Transformation: Why Argentinians Embrace Cryptocurrency?

Original Title: “Why Inflation Battered Argentinians Are Turning To Crypto”

Author: Javier Paz, Forbes

Translated by: Luffy, Foresight News

In recent years, Argentina has been labeled with inflation, much like their world-famous barbecue beef. Over the past 12 months, the country has accumulated an inflation rate of 276%. In fact, a typical manifestation of Argentina's soaring inflation is that residents' dietary habits are changing, with a decline in demand for beef as they turn to cheaper proteins like pork and chicken. Some observers believe that beef prices in Argentina will rise by 600% this year, and steak is no longer a staple for Argentinians.

Monthly Inflation Rate in Argentina

Although Argentinians are only now starting to seek alternatives to beef, they have been trying to escape the constantly devaluing peso for decades. In fact, Argentinians have been purchasing dollars through black market channels for 50 years. The most famous black market operators even appear on the main thoroughfare of Florida Avenue in the capital, Buenos Aires.

The black market is a desperate choice for Argentinians, where they may be scammed. At these unregulated and unsafe currency exchange points, Argentinians sometimes exchange pesos for dollars at twice the government-published rate. The current exchange rate is 41% higher than the official rate of 954 pesos to 1 dollar. This is not the only risk. According to one of the local major newspapers, La Nación, other significant risks include customers being robbed by trading partners or receiving counterfeit bills.

But now, a new way to obtain dollars has emerged: cryptocurrency. In fact, Argentina's cryptocurrency adoption rate (the proportion of cryptocurrency users in the total population) is higher than any other country in the Western Hemisphere. A study conducted by Forbes in collaboration with the data analysis company SimilarWeb found that out of 130 million visitors to the 55 largest exchanges globally, 2.5 million came from Argentina.

Cryptocurrency Adoption Rates in the Americas

Argentinians are not playing with Memecoins or trying to get rich overnight with the next hot token. Instead, they typically buy and hold Tether (USDT), a synthetic dollar with a market cap of $112 billion. Maximiliano Hinz, the head of Latin America for the cryptocurrency exchange Bitget, stated, "Argentina is an outlier market where many people just buy USDT. We don't see this elsewhere. Argentinians buy spot USDT and then do nothing."

While stablecoins like USDT seem to be the perfect way for Argentina to escape its inflation predicament, they also carry certain risks. The country has yet to establish any regulations to govern this chaotic industry, and the most trusted exchanges and marketplaces in the world (Forbes rankings) are not the most widely chosen by Argentinians.

Argentina's newly elected libertarian president, Javier Milei, has expressed his willingness to embrace dollarization in Argentina. On May 17, he stated at a business conference that the country is moving towards a "competitive currency system," where everyone can choose which currency to use for payments and transactions. He anticipates that this will lead to Argentinians "using the peso less and less, and when we almost stop using the peso, we will move towards dollarization and eliminate the central bank, so corrupt politicians cannot steal wealth through money printing."

Dollar-pegged stablecoins align with the idea of dollarization, but buyers must find a safe way to purchase, hold, and use them. Argentina does not provide reliable protections for cryptocurrency users.

Argentina's cryptocurrency adoption rate is higher than any other country in the Western Hemisphere. According to Forbes' research on SimilarWeb data, out of 130 million visitors to the 55 largest exchanges globally, 2.5 million came from Argentina. Additionally, the cryptocurrency data analysis company Chainalysis noted in a report at the end of last year that as of July 2023, Argentina "leads Latin America in raw trading volume, with an estimated trading value of $85.4 billion."

However, the stablecoin USDT chosen by Argentinians has a complicated history. Tether, headquartered in the British Virgin Islands, has been cautious about its internal operations, never undergoing an audit and not disclosing which banks it uses. In 2021, the CFTC and the New York Attorney General forced Tether to pay fines of $41 million and $18.5 million, respectively, for falsely claiming that USDT was pegged to the dollar on a one-to-one basis. In a country still plagued by triple-digit inflation, these warning signs seem to have not raised enough concern among users.

The risks do not stop there, as they also include the exchanges and markets serving Argentina. Forbes' May ranking of the 20 most trusted cryptocurrency exchanges globally did not include any of the top five cryptocurrency providers in Argentina—Binance, eToro, BingX, HTX, and Bitget—due to a lack of domestic regulatory oversight. Binance is the most visited exchange website, with traffic from Argentina exceeding that of any other country. However, Binance is not regulated by any national regulatory body, let alone local regulators.

Most Visited Cryptocurrency Exchanges by Argentinians

Visitor Sources for Binance's Website

How dangerous is it to do business with Binance? We know that Binance previously admitted to violating U.S. anti-money laundering regulations, resulting in a $4.3 billion fine and long-term monitoring by U.S. regulators to prevent such incidents from happening again.

But that's not all. A previous Forbes investigation into Binance also revealed that customers' online account balances are not reliable, as the tokens they hold are ultimately determined by the company's internal ledgers, which are not open to the public. (Note: Binance has published proof of reserves.) The company has previously transferred funds off-exchange as collateral for issuing stablecoins. However, in Binance's favor, it has not gone bankrupt, is generally able to handle customer withdrawals, and continues to operate normally.

Ordinary Argentinians or other novice investors find it difficult to understand and recognize these risks. Fernando Apud, a software engineer living in the northern province of Tucumán, recently evaluated local companies like Cocos Capital and larger, more complex sites like Binance. While these sites claim that security and convenience are their main selling points, he found that even large sites like Binance are reluctant to disclose basic information, such as whether they are registered to operate in Argentina and who the actual owners of the company are.

