Many experts have suggested dollarization as a way to save Argentina’s ailing economy, but it also needs Bitcoin.
This is an opinion piece by Carlos Cárdenas, an institutional account manager who has worked at traditional banks and cryptocurrency exchanges.
Argentina is on the brink of financial collapse as record inflation and the devaluation of the Argentine Peso (ARS) hits the market. According research by Steve Hanke, professor of applied economics at Johns Hopkins University, the peso has depreciated 47% against the US dollar (UD) and inflation is above 118% per year. His solution: dollarize the Argentine economy.
While dollarization is already in play in Argentina to some degree (many Argentines save in dollars and accept dollars in their businesses), the peso is still the country’s de facto currency. THE Blue Dollar The exchange rate, an informal measure of the cost of buying and selling a physical dollar bill in Argentina, has increased 23 times since 2018. At the time of this writing, it stands at ARS 465 for $1. Factors such as the rising cost of living, bad economic practices and the COVID-19 pandemic led to this result for Argentina.
Experts, politicians and local citizens advocate full-fledged dollarization as the solution, but is it the best method, or can we find something better? Given the problems inherent in the USD, perhaps a hybrid approach implementing 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 countries in Latin America to leave its national currency, sugar, and adopt the US dollar in 1999.
End of 1999, inflation in Ecuador had reached 60% and the sugar had devalued by about 300%. To prevent bank failures, the government close the banks and start “saving” 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 gave up on sugar, and in 2000 the government officially adopted the US dollar as legal tender. The short-term consequences for dollarization have been disastrous: people have lost their life savings, some have committed suicide, and many have left the country to work in the United States and Europe. This immediate cost caused the government to collapse and the country suffered a depression from which it eventually recovered.
Fast forward and, due to dollarization, Ecuador’s real GDP grew by a total of 75% from 2000 to 2013, while inflation and interest rates fell. It might have seemed like a happy ending, but due to corruption and mismanagement of resources, Ecuador’s full economic potential was never realized and today it has a below average economy.
Dollarization has been very successful in Ecuador, so it has continually posed a threat to politicians and central bankers. They no longer had the power to manipulate a currency so, taking inspiration from blockchain technology, devised a program to develop a central bank digital currency (CBDC) through a fintech program called “Dinero Electronicsbetween 2014 and 2018. Because there was no effective data control, this program allowed the government to print more dollars and allow users to transact through their phones, creating a currency that operated alongside the dollar. This added to privacy issues and a lack of trust that caused the program to crash and burn.
Lessons learned for Argentina
Given the initial success of the US dollar in Ecuador, I think dollarization is the most prudent way Argentina can go about setting monetary policy. However, Argentina can also formalize bitcoin as legal tender to reduce the immediate shock to the economy, modernize its financial system, and provide alternatives for its citizens.
Just a few years ago Bitcoin did not exist. Today, Bitcoin has a market capitalization of over $500 billion. and it is leveraged by sovereign wealth funds, hedge funds, insurance companies, technology companies and retail users around the world. And as institutional adoption grows, so do cross-border business opportunities. Bitcoin’s Lightning Network is now 1000 times cheaper only major credit card providers such as Visa or Mastercard. The potential for businesses dependent on international capital and remittances would be huge and bring confidence to the country.
Argentina also already has one of the highest crypto adoption indexes in Latin America, with over 31% retail crypto transactions made with stablecoins, a way for citizens to protect themselves from ARS inflation. Besides, more than 60% of Argentines believe that BTC has capabilities as a store of value with the power to outperform the peso.
More recently, Argentina’s Comisión Nacional de Valores, its national securities commission, authorized the launch of a bitcoin futures contract who moved to ARS. Also, bitcoin is on the rise 105% year-to-date, as reported in Argentine pesosreflecting the belief that citizens and government have in the orange room.
Many challenges could slow Bitcoin adoption in Argentina, such as lack of infrastructure or regulatory clarity. Nonetheless, with a population already highly educated in crypto assets and in need of a lifeboat, hybrid Bitcoin dollarization might prove to be a better experience than that of Ecuador. Additionally, incorporating Bitcoin adoption would provide a better social contract between the government and its citizens.
This is a guest post by Carlos Cárdenas. The opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.