Argentines take refuge in cryptocurrencies due to the shortage of dollars and the weakness of the peso

Representations of the virtual currency BitcoinDado Ruvic / Reuters

Marked by decades of financial instability and crisis, at least one million Argentines have adopted cryptocurrencies as an alternative to their national currency, as an investment instrument or to transfer funds without the need for a bank.

Today, given the success of cryptocurrencies in global markets, the implications for the third-largest economy in Latin America can be enormous.

And the risks, too.

This month, the most recognized and well-established cryptocurrency in the world, bitcoin, broke its all-time high by trading at more than $ 23,000, driven by the entry of institutional investors such as global banks and mutual funds.

Low interest rates imposed in developed countries have whetted investors' appetite for other, riskier and more profitable assets, including cryptocurrencies.

Specifically, a cryptocurrency is a digital asset that can be safely exchanged through a secret language or cryptography.

Its existence is possible thanks to a sophisticated digital technology called blockchain, which works as a kind of ledger that records each transaction.

Cryptocurrencies do not have a central bank that issues or supports them.

They do not even have a clear authority or responsibility.

But for Argentines, cryptocurrencies are more than just the investment in fashion: they are an alternative to their fiat currency, that is, the currency issued by their central bank, and they have many reasons not to trust it.

They have seen hyperinflation, unsustainable debt, dramatic devaluations.

Your financial history is a series of failed decisions by your governments, regardless of political party or position on the ideological spectrum.

The lack of confidence is such that the Government has had to limit the amount of US dollars allowed for personal savings and, when that was not enough, it placed restrictions on the purchase of foreign currency, the use of cards abroad and even exchange operations with bonds.

Buying foreign currency to preserve the value of money is something that Argentines have always done because of the weakness of their currency, says Lucas Llach, an economist and author of several books on the economic history of his country, who was vice president of the Central Bank in 2015. to 2018 and from Banco de la Nación Argentina in 2019. Faced with restrictions, Argentines are turning to bitcoin, other

cryptocurrencies

and even

stablecoins

-

cryptocurrencies

whose value is tied to other assets, such as raw materials or precious metals, for example.

"It is also a way of buying something that protects more value, with more risk," says Llach on the phone from Buenos Aires.

“What I'm already taking for granted here is that Argentines, as they have a weak currency in general, are looking for strong currency.

And the question is why not the dollar and more cryptocurrencies?

Well, I think one factor is that in Argentina today I cannot buy a dollar from you, like this, legally, because it is an exchange transaction and that has a special law called Criminal Exchange Law and it is very punished, while yes I can buy you cryptocurrencies legally, it is a digital asset.

It's like buying you a pair of shoes. "

Creative energy

There is a second factor that could explain the attractiveness of cryptocurrencies in Argentina, Llach points out: the community of web developers, computer scientists and entrepreneurs in the digital space who have adopted digital banking very early.

Companies whose business is based on information technology or online commerce such as Mercado Libre, Globant and OLX were born from this Argentine community and today they are world leaders.

"There has been a lot of creative energy and they have been like evangelizers of cryptocurrency, it seems to me," says Llach.

Technology has advanced in recent years to allow digital financial services companies, known as the

fintech

industry

, to allow people to transfer money electronically without going through a bank.

During his vice presidency, says Llach, the Central Bank facilitated an integration between conventional banking and fintech companies.

"I'm not saying it was the deciding factor, but in these things the user experience is always relevant," he says.

At that time, the bank saw the interaction between cryptocurrencies and fiat currency "as an opportunity in certain dimensions," says the expert.

"It is true that some of the crypto promises are not fully fulfilled, but above all we saw it as an opportunity in what is international transfers."

Argentina is ranked 28th out of 142 countries in the world in the most recent global cryptocurrency adoption index prepared by the firm Chainalysis, a leader in information in this market.

In Latin America, only Brazil, Colombia and Peru are ahead of it.

The index is based on the volume of transactions until June of this year, however, information from the specialized international medium Coindesk points out that the volume of transactions from fiat to cryptocurrencies has been growing in Argentina consistently since the summer, touching a volume record $ 1.2 million in November.

"Many people are unable to obtain bank accounts, which is another factor driving the adoption of cryptocurrencies," says Chainalysis' annual report, released in September.

"Without easy banking access, many young people in Latin America turn to cryptocurrencies as a means to store value."

The popularity of

stablecoins

like DAI, which is tied to the price of the U.S. dollar, points to the importance of stablecoins for Latin Americans looking to protect their savings, the firm added.

For its part, Coindesk reported this month that one of the largest cryptocurrency exchanges in Argentina, Ripio, started the year with 400,000 users and will close it with one million.

"It makes perfect sense that Argentina is a country that is embracing cryptocurrencies," says Emily Parker, author and managing editor of Coindesk.

“The thing to remember about bitcoin, its beauty and its importance, is that it is a currency that operates independently of governments and banks.

So, bitcoin is particularly attractive in countries where there is mistrust in the banking system or mistrust in monetary policy.

Argentina, after having gone through a series of financial crises, is a kind of good candidate for bitcoin ”.

In May, the Financial Information Unit of the Argentine government announced that it would request information "in view of the increase in operations with virtual assets", without referring directly to bitcoin or cryptocurrencies.

“In recent times, there has been an increase in operations carried out through virtual assets.

In this context, the UIF-Argentina warns that such operations could be being carried out by people who intend to circumvent international standards and avoid the preventive system of Money Laundering and Terrorism Financing, ”the statement said.

No regulation

The big risk when it comes to investing in cryptocurrencies is the lack of regulation, says Teresa Walsh, global intelligence director at FS-ISAC, a global cyber intelligence exchange organization focused on financial services, from London.

“Financial institutions have been investing in cybersecurity and resilience for years, in part because they are heavily regulated.

They are required to invest in cybersecurity and have plans in case of attacks.

In many countries, bank deposits are insured by the government.

This means that if a customer loses money, there may be a way to get it back. "

“However, with unregulated entities like cryptocurrency exchanges, you don't need to invest in cybersecurity, have incident response plans, or have insurance to protect consumers.

We have seen cyber attacks that have affected crypto exchanges, with millions in losses.

In these cases, consumers have no legal recourse to try to recover the funds, ”adds Walsh.

The perception of cryptocurrencies has changed from being a currency used by organized crime or arms dealers, to being a legitimate investment option.

"The simplest explanation, probably, is acceptance by institutional investors, something we have seen a lot this year," says Parker of Coindesk.

The change in narrative, therefore, does not necessarily reflect that investment security has radically improved.

It is precisely in emerging markets, such as Argentina, where effective regulation will be most important to protect consumers, Walsh believes.

“There is an opportunity for these countries to innovate and develop effective regulations and controls that will lay the foundation for responsible adoption of encryption systems around the world,” says the specialist.

And to investors, Walsh offers one final piece of advice: “The keys for crypto investors wherever they are are education and research.

Unlike regulated financial institutions, you may never know who is responsible for your money.

If you invest, consider it a high risk asset class and know that any loss from a cyber attack is likely to be permanent. "