When Forbes inquired with Rose Zimler from Binance's Spanish communications team about Binance's status in Argentina, she stated that the company "maintains close contact with the authorities" but has not registered in Argentina. She did not explain why there is no registration or whether there are plans to register. She mentioned that Binance holds 18 licenses globally.

Binance is not an isolated case. Other top cryptocurrency exchanges in Argentina have also not registered with the national securities regulator, the Comisión Nacional de Valores (CNV). They often tell Forbes that they are trustworthy because they have a good operational history. BingX brand ambassador Pablo Monti, representing the exchange's communications team, declined to disclose the regulatory compliance nature of the platform in Latin America but told Forbes on May 20, "As we celebrate our 6th anniversary, BingX is further expanding into Argentina and other countries like Turkey and Vietnam." A spokesperson for eToro did not address the registration issue. However, she stated, "As a company regulated by multiple financial authorities globally, eToro is committed to complying with the applicable rules and regulations in the jurisdictions where it operates." Bitget is a cryptocurrency exchange with world-famous Argentine soccer star Lionel Messi as its brand ambassador. Maximiliano Hinz from Bitget stated, "To my knowledge, there are no licensing requirements for countries in Latin America where Bitget operates." Finally, the exchange HTX, associated with Sun Yuchen, did not respond to email inquiries regarding its operations in Argentina.

In addition to cryptocurrency exchanges, Argentinians can also utilize domestic companies that use cryptocurrency. These companies allow users to purchase and spend cryptocurrency through prepaid cards, such as Lemon and Buenbit. However, these companies also have regulatory loopholes. In the latest Chainalysis report on Latin America, Lemon Cash's compliance officer Alfonso Martel Seward stated that his company has about 2 million Argentine users, while the total number of cryptocurrency users in the country is approximately 5 million.

Argentinians have had enough of the peso. Since the country ended the one-to-one peg of the peso to the dollar in January 2002, the devaluation of the peso has caused them considerable trouble. Since then, years of overspending and debt defaults have plagued the peso, and ten years after the peg was broken, the dollar to peso exchange rate fell to around 4 pesos, while with the onset of the Covid-19 pandemic in early 2020, the peso to dollar exchange rate plummeted to 64 pesos.

According to Bloomberg data, although the devaluation of the peso at the beginning of this century promoted the country's foreign trade, this benefit gradually disappeared after 2009. Over the past decade, inflation-adjusted GDP has declined by an average of 0.1% per year, with only four years showing growth.

Why has Argentina fallen into this predicament? In addition to a bloated public sector with 3.5 million employees and a lack of commitment to fiscal tightening, external factors such as weather patterns (La Niña phenomenon) have significantly impacted food exports (the country's main source of hard currency) last year and this year. Argentina has experienced its worst drought in 60 years. "It has never happened before that all three crops—soybeans, corn, and wheat—have failed," said Julio Calzada, head of economic research at the country's main agricultural exchange. "We are all waiting for rain," and the crop failures mean reduced dollar income, which in turn drives up food prices, increasing default risks and interest rates. Milei clearly stated in his inauguration speech on December 10, 2023, that he plans to end previous practices. "On this day, we bury decades of failure and meaningless struggles," he said. "There is no turning back." At that time, Argentina's annual inflation rate was as high as 143%, with a trade deficit of $43 billion and a fiscal deficit equivalent to 3.5% of the country's GDP. Six months after Milei took office, inflation remains high, but the country has achieved a trade surplus for six consecutive months, with a fiscal surplus of 1.1% of GDP.

Milei is working hard to reverse Argentina's economic downturn. His measures include firing tens of thousands of public sector employees, suspending public works, eliminating energy subsidies, raising taxes, and reducing revenue sharing between the federal government and provinces. These measures have faced massive opposition, leading to street protests, and Milei's fiscal tightening measures have been significantly scaled back, with limited support in Congress. In June, a scaled-down fiscal package narrowly passed in the Senate and is now set to be reviewed by the House of Representatives.

Milei's conservative strategy may be the strong medicine the country needs to move forward, but a spoonful of sugar could make this medicine easier to swallow.

Even if Argentina's fate improves, decades of poor economic management mean that people will continue to flock to the dollar, whether in cash or digital currency. However, the government has not taken many measures to protect its citizens.

What cryptocurrency regulations does Argentina have? More than three months ago, the CNV announced a registration requirement stating that "anyone who sends advertisements to individuals residing in Argentina through websites, social networks, or other means" and "receives user funds using any technology" must register. There is no deadline for registration. CNV President Robert E Silva stated, "Unregistered entities will not be able to operate in the country."

This requirement is neither complex nor cumbersome for registrants. However, many of the 55 cryptocurrency companies in Forbes' research operate in Argentina, yet none have registered three months after the rules took effect on March 25. As of June 20, the public registry shows 48 companies listed, most of which are relatively small local operations. Argentine officials did not respond to multiple requests for comments on this matter.

Registration is just a small step, and for the world's 22nd largest economy with a GDP of $633 billion, this is clearly insufficient. Bitcoin and digital currencies were born out of the Great Recession that erupted in the U.S. in 2008. But if Bitcoin starts from this long-term inflationary and politically unstable Andean country, it is equally expected.