Can Bitcoin find its practical use case as a currency in Latin America?

Eduardo Gomez started with Bitcoin in 2012, though he didn’t quite understand what he was getting himself into nor how it would change his life.

Back in his home country of Venezuela, the struggling computer science student signed up to manually process thousands of captchas at a time, and he received Bitcoin in return. Little by little, Eduardo became intrigued. He saw bitrapreneurs pop-up all around him as savvy hackers set up mining operations that took advantage of the country’s subsidized though irregular electricity. He started reading more, writing more, and pretty soon he became a recognized authority on all things crypto.

Eventually he would be hired by a company that allows people to purchase things on Amazon using Bitcoin. When Venezuela became unlivable, Eduardo’s company helped him and his support team relocate to Argentina. In a moment of euphoria, Eduardo wrote:

Though Venezuela crumbled around him, Eduardo found a way to opt-out of his government’s mass-imposed misery. He still worries about his family and friends, but he’s grateful to have had a choice. Unlike the Silicon Valley-based techno-libertarians and utopians who claim Bitcoin will save us from inevitable tyrannical government meddling, Eduardo feels Bitcoin actually did save him from tyrannical government meddling. He believes it can do the same for other Latin Americans, as well.

Since its triumphant arrival to mainstream polite conversation, Bitcoin and its underlying technology blockchain have promised to revolutionize everything from commerce to voting.

While blockchain appears to be fulfilling its promise, many wonder if Bitcoin will ever get around to acting as a viable currency rather than just a store of value or speculative asset.

While Bitcoin can be credited with spawning a new industry of cryptocurrency, in 2018 we still seem to be a ways away from purchasing ice cream or hourly parking with Bitcoin — or any other cryptocurrency for that matter.  

If Bitcoin is to become a viable means of exchange, Latin America would appear to be the currency’s first point of entry on its journey toward ubiquity. Indeed, the region’s long history of economic mismanagement makes Bitcoin adoption as much a necessity as a luxury.  

For example, when you arrive at Simon Bolivar International Airport in Caracas you’ll see an official exchange rate listed above the currency exchange kiosks, and you might be tempted to cash-in your U.S. dollars for whatever the local currency happens to be that month.

Maybe even before you leave the airport someone, possibly a taxi driver, will approach you and offer a completely different and far more beneficial exchange rate. Though the government purports to control the exchange rate across the country of 30 million people, it struggles to control the exchange rate inside the airport.

If you’re dining in Buenos Aires and you offer to pay in U.S. dollars, you’ll be happy to know you’ll receive a favorable exchange rate for your Benjamins. However, once you pull a bill from your pocket, you may find yourself in a seemingly nonsensical discussion with the waiter about the quality of the bill and how the slightly bent edges means a lower rate than the one initially offered.

Finally, if you arrive in Quito, Ecuador as a tourist, you’ll be delighted to see that the country has no currency of its own in circulation: the country has used the greenback since a financial crisis in 1999 destroyed the banking system and the country’s currency. In an act of desperation, the country switched to the U.S. dollar.  

Your glee may turn to discomfort after you ask a taxi driver to break a $20 bill and you’ll see him fidget nervously and probably ask you for exact change. Few things are harder in the Andean capital than breaking a $20. Never having the right mix of bills is one of the downsides of not controlling your own money supply.

For your average tourist, these encounters are befuddling. To economists, these incidents are both sad and bemusing: all of the worst-case currency management scenarios first-year economics students study in textbooks seem to come to life in the countries that are fed by the Amazon river and its tributaries — like a twisted Narnia for economists.

To the local populations of the aforementioned countries, managing currencies has turned common people into artisanal forex traders. While annoying, volatile currencies have been around for as long as anyone can remember, and people adjust their behavior in order to survive. If you want to buy an apartment in Buenos Aires, for example, you’ll be expected to arrive with the payment in U.S. dollars in cash. Best to invest in a good briefcase.

As crypto enters its peak or its decent, depending on who you ask, Latin America offers the perfect testing ground for the technology’s practical application. Specifically, Argentines and Venezuelans would appear to be the test group for the use of crypto currencies as an alternative to unstable and unreliable national currencies.

In a parallel world, both Argentina and Venezuela would be the region’s richest countries, were it not for their leaders’ penchants for mismanagement and corruption. With oil reserves greater than those of Saudi Arabia, Venezuela should be thriving. Instead, its experiment with socialism has resulted in more than two million people leaving the country, a wrecked economy and a humanitarian crisis that threatens regional stability.  

