ways of getting in on the action, they won't be putting both feet forward until the crypto space is fully regulated, sources told S&P Global Market Intelligence.

In Brazil and Colombia in particular, regulatory sandboxes in 2021 will allow financial institutions to test drive cryptocurrency, blockchain and tokenization projects, including the possibility of holding, buying and selling Bitcoin.

"We have to make progress; we can't bury our heads in the sand," Felipe Noval, head of digital transformation at Colombia's banking association, Asobancaria, said, adding he expects several banks will be taking part in next year's test runs. Once pilot programs end, a regulatory framework should ensue, which is what lenders need before they formally launch any brokerage services, he added.

Banco Bilbao Vizcaya Argentaria Colombia SA, Grupo Aval Acciones y Valores SA, Bancolombia SA and Banco Davivienda SA are very likely to be working on crypto solutions in their in-house labs, teaming up with or acquiring fintechs in the process, according to Noval. They are keeping a low profile on such efforts to avoid giving anything away to the competition, he added.

"Regarding the [crypto] sandbox, Aval Digital Labs is looking at the opportunities that may be available," Alejo Sánchez García, strategic planning and investor relations manager at Aval, Colombia's largest bank and Latin America's seventh biggest, confirmed in an email.

According to Noval, banks in Colombia have taken note of how European banks have started to adapt to crypto, and are very interested in replicating such efforts.

Banco Bilbao Vizcaya Argentaria SA, which has large operations across Latin America, will be launching its own crypto brokerage service in Europe next year. "If it's successful we could think about expanding the range of digital assets it will offer, as well as expanding to other geographies," Luz Fernández Espinosa, a spokesperson for the Spanish major, told S&P Global Market Intelligence.

The genie's out of the bottle

In a sign that virtual money is edging closer to becoming mainstream in the region's largest economy, Binance and digital bank Capitual recently sealed an agreement with Brazil's Tecnologia Bancária SA to enable cash-to-cryptocurrency exchanges on the country's largest ATM network. Coin Cloud, a U.S. company, recently unveiled its own cash-to-crypto terminals in Rio de Janeiro.

As in Colombia, Brazil's CVM securities commission and central bank will be launching sandboxes next year for regulated institutions to pilot crypto solutions.

"Banks will be interacting with the regulators and will probably receive authorization and formal regulations once the process is finished," Bruno Diniz, co-founder of fintech consultancy Spiralem, said.

Marcelo Oliveira Alexandre, investor relations manager at Banco do Brasil SA, Brazil's second largest bank, also confirmed that the bank was "studying these movements in crypto and closely monitoring new technologies."

"Financial institutions in Brazil are starting to dip their toes into the crypto waters, and the more the market develops, the more curious they will grow, putting aside any original prejudices," Stefano Sergole, a distribution manager at Hashdex, a Brazilian crypto asset management firm that recently teamed up with Nasdaq to launch the world's first crypto-ETF, said.

As with the competition they are presenting in other segments, digital banks such as a Uzzo, Zro Bank, Alterbank, Bancryp, Nexo, have gotten a head start, and are already offering crypto brokerage services.

As Sergole put it, "the genie is out of the bottle," and it is likely that Brazilian banks' direct participation in the crypto market will happen sooner rather than later.