Crypto key to currency crisis in LatAm?

Are the promises of cryptocurrency all hype for financially-challenged countries like Venezuela and Argentina?

Blockchain's global nature and liquidity have made it an attractive option for entrepreneurs — and government — in two Latin American countries facing financial crises with vastly different results.

In Argentina, crowdfunding through blockchain has yielded better results than traditional VC funding. Ripio Credit Network was the first to benefit from the ICO fever by securing more than $37 million, creating a blockchain start-up with a working product and solid user base of hundreds of thousands. But it's not the only one -- according to Venturebeat, AstorGame raised over $11 million, Flixxo then grabbed a $5 million raise, and Decentraland nabbed $24 million. In addition, uptake of bitcoin has grown in Argentina as a result of economic uncertainty, and the country has also launched its own cryptocurrency, the buenos.

Venezuela is likewise looking to blockchain and cryptocurrency in the wake of its financial woes, with the government having launched a national blockchain for its own oil-backed petro cryptocurrency in the hopes that it can break the economic blockade imposed by the United States.


Cryptocurrency as a crisis solution

Peter Earle, a research fellow at the American Institute of Economic Research, explains that the difference between Argentina and Venezuela where cryptocurrencies are concerned, is in their respective roles as crises have broken out. 

"In Argentina, which has historically been more friendly to markets than Venezuela - which may not be saying much - the availability of cryptocurrencies has led to them being used as a safe haven, much like gold or silver previously, as the peso has plunged," he says.

Venezuela is a vastly different case, however. "The growing and self-inflicted catastrophe has led the Maduro regime to attempt to leverage the cryptocurrency market by issuing its own, the petro, to attempt to stay liquid and solvent. It has been singularly unsuccessful." Recent reports have noted that not only are hardly any shops actually accepting the currency, availability of the petro is practically non-existent.

Bradley attorney Steve Snyder says the petro has been heavily criticized for various changes and conflicting information provided as to the underpinning technology. This information is usually provided in a transparent manner in white papers, but for the petro the white paper was revised more than once and the details of the cryptocurrency are still unclear.

"The purported backing of the petro with resources has also been subject to questions given the lack of detail provided. The petro has largely been touted at a very high level, which prevents any realistic evaluation of its utility," Snyder says.

Lance Morginn, CEO of Blockchain Intelligence Group, notes that citizens worry about the volatility of the new currency. "Instigating mandatory petro payments has forced up prices… and senators are pushing for tighter sanctions to weaken efforts to legitimize the petro digital asset," he explains.

Morginn says that the Venezuela Humanitarian Relief, Reconstruction and Rule of Law Act 2018, which the same Senators supported to provide humanitarian aid to migrants and boost efforts to restore their democracy, will not allow Americans to support the petro. It mandates that the U.S. State Department and Commodity Futures Trading Commission and the Securities and Exchange Commission submitted a report to the congressional committees that discuss how crypto negatively impacts U.S. sanctions.

Earle adds that Venezuela's challenge is beyond cryptocurrencies: they attempted to issue the petro and encourage its use, with the result that it has floundered miserably. "The Venezuelan government thought, I suppose, that the crypto medium would be more forgiving of monetary hi-jinks than the fiat medium would, and they were incorrect. It's back to square one for them," he says.

Both Venezuela and Argentina have been looking to cryptocurrency as a way to address severe economic issues. Camilo Jimenez, CEO of Colombian crypto company Send, explains that hyperinflation in Venezuela will reportedly hit 1,000,000,000% by the end of this year, and though not to the same extreme, inflation and currency depreciation are significant throughout much of Latin America.

In Argentina, on the other hand, average annual depreciation is 34% and people have been known to save American dollars under their mattresses. Currency exchange restrictions make access to USD increasingly difficult, exchange monopolies make USD expensive, and without hard currency, saving is next to impossible.

"In both countries, we've seen people identify the value of cryptocurrencies as a mechanism for saving and to move dollars as payment. In both economies, we are seeing a return to the basic principles of trading products for other products. Increasingly, we are seeing crypto used in the middle of these operations for its wider value," Jimenez says.



Despite the failure of the petro, Venezuelans have benefited from cryptocurrency in the private sector. Morginn says there are more encouraging efforts in the private sector to aid economically deprived Venezuelans. Dash Text will help Venezuelans without access to smartphones or internet to have access to cryptocurrency transactions which is becoming increasingly popular.

"This approach is less menacing to the United States as it is not a state-run cryptocurrency. Some big multinational companies now accept payments in Dash such retailers include, Subway and Calvin Klein," he says.

Jimenez adds that although crypto is being used at higher rates in these two countries than in other parts of the world, there are still plenty of challenges. One of the major challenges is figuring out how to choose which cryptocurrency to use based on what people intend to do with it. Many cryptocurrencies still have limited use, limited networks for cash-in and cash-out, and very little information available for a consumer to make an educated decision while misinformation is still pretty commonplace, Jimenez cautions. "In Venezuela, bitcoin is still the main currency used, but more and more people are trying to implement Dash and WeSend for payments," he says.

Argentina's approach to the adoption of cryptocurrency has been different, with the country seeing the installation of 30 bitcoin ATMs in October 2018. Promises to roll-out more than 1,500 more, however, have been put on hold, calling into question the success of such ventures.

According to Morginn, efforts in Argentina are coming from the nation's start-up community devising solutions for the 50% who lack a bank account. He adds that there is an ideological element to the crypto space, which fits well into the Argentinian culture.

"Argentina seems to have more of a proactive approach to the start-up community and the crypto community without forcing its citizens to purchase a digital peso. New regulations have allowed independent crypto companies to enter the market with trades surpassing $9 million in BTC," he says.

"We are encouraged that the government requires by law that individuals report suspicious transactions involving money laundering or terrorism financing when dealing with virtual currencies."

In both cases, the availability of cryptocurrencies like bitcoin are offering citizens what amounts to a personal finance lifeboat - one that is vastly more flexible than the traditional safe havens, gold and silver, according to Earle.

"Citizens of nations whose governments seem to lurch from one crisis to the next now have a readily accessible way of avoiding the damage that such periods inevitably wreak upon them," he says. "For the governments of such nations, citizens moving their funds out of the banking system and into the crypto economy can be seen as nothing less than a scathing rebuke to their policies."

Snyder emphasizes, though, that country-issued cryptocurrencies such as the petro and Argentina's buenos have had little to no real impact due to the fact that they are not traded on exchanges. "There are some reports of Venezuelans being forced to use petros within the country, but without external value this is akin to providing food stamps. It is not establishing an alternative currency unless it attains value vis-à-vis other currencies," he says.

Snyder does believe, however, that the actions of these two countries, which are desperate for a non-traditional solution, may be signalling a real potential disruption to global economics. "If they show any promise other countries may follow suit," he says.

What has been true of bonds for a long time - that once an issuer's credit rating dropped low enough, it wouldn't be able to issue more bonds - now applies to currencies and government policy: citizens are no longer captive to bad policies because of a state's monopoly on currency issuance, Earle highlights.

"It would be better for governments - especially those with a long history of economic policy indiscretions - to either embrace cryptocurrencies, or to do the unthinkable and put their national finances in order," he says. "Bans, deception, and disingenuous schemes are only hastening the pace of crypto adoption." The lesson here seems to be embracing cryptocurrency in a way that actually delivers.