Argentina’s current crisis is far more complex, and yet also more predictable due to the country’s history of boom and bust.

Despite the initial optimism voiced by foreign investors when a right-leaning pro-market government came to power in 2017, such optimism has not been reflected in support for the peso.

The peso has suffered due to, amongst other factors, a strengthening dollar, dwindling foreign currency reserves and investor mistrust. Inflation caused by past policies of over-printing money to service local debt combined with the current government’s elimination of energy subsidies means that Argentines can’t be sure on Monday what their money will be worth on Friday.

The theatrics of Argentina’s politics also doesn’t inspire confidence, and breaking news can often send the peso on nosedives. Stories of corruption unfold like Emmy-winning soap operas.  

For example, the recently discovered notebooks of a government chofer reveal that businesses close to the current president are alleged to have paid bribes to its bitter rivals from the previous government. Regardless of their ideological differences, Latin America’s political class is often united in its penchant for corruption.

The cyclical nature of Argentina’s currency crisis is what gives some hope that the country can become the first to develop a thriving national Bitcoin market. Already a hotbed for blockchain-based companies such as Ripio, Buenos Aires has a higher percentage of businesses that accept Bitcoin than New York. By the end of 2018, Argentina will have more than 100 Bitcoin ATMs, a number expected to increase to 1,600 by the end of 2019.

For Agustina Fainguersch, an Argentine entrepreneur who helps companies, including many in Latin America as managing partner at Wolox, manage digital transformation through the adoption of technologies such as the blockchain, Bitcoin is a practical solution for the average Argentine just trying to make ends meet.

“In Argentina, we exchange pesos into dollars and then back again within the span of a week,” she says. Given that the peso has lost 50 percent of its value against the dollar since the beginning of 2018, most are changing money for the purpose of short-term survival rather than long-term savings. “Many Argentines are often just trying to make sure they have enough money to cover basic expenses.”

According to Fainguersch, the advantage Bitcoin has over other currencies is its increasingly availability, and as such acts as an alternative to the U.S. dollar. Fainguersch has seen how, over the span of a few years, more and more Argentines can access the cryptocurrency and easily exchange pesos. “So long as it’s less volatile than the peso, it’s attractive. Argentine’s have a long history of navigating volatility,” notes Fainguersch.

That volatility, however, is also a risk that places Bitcoin at a disadvantage when compared to the U.S. dollar. Also widely available, the dollar is relatively stable and relatively easy to exchange, though not without burdens and risks, such as falsified bills, hence the extra-value placed on crisp bills.

For Matías Bianchi, the Argentine political scientist and founder of the regional think-tank Asuntos del Sur, the demand for Bitcoin in Argentina follows a familiar pattern: Like much technology that promises to democratize access to something, the benefits of said technology most likely end up helping a wealthy few at the expense of the increasingly hard-luck masses.

In the case of Bitcoin, Bianchi opines that its adoption in Argentina is driven in large part by a wealthy class that has always looked for ways to subvert the country’s institutions to protect its wealth and to benefit from speculative financial activities. “Bitcoin allows the elites to opt-out of the poor decisions made by the government they help install.” After all, unequal access to technology often means unequal access to the benefits of technology.

For Bianchi, talk of an alternative to the national currency is elitist hogwash. Even if a larger and larger percentage of Argentines use Bitcoin, Bianchi argues, 100 percent of Argentines still need to use pesos. As such, opting out of the peso is a luxury for some but not for a viable solution for all. In Bianchi’s view of the world, Bitcoin is more like a modern-day offshore account that removes wealth from the economy and shifts the burden of bad government to the poor. It’s like a Cayman Islands account on your phone, and in countries where corruption is rife and stability is rare, such technology is bound to thrive.

For Venezuelans arriving in Argentina like the aforementioned Eduardo Gomez, their new country’s currency woes are not unfamiliar. As previously mentioned, Eduardo was a student in Venezuela when he first discovered Bitcoin. As the bottom fell out of the Venezuelan economy, Bitcoin mining became a popular activity in a country where everything is subsidized, including energy. Eventually the government caught on and cracked down, but not before a nascent Bitcoin community took form.

Undemocratic Socialist governments tend to replace economic elites with elites who are connected to the sources of power, and, according to Gomez, people with connections in the government eventually took over the Bitcoin mining space. Venezuela even launched its own cryptocurrency, the Petro, whose value is tied to oil production. The Petro has been met with skepticism from both crypto-enthusiasts as well as average Venezuelans who have long lost faith that the government responsible for their problems is capable of solving them.

