Although back in March, coronavirus seemed like a European problem, it was only a matter of time before it started to wreak havoc across Latin America and North America. At the time of writing, Brazil is second only to the US in terms of case numbers, with Chile and Peru also in the top eight hardest-hit countries globally.
All countries will feel the inevitable economic fallout from the virus, but many Latin American countries were already in a difficult economic state before the crisis hit. As of 2019, there were already 191 million people living in poverty in the region.
The OECD points out that in its current economic situation, Latin America has less “fiscal space” to mitigate the inevitable oncoming recession than it did in 2008, before the global financial crisis. The IMF is now predicting a bigger economic contraction in Latin America than any other developing region.
Compounding the situation even further, US dollar-denominated debt was on the rise in 2019, up 3%. This is a particular challenge for Latin American countries, many of which have highly volatile national currencies. Recessions push inflation, meaning that the value of national currencies is likely to depreciate against the dollar. This will make it even harder for debts to be repaid.
Financial Innovation — A Lifeline Out of the Crisis
For the average citizen in Latin America, it’s shaping up to be a tough few years ahead. In a recent interview with the Financial Times, the new vice-president of the World Bank for the region, Carlos Felipe Jaramillo, stated he was “very worried about what [the economic fallout of the virus] means for Latin America in terms of poverty, poverty numbers, employment, incomes, and inequality, which has always been a problem.”
Later in the interview, Jaramillo points out the role that innovation and entrepreneurship can play in helping to increase productivity, as a means of bringing relief from the economic crisis. He cites the example of Kenya’s M-Pesa money transfer system as an example of this in action.
I happen to agree with him — financial innovation is exactly the tonic that Latin America needs to help it survive this crisis and thrive beyond it. I came to this realization myself through my own discovery of Bitcoin back in 2012. At that time, there were strict controls on the transfer of capital, imposed by the government. These controls made it all but impossible to transfer money in or out of Argentina. A friend living in Silicon Valley told me to open an account and transferred some BTC to me. Twenty minutes later, I sent it back, but he told me to keep one and play around with it.
The ease of that financial transaction, at a time when I couldn’t have legally bought a single U.S. dollar if I’d wanted to, opened my eyes to what an open financial system could look like. I decided to devote my life to helping develop and spread the word about Bitcoin. In 2014, I founded the Bitcoin Center in Buenos Aires. Today, we have ten countries in the region with active Bitcoin communities and meetups.
And it’s working — people are starting to see the potential of decentralized open finance. A survey last year by Statista showed that, of the top seven countries to adopt cryptocurrencies, five are in Latin America.
Even though I’d like to think that this level of adoption is all down to the efforts of us, early evangelists, the reality is that the economic circumstances in Latin America make fertile ground for the adoption of crypto.
Why Bitcoin Could Be a Boon for Latin America
A significant part of the reason for Bitcoin’s popularity is the factors mentioned above. Cryptocurrencies level the financial playing field. Using Bitcoin doesn’t require you to go to a bank, hand over your passport and undergo complex KYC checks and credit ratings scores. Anyone with a smartphone can start using cryptocurrencies within seconds, meaning it holds vast potential as an enabler of financial inclusion.
This is how Kenya’s M-Pesa system took off — because it bypassed the need for a bank account, making it a viable option for the unbanked and those in poverty. As the economic crisis bites on Latin America, Bitcoin has the potential to do the same.
Unlike M-Pesa, which relies on national currencies, Bitcoin holds another attraction for the people in Latin America. The value of the Argentinian peso has fallen by 85% against the U.S. dollar in the last five years — and that’s not unique within the region. With such a low level of confidence in national currencies and purchasing power loss that make Bitcoin volatility irrelevant, people prefer to convert their funds to crypto. When the Argentinian government clamped down on crypto last year, the people simply started using LocalBitcoins and other peer to peer means of exchange.
Broader Opportunities From DeFi and More
These days, using crypto doesn’t even mean depending solely on Bitcoin as a store of wealth, given it has also shown record volatility levels this year. Stablecoins are more available than ever before and backed by a wide range of more stable currencies, including the U.S. dollar and the euro.
These foreign currencies would have been entirely inaccessible to many citizens of Latin America a few years ago. Now they’re available to buy in virtual form within seconds, using only a smartphone and without going through any middleman.
Decentralized finance is taking off in a big way, and opening up even more opportunities for financial inclusion for people in Latin America. Stablecoins pegged to the U.S. dollar and backed by crypto allow holders to use their crypto as collateral on loans, creating new avenues of lending for those who would otherwise be ineligible for bank credit. If someone does have a store of wealth in crypto, they can stake it and earn interest from those wishing to borrow.
Blockchain is also becoming more interoperable. Therefore, it seems reasonable to expect that within a few years, decentralized finance applications running on Bitcoin and other platforms will run together seamlessly, allowing a lender on one platform to loan funds to a borrower on another. Tokenizing traditional assets, such as commodities or even real estate, could finally bring true democratic access to the broader financial markets.
Due to the continuing challenge of the pandemic, things seem bleak right now. The next few years will be some of the most economically challenging in LATAM’s history. However, those of us in the crypto space have an opportunity and a responsibility to use our knowledge, expertise and influence to help use digital finance as a way of alleviating the situation for the benefit of young and future generations.
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