Chainalysis: Exploring the Passion and Colors of Web3 in Latin America

Original Title: Latin America: Venezuela and Argentina Stand Out as Examples of Crypto's Unique Utility

Original Author: Chainalysis

Original Translation: Luffy, Foresight News

This article is excerpted from Chainalysis' 2023 Cryptocurrency Geography Report, which will be released later this month.

Among all the regions we studied, Latin America is the seventh largest crypto economy, just ahead of Sub-Saharan Africa, but behind the Middle East and North Africa, East Asia, and Eastern Europe. Compared to other regions, Latin America's position has remained relatively stable over the past two years.

Among all the regions we studied, Latin America has the highest preference for centralized exchanges, and the region has the least institutional activity compared to others.

Although the scale of the crypto economy in Latin America is smaller than in most other regions, grassroots adoption is strong, with three countries ranking in the top 20 of the global Crypto Adoption Index: Brazil (9th), Argentina (15th), and Mexico (16th). Cryptocurrencies have become an important part of daily life in many countries in the region, especially in those facing currency devaluation.

There are significant differences in cryptocurrency adoption patterns among Latin American countries. The heat map below compares some of the largest cryptocurrency adoption countries in the region by preferred platform type.

In almost every country in the region, the market share of centralized exchanges is above the global average. In Venezuela, up to 92.5% of cryptocurrency activity occurs through centralized exchanges. However, Mexico is the only exception (more in line with the global average), where nearly half of the trading volume is conducted through decentralized exchanges. This may explain why Mexico shows a greater preference for investing in altcoins, as the number of assets listed on decentralized exchanges far exceeds those on centralized exchanges.

Mexico is an important country to watch as it embraces cryptocurrency-based remittances. Remittances are a significant financial sector, and cryptocurrency advocates have long touted that the technology can make remittances faster and cheaper. Mexico is the second-largest recipient of remittances in the world, with approximately 61 billion dollars flowing into the country from abroad each year, most of which comes from the United States. Daniel Vogel, CEO of the Mexican exchange Bitso, stated that in 2022, his company processed over 3.3 billion dollars in cryptocurrency remittances sent from the U.S. to Mexico, accounting for 5.4% of the entire market.

Brazil is another unique market in Latin America. In earlier editions of our Cryptocurrency Geography Report, we highlighted Brazil's developed institutional crypto market and the country's acceptance of DeFi and other innovative crypto platforms, bringing it closer to wealthier regions that adopted cryptocurrencies earlier, such as North America and Western Europe. The Brazilian market still exhibits these characteristics, but not as strongly as in previous years. For example, as we see below, the scale of large institutional transfers has declined, leading to an overall downward trend in cryptocurrency activity.

However, there is still a positive side for cryptocurrency enthusiasts in Brazil. Firstly, although large institutional trades are generally on the decline, they appear to be rebounding, having increased for three consecutive months as of June. Additionally, even during the months when the decline in large institutional transfers led to an overall decrease in cryptocurrency activity, trading volumes for professional investors and retail traders remained relatively stable, as shown in the line chart below.

These data paint an optimistic picture of the Brazilian cryptocurrency market. Even during the crypto winter, so-called "middle-class" high-value cryptocurrency traders and retail investors continue to use crypto assets. If they keep trading, it stands to reason that when we enter a bull market, institutional users in Brazil will return, possibly exceeding previous levels.

Despite institutional issues, Brazil's market is still quite different from its economically unstable neighbors. This is particularly evident when we look at exchange order book data. The chart below shows the most purchased assets using the Brazilian real across several popular exchanges in Latin America, compared to the most purchased assets using the Argentine peso. Argentina faced severe currency devaluation last year, while Brazil's currency has remained stable.

Data indicates that Argentina's demand for the stablecoin USDT is significantly higher than that of Brazil. This is due to the recent currency devaluation faced by Argentina. Meanwhile, Brazilians show higher demand for Bitcoin, particularly altcoins, which are more commonly used for long-term investment and speculation.

Argentina: How Cryptocurrency Alleviates Currency Crisis

For decades, Argentina has faced economic difficulties, with extreme currency devaluation periodically undermining residents' savings and complicating daily financial activities. Unfortunately, Argentina is currently in another such cycle, with the value of the Argentine peso dropping by about 51.6% over the year ending July 2023. However, during the same period, Argentina's cryptocurrency trading volume led Latin America, amounting to approximately 85.4 billion dollars, ranking second in the region for ordinary residents' adoption. We interviewed Alfonso Martel Seward, the compliance and anti-money laundering officer at the Argentine cryptocurrency exchange Lemon Cash, to learn more about the factors driving cryptocurrency adoption in Argentina.

Martel Seward stated that cryptocurrencies allow ordinary residents to shield themselves from the devaluation of the Argentine peso, which is a major driver of the country's cryptocurrency adoption. "Our inflation rate is very high, and there are many restrictions on purchasing foreign currency. This makes cryptocurrencies a valuable savings option." Martel Seward noted that stablecoins are particularly popular, providing a new way to meet the local demand for dollars. "You can walk up to any Argentine and ask how many pesos one dollar is worth, and they all know," Martel Seward explained. "With the growth of cryptocurrency adoption, many people here immediately convert their salaries into USDT or USDC."

