A street vendor in Buenos Aires, Argentina, offers clothes in front of an advert for Buenbit, a platform for buying and selling cryptocurrencies. "Operate with crypto without jitters," the sign reads. |
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In Argentina, where citizens are prohibited from buying more than $200 a month in U.S. currency as a result of capital controls intended to preserve international reserves, rampant inflation and a peso that is losing value by the day have made people desperate for alternatives. Many are turning to cryptocurrencies and decentralized finance, or DeFi.
While cryptocurrency is widely seen as an investment opportunity in places like the U.S. and Europe, in Latin America it is also gaining favor as a creative solution to basic foreign exchange needs. Cryptocurrency and DeFi — a form of finance that relies on blockchains rather than traditional financial intermediaries such as banks and exchanges — are allowing people to get money to relatives in different countries, dump weak currencies in favor of strong ones and, as in Argentina, evade capital controls.
A recent World Bank report found that U.S. dollars to Nigerian naira and Colombian pesos to Venezuelan bolivars are the top two cryptocurrency vehicle trades in the world. Cryptocurrency vehicle trades are those transactions in which cryptocurrency is used to bypass more expensive methods like Western Union and, of course, capital controls. Remittances using cryptocurrency have more than doubled in Latin America over a two-year period to nearly $400 million for April 2021, according to blockchain data company Chainalysis.
"We see in Latin America, huge demand and interest in cryptocurrency. It's a new financial product. It's new currency that is quickly becoming accepted and usable and in some cases, great alternatives as a place to store some part of your wealth, or invest some part of your wealth for people that did not have access to these types of investments in the past," said Walter Hessert, head of strategy at cryptocurrency brokerage Paxos.
As adoption of cryptocurrency spreads rapidly across the region, governments are wrestling with how to exert regulatory controls.
Weak currencies among most traded
Venezuela and Argentina are both in the list of the top 10 countries of the Global Crypto Adoption Index, released by Chainalysis. Brazil is not too far down the list, at No. 14.
The bolivar's prominence in these cryptocurrency vehicle trades should be of little surprise after Venezuela's economy imploded and inflation percentages measured in the millions, prompting many Venezuelans to leave the country. Meanwhile, in Argentina, peer-to-peer cryptocurrency activity has risen in tandem with the weakening of the peso and an inflation rate that has hovered above 50% in the past year.
"The countries that are doing this are the countries that need to do this. The amazing thing is, this whole finance revolution is coming from developing countries and not from the U.S.," Renata Rodrigues, senior global marketing manager at peer-to-peer trading platform Paxful, said in an interview. "If anything, from the U.S. it's from immigrants, it's not from a regular American citizen."
In January, Paxful recorded growth of peer-to-peer trades of 150% in Latin America compared to a year earlier, including 400% in El Salvador, where cryptocurrency is legal tender, and 120% in Argentina. The expectations are for the interest to keep growing.
Peer-to-peer trading has soared in the region over the past two years. Companies such as Paxful provide a platform for buyers to meet sellers and trade cryptocurrency. That means, for example, someone in Argentina can buy cryptocurrency with pesos, then sell the it for U.S. dollars or stablecoins and hold their cash in a safer currency.
Latin America received a total of $353 billion in cryptocurrency in the 12 months through June 2021, or roughly 9% of the global total, according to Chainalysis.
The World Bank found that of the largest cross-border capital flows through cryptocurrency vehicle trades, eight of 10 were to Venezuelan bolivars, and the remaining two to Nigerian nairas. In 2020, Venezuela's currency represented the most active market on the LocalBitcoins market — a global peer-to-peer platform for trading cryptocurrency. Latin American countries represented six of the top 10 most active markets that year, according to the World Bank.
"The use of crypto currencies is changing the economics of capital control evasion and, in turn, capital control evasion is an important driver for the expansion of crypto markets," the report said.
"Every time you see a big diaspora from Venezuela, you see the market increasing," Rodrigues said. Paxful's biggest market is Colombia — where Venezuelans are sending money home.
According to a World Bank estimate, at least 10% of all trades that it analyzed are cryptocurrency vehicle transactions. But bank officials believe the number to be much higher.
Necessity the mother of invention
Argentina is a perfect case study for the adoption of cryptocurrency in the face of necessity, according to World Bank economist Clemens Graf von Luckner. He points out that bitcoin transactions in Argentina were barely a blip in 2018 before they suddenly spiked in 2019 — after capital controls were reintroduced.
"It becomes more costly to use the official exchange rate when we move money into Argentina, it becomes harder to move dollars or your local currency out of Argentina. And so you opt out for alternative channels," the World Bank economist said.
Daniel Cartolin, a New York City-based account executive at Chainalysis and native of Peru, says his family sends money back home regularly.
"One of the major reasons crypto makes more sense than the traditional Western Union or other traditional remittance companies is that they kill you with fees," Cartolin said. "In crypto, you have minor fees."
Brazil, the region's largest economy, is seeing fewer cryptocurency vehicle trades and more interest in using cryptocurrency for investing.
"It's more so investment and speculation," Cartolin said. For example, Brazilians wanting to invest their savings are looking away from traditional brokerage accounts toward cryptocurrency and decentralized finance for better options, Cartolin said.
Paxful's Rodrigues, a Brazilian, says that there is much less interest in holding U.S. dollars in the country. Inflation and long-term devaluation of the currency have led Brazilians to seek out cryptocurrency options.
Noting the growing interest in Brazil, Mercado Libre, a marketplace platform that also runs a financial platform called Mercado Pago, in December 2021 rolled out the ability for Brazilians to buy, hold and sell cryptocurrency in partnership with Paxos, whose customers include PayPal and Credit Suisse. Within two months, 1 million customers were trading on the platform.
"We've seen this play out similarly in other markets. Financial institutions are also waking up, responding to their customers with regards to these digital assets, and they're saying, 'How do we do it?'" according to Paxos' Hessert.
Regulations lagging
A big question for all countries is regulation. Mercado Pago figured out a way to bring the cryptocurrency product to market in a regulated and compliant way, Hessert said. But other mainstream and even newer financial technology enterprises are waiting for more solid rules before dipping into cryptocurrency.
"Large financial institutions with a lot to lose aren't going to go into this haphazardly," Hessert said. That means while banks and fintechs alike are eager to jump in, they are also waiting on governments to act.
Brazil and other countries are responding and actively developing legislation.
"If a government is seeing that sort of desire, demand from the people, then they need to get more education," Cartolin said. "They need to get more clear regulation on what's going to happen."
This is also where central bank digital currencies, or CBDCs, come into effect. "The countries are super worried — that's why they are trying to create their own currencies to try to control the mechanism," Cartolin said.
Argentina's financial market regulator, CNV, launched an innovation hub in April where it will consider regulatory proposals from fintechs, said Martín Breinlinger, fintech director at CNV. Previously, CNV and the central bank had issued an alert warning cryptocurrency investors that their interests were not being protected by government entities.
"We are still in a very premature state, and our vision is that there is no immediate way today to get out and regulate overnight," Breinlinger said. "We believe that we will have to regulate it in the future."