As previously mentioned, Venezuelans have been leaving their country en masse to escape the entirely man-made crisis that has engulfed their country, and more than 130,000 have settled in Argentina. Gomez sees the parallels between Argentina’s current predicament and the one he left behind in Venezuela, though he feels Argentina’s crisis is tame compared to the complete social breakdown suffered in Venezuela.  

Compared to Venezuela, trading Bitcoin in Argentina is much easier: users in both countries use LocalBitCoin.bom to connect with buyers and sellers to facilitate converting money to and from local currencies. The process is somewhat archaic and not without risks. Unlike in Venezuela, in Argentina many money exchangers also offer Bitcoin exchange services. Whereas in Venezuela buyers and sellers run the risk of the government discovering their Bitcoin activities and blocking their bank accounts, in Argentina the government is more concerned about individuals not declaring their income or capital gains.

Both Argentina and Venezuela have offered the ideal conditions for the development of national Bitcoin communities, including the two key ingredients: subsidized energy and unstable national currencies.

As a result, both countries have benefited from the emergence of developer communities focused both on cryptocurrencies as well as blockchain-enabled technologies. Nonetheless, neither country is likely to fulfill the Bitcoin fantasy of replacing their national currencies, nor even overtaking the greenback as an alternative to unstable national currencies.

Bitcoin’s ultimate use cases are more likely to appear along the lines of existing power structures. Wealthy people in Argentina will use Bitcoin to hide their money. Corrupt Venezuelan officials will find a way to enrich themselves at the cost of the struggling masses. Having said that, if Bitcoin becomes as stable as the U.S. greenback, its use as a store of value will continue to increase.

Other innovations will also emerge: as Gomez points point, the launch of Coinbase’s USD coin, a cryptocurrency pegged to the U.S. dollar, could make it a lot easier for people to move money between dollars, pesos and bitcoins without the need to carry physical cash. One of Argentina’s leading Bitcoin thinkers, Santiago Siri, has proposed to the country’s Central Bank that it hold 1 percent of its foreign currency reserves in cryptocurrency. Though the plan is unlikely to succeed, Argentina’s desperate circumstances has opened the door for out-of-the-box thinking.

The emergence of Bitcoin as an alternative to the U.S. dollar will not reduce the need for sound monetary policy, nor will the stability promised by the U.S. dollar become less attractive for the average Argentine or Venezuelan looking to make ends meet rather than speculate away their savings. In either case, Bitcoin does not replace the need for sound institutions.

Of course, if President Trump is successful in gaining control of the U.S. Federal Reserve in order to begin manipulating monetary policy to benefit his short-term political agenda, the U.S. dollar could lose its attractiveness. So far, however, U.S. institutions appear to be fairly resilient in the face of the type of intrusive leadership Latin Americans know all too well.

Though its proponents will continue to tout Bitcoin’s superiority vis-à-vis fiat currencies, Bitcoin’s ultimate challenge is that it is hard to understand and will therefore be defined by stories we tell about it. In other words, the future of Bitcoin will depend on which narratives become the meta-narratives: will Bitcoin be defined by the Eduardo Gomez stories of individuals who escape systems of tyranny thanks to Bitcoin, or the corrupt government officials who receive bribes in their anonymous crypto-wallet, or the drug traffickers who evades detection by shifting from U.S. dollar payments to crypto?

Over 50 years ago Marshall McLuhan wrote, “the new media and technologies by which we amplify and extend ourselves constitute a huge collective surgery carried out on the social body with complete disregard for antiseptics.” Bitcoin is the perfect example of a surgery we are undertaking on the body politic without necessarily understanding the far-reaching consequences. We have to consider that making policy decisions based on the currency’s theoretical promise may not result in a better world.

At the same time, we should also be open to re-thinking how the world operates for the sake of empowering people through technology. The challenge for democratizing technologies is that they must take on and overcome existing power structures. In Latin America institutions are often weak, which is part of the reason why Bitcoin can flourish there: the poison and the antidote spring from the same well. That doesn’t mean, however, that there aren’t powerful and resilient interests filling the voids left by those floundering institutions.

Ultimately the question for Bitcoin in Latin America and elsewhere in the world is following: Is it easier for technology to co-opt power than it is for power to co-opt technology? Argentina and Venezuela are putting that question to the test. The world watches.