We can see evidence of cryptocurrencies playing a role in Argentina's fight against currency devaluation in the chart below, which uses order book data from Argentina's major exchanges to compare the value of the Argentine peso over time with the amount of cryptocurrency purchased using that currency.

As the Argentine peso continues to devalue, the volume of cryptocurrency purchases has risen, experiencing a surge in mid-April when Argentina's inflation rate surpassed 100% for the first time in 30 years. We also observed a slight decline in cryptocurrency purchases starting in September, shortly after the peso's value stabilized.

Argentina's economic situation not only affects citizens' savings but also complicates basic daily business, as the value of the peso can change within hours. To address this, Lemon Cash offers a debit card that allows users to pay at any retailer accepting the card using their cryptocurrency accounts. After swiping the card, the cryptocurrency is immediately sold from the user's account, and the business receives payment in local currency. These products have helped Lemon Cash become a leader in an extremely active cryptocurrency market. "Cryptocurrency has become mainstream in Argentina, with about 5 million people (out of a total population of 45.8 million) using it, including 2 million using Lemon," Seward said. The growth of Lemon Cash and the widespread popularity of cryptocurrency in Argentina demonstrate the unique ability of this asset class to provide relief during economic hardships.

Venezuela: Cryptocurrency as a Weapon Against Dictatorship

Like Argentina, Venezuela is also facing severe economic problems and currency devaluation. However, there is a key difference between Venezuela and Argentina: the country is ruled by a dictatorial government. Under Nicolás Maduro's regime, Venezuelans face severe human rights violations and political repression, and there is a lack of basic necessities due to government corruption.

How can cryptocurrency improve the lives of people suffering from poor economic conditions and abuses by a dictatorial regime? We spoke with opposition leader Leopoldo López to find out. López is the founder of the Venezuelan political party "Voluntad Popular" and became a political prisoner after leading protests against the Maduro regime in 2014, eventually leaving the country in 2020. López is a close ally of former exiled Venezuelan president Juan Guaidó and worked with Guaidó's interim government to contest Maduro's presidency. After leaving Venezuela, López continued to advocate for democracy in the country from abroad and accepted cryptocurrency as a tool to promote this process.

López explained to us how cryptocurrency helps many Venezuelans preserve their savings as the local currency, the bolívar, devalues. "Venezuela's hyperinflation rate exceeds 1 million%, making it one of the worst in history," López told us. "Cryptocurrency, especially stablecoins, has helped many Venezuelans overcome this issue." We can see this phenomenon in exchange order book data, where the use of bolívars to purchase cryptocurrency tends to increase when the bolívar devalues. Although this relationship is not as strong as we observed in Argentina or in previous years in Venezuela: there is a slight delay between the maximum drop in bolívar value and the significant increase in stablecoin purchases that began in April, but it is noteworthy that other inflation-related indicators, such as consumer prices, did indeed spike at this time.

López also told us that cryptocurrency plays an important role in remittances to Venezuela. In recent years, remittances have become increasingly important for Venezuela. "Until recently, Venezuela was not a country with a high emigration rate," López stated. "But since 2014, due to a complex humanitarian emergency, there has been a massive exodus. Over the past decade, about 25% of the population has left the country." Remittances have become an important part of the Venezuelan economy, and López told us that many have turned to stablecoins as an alternative to meet this demand.

However, Venezuela's most unique use case for cryptocurrency is how it enables citizens to resist the oppression of the Maduro regime. López recounted an example. During the COVID-19 crisis in 2020, the interim government led by Guaidó devised a plan to provide direct assistance to doctors and nurses in the country using cryptocurrency. Cryptocurrency was their best option because international aid was difficult to provide through normal channels due to corruption in the Maduro regime and political reasons. "The challenge was how to make cash transfers directly without interference from the dictatorial regime, which completely controls the banking and financial system," he explained. The rescue team solved this problem by using cryptocurrency wallets to transfer funds to trusted local individuals (human ATMs), who then distributed the funds to doctors and nurses. They also conducted KYC checks on recipients based on records from doctors' and nurses' unions trusted by the interim government to ensure that funds only went to medical professionals.

"This project directly helped 65,000 doctors and nurses," López said, "and it indirectly helped hundreds of thousands of people who received their care. Keep in mind that at that time, the average salary for nurses was 3 dollars a month, and for doctors, it was 5 dollars a month. This project provided them with 100 dollars a month. Equally important was the emotional impact, letting them know that they were not alone on the front lines during the COVID crisis, which was a significant contribution of the program."

López also told us that cryptocurrency has become an important tool for resisting dictatorial governments, not only in Venezuela but around the world. He said, "Cryptocurrency provides an alternative for democratic activists, NGOs, and freedom fighters to overcome censorship and the closing of civic space." But he emphasized that cryptocurrency itself is not a panacea. In authoritarian countries, converting cryptocurrency into fiat currency is always difficult. "I believe that the true value of crypto assets supporting democratic movements will only be realized when they operate completely independently of dictatorial regimes."

Venezuela's acceptance of cryptocurrency, and its role in the aid programs led by López and his allies, remind us of the potential of this cutting-edge technology to promote freedom and improve quality of life.