Emerging Markets: Latin America’s Blockchain Breakthrough

In the first post on the series about decentralized finance in emerging markets, we have seen that many countries in Africa have a genuine need for cryptocurrencies and blockchain technology which has resulted in rapid growth in adoption. Latin America is another emerging market where the adoption of technology has catapulted upwards, now having the highest concentration of cryptocurrency users in the world [1].

The continent represents a breakthrough region for cryptocurrency and blockchain technology. Throughout April, record volumes on Localbitcoins were being achieved. Argentina saw $710,000 in weekly volume during the week of April 18 while Columbia’s weekly volume oscillated between $2.1 million to $2.6 million throughout[2]. Furthermore, it is encouraging to see volumes experiencing growth when compared to previous periods [Figure 1][3]. However, as you begin to examine the reasons behind such volume, it only reflects the continued turmoil the public are experiencing.

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Figure 1 — Localbitcoins trade volume (Past 90 Days)

Numerous governments in Latin America have all been taking an interest in the technology. Mexico’s government has been investigating using blockchain to track and validate bids for public contracts [4] while Columbia has turned to blockchain to help authenticate electronic voting [5]. It is the citizens of Latin America however, that have driven adoption. Approximately 70% of the population still remain unbanked [6]and have little faith in the current institutions that for decades have hampered opportunity and growth. Cryptocurrencies and blockchain technology, however, represent an opportunity to move away from weak state institutions that have resulted in banking crises, persistent corruption, and political instabilities [7].

To grasp the impact blockchain and cryptocurrencies can have on Latin America, let’s examine Argentina and its fiat currency, the Peso. The peso has long been tied to the US dollar given the fact that various regimes have been implemented across a number of decades in an effort to stabilize the currency and lower inflation. The most famous of these regimes was the Convertibility Law of 1991. As a response to hyperinflation, the Convertibility Law pegged the peso to the US dollar on a one-to-one fixed rate and limited the printing of the peso “only to an amount necessary to purchase dollars in the foreign exchange market” [7]. Pegging the peso to the dollar was initially successful in the number of years following its introduction. Argentina enjoyed approximately 10 years of low inflation and a high rate of gross domestic product growth that brought the region out of recession. However, Argentina’s economy became reliant on borrowing in part to service the demands of the Convertibility Law [8], and from 1999 onward, the Argentine economy went into a downward spiral culminating in 2001. By then, the public had lost all confidence in the government’s ability to manage the country’s finances. The possibility of peso devaluation was suspected and by the end of 2001, the banking sector was on the brink of a liquidity crisis which forced the government to freeze bank deposits [9].

Fast forward to the present and Argentina is engaged in negotiations with its creditors over at least $65 billion in government debt, a substantial amount of which is foreign currency debt mostly in dollars and owned by foreigners [10]. COVID 19 has only complicated matters. If governments are forced to use scarce foreign currency to make unsustainable debt payments, health care, medical equipment, and testing measures will not be affordable [10]. Other regions of Latin America are also experiencing significant problems; Columbia and Mexico have suffered from high inflation while Venezuela’s inflation rate is as high as 15,000% [11]. It is easy to understand the mistrust the public has in their currencies and institutions. What is needed is systematic change.

From a decentralized finance perspective, what is so exciting about Latin America is that the people adopting Bitcoin and other digital alternatives are not crypto savvy and are not aware of the underlying technology. This is a significant step toward mainstream adoption. Many of the public in Latin America have turned to digital monetary alternatives such as Bitcoin for change. For many, it represents a legitimate alternative to the respective fiat currency as a medium of exchange for both domestic and cross-border payments. When you look at Argentina for example, it is easy to understand why a stateless currency free from manipulation is appealing. And although Brazil has been slower to adopt crypto and examine blockchain solutions, its economy has been hit hard by the pandemic, which has resulted in Brazil’s public examining how cryptocurrencies could be used as a long-term saving option and as a means to transact across borders. People are using Bitcoin and other cryptocurrencies as a monetary alternative because it fundamentally solves problems and provides a hedge against the instability of the federal currency.

While Bitcoin has worked well as a medium of exchange thus far, questions remain over whether or not it will remain a vehicle currency and if people will use it as a store of value alternative given its volatility. Regarding a store of value options, there is a genuine need for given that hyperinflation has wiped out people’s savings in the past. Stablecoins offer solace, especially those pegged against the US dollar. A US dollar-backed stablecoin represents a very real and viable option to protect the value of citizens’ savings and surviving hyperinflation for those in Latin America, especially for those in a region like Venezuela where the local currency suffers from historic hyperinflation, and US dollars are restricted. While stablecoins are not being used for day-to-day spending yet, many are beginning to store their savings in a stablecoin option and then converting back to their local currency as needed.

Despite the public driving adoption so far, it is the active participation of governments in the market’s regulation and promotion that will lead to expansion, maturity, and normalization of the cryptocurrency and blockchain industry in Latin America. On one hand, Uruguay is taking a positive stance on crypto and blockchain in that it is leveraging their current Economy Free Trade Zones to create a crypto-friendly hub to attract enterprises, talent and innovation [12]. On the other hand, Argentina is cracking down on cryptocurrency trading in what is perhaps an attempt to prevent the Peso from being devalued further [13] while Brazil has brought in regulations forcing residents to report cryptocurrency trading. One thing is for sure however, financial activities which used to take place behind monetary walls are now operating without permissions. Governments can continue to try and restrict the flow of money but this will only drive adoption upward. Furthermore, as decentralised financial offerings continue to evolve with regard to cost of use, user friendliness and network effects, they will continue to take a stronghold in regions with monetary and economic issues. Frankly, public institutions can no longer deny the significant contribution blockchain and crypto can make toward the future development of Latin America.

Written by Conflux Network’s Analyst Niall Yorke

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