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Friday, April 19, 2024

Reviving Argentina's Economy: Dollarization And Bitcoin As Catalysts For Change

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Many experts have suggested dollarization as a way to save Argentina’s flailing economy, but it needs Bitcoin too.

This is an opinion editorial by Carlos Cárdenas, an institutional account manager who has worked at legacy banks and cryptocurrency exchanges.

Argentina is on the verge of financial collapse as record inflation and Argentine peso (ARS) devaluation hits the market. According to research from Steve Hanke, a professor of applied economics at Johns Hopkins University, the peso has depreciated 47% against the U.S. dollar (UD) and inflation is running higher than 118% per year. His solution: dollarize the Argentine economy.

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While dollarization is already in play in Argentina to some extent (many Argentinians save in dollars and accept dollars at their businesses) the peso is still the de facto currency of the country. The Dólar Blue rate, an informal measure of the cost of buying and selling a physical dollar bill in Argentina, has risen 23 times since 2018. At the time of this writing, it sits at 465 ARS to 1 USD. Factors such as the rising costs of living, bad economic practices and the COVID-19 pandemic have led to this outcome for Argentina.

Pundits, politicians and local citizens are advocating for full-fledged dollarization as the solution, but is this the best method, or can we find something better? Given the inherent problems with the USD, perhaps a hybrid approach that implements the superior qualities of Bitcoin, could serve Argentina better.

A Case Study In Ecuador

To analyze this, let’s take a look at Ecuador, which was one of the first Latin American countries to leave its national currency, the sucre, and adopt U.S. dollars in 1999.

By the end of 1999, inflation in Ecuador had reached 60% and the sucre had devalued by about 300%. To prevent bank failures, the government shut down banks and started to “rescue” the financial system. As expected, this did not work and not only did poverty explode in the country, but the monetary base expanded by 552%. Consequently, Ecuadorian citizens abandoned the sucre and, by 2000, the government officially adopted the U.S. dollar as legal tender. The short-term consequences for dollarization were dire: people lost their entire lives’ savings, some committed suicide and many left the country to work in the United States and in Europe. That immediate cost caused the government to collapse and the country to suffer a depression that, eventually, it recovered from.

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Fast forward and, as a result of dollarization, the real GDP of Ecuador grew by 75% in total from 2000 to 2013, while the inflation and interest rates dropped. This might have seemed like a happy ending, but due to corruption and mismanagement of resources, the full economic potential of Ecuador was never realized and today it has a below-average economy.

Dollarization was very successful in Ecuador, such that it continuously posed a threat to politicians and central bankers. They no longer had the power to manipulate a currency so, with the inspiration of blockchain technology, came up with a program to develop a central bank digital currency (CBDC) through a fintech program called “Dinero Electrónico” between 2014 and 2018. Because there were no effective data controls, this program allowed the government to print more dollars and allow users to transact via their phones, thus creating a currency that operated in parallel to the dollar. This added to privacy concerns and a lack of trust that drove the program to crash and burn.

Lessons Learned For Argentina

Seeing the initial success of the U.S. dollar in Ecuador, I do believe dollarization is the most prudent way that Argentina can go about fixing its monetary policy. However, Argentina can also officialize bitcoin as legal tender in order to reduce the immediate shock to the economy, modernize its financial system and offer its citizens alternatives.

Mere years ago, Bitcoin was non-existent. Today, Bitcoin has a market cap of well over $500 billion dollars and it is leveraged by sovereign wealth funds, hedge funds, insurance firms, tech firms and retail users all across the globe. And while institutional adoption grows, so do business opportunities across borders. Bitcoin’s Lightning Network is now 1,000 times cheaper to use than major credit card providers like Visa or Mastercard. The potential for businesses relying on international capital and remittances would be huge and bring trust to the country.

Argentina also already has one of the higher indices of crypto adoption in Latin America, with over 31% of the retail-sized crypto transactions being conducted with stablecoins, a way for citizens to protect themselves from the ARS inflation. In addition, over 60% of Argentinians believe that BTC has capabilities as a store of value with the power to outperform the peso.

Most recently, Argentina’s Comisión Nacional de Valores, its national securities commission, authorized the launch of a bitcoin futures contract that settles in ARS. In addition, bitcoin is up 105% year to date, as quoted in Argentine pesos, reflecting the conviction that both citizens and the government have in the orange coin.

There are many challenges that could slow down Bitcoin adoption in Argentina, such as the lack of infrastructure or regulatory clarity. Nonetheless, with a population that is already highly educated in crypto assets and in need of a lifeboat, Bitcoin-hybrid dollarization might prove to be a better experience than Ecuador’s. In addition, incorporation of Bitcoin adoption would deliver a better social contract between the government and its citizens.

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This is a guest post by Carlos Cárdenas. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.





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