South Americans jumping on crypto to address economic problems

26 March, 2019

There is an interesting trend emerging in South American countries facing profound economic problems. Rather than continuing to do the things the same way and expecting different results, a small handful of South American countries are looking to crypto as a means of addressing their economic woes. It is fascinating to watch.

Where you and I may think of cryptocurrency in terms of depositing bitcoins to play online, some leaders view those same coins as economic lifesavers. They are working within the ranks of government to come up with crypto-based solutions for economic recovery.

Venezuela immediately comes to mind here. But they are not alone. Argentina and Paraguay are also looking at cryptocurrency. Whether or not these countries are successful in reaching their goals could very well influence leaders from other economically troubled nations.

Cryptocurrency in Venezuela

We talk a lot about Venezuela here on the website for the simple reason that they are the first country in the world to produce their own crypto backed by a national asset. The Petro, as the digital coin is known, was announced in 2018 by Venezuela's regulatory agency, Sunacrip.

All eyes are on Venezuela right now for obvious reasons. The country's economy has been in free fall for years now, and politics within the South American nation are very unstable at the time of this writing. Cryptocurrency would get a big boost worldwide if it could help stabilize Venezuela's economy and bring about political change.

A new remittance platform

Despite introduction of the Petro and new authority given to Sunacrip to regulate competing cryptocurrency businesses, Venezuela's government also established a new remittance platform known as Patria. The platform allows for the exchange of Bitcoin (BTC) and Litecoin (LTC) inside Venezuela. It has had a profound impact thus far.

Apparently, Venezuelans have been spending tens of thousands on BTC and LTC since the platform was introduced. The CryptoNews website says that individual citizens purchased in the neighborhood of BTC 16,500 just in January and February alone.

All of this activity led Sunacrip to announce intentions to regulate prices and impose transaction fees to allow Petro to compete. That has done little to dampen the enthusiasm of Venezuelans who believe they can protect what little wealth they have left by converting their fiat into bitcoins and litecoins.

An economic juxtaposition

A careful examination of the economic conditions in Venezuela clearly shows a juxtaposition with no easy reconciliation. The Venezuelan government introduced the Petro in hopes of creating a monetary system with a solid backing. Such a system is desperately needed in light of the bolivar being nearly worthless on world currency markets.

Backing the petro with the country's oil production seems like a smart move. And yet, it appears as though Venezuelans would rather own bitcoins than petros. This puts the government in an awkward position. It would rather their citizens choose petros for every day, run-of-the-mill transactions, but bitcoins and litecoins are clearly more valuable. So what is more important?

Value is more important for Venezuela's economy in the end. The reality is that Petro will do very little to stabilize the economy if it is worthless as a store of wealth. There is no more value in the petro than the bolivar as long as it remains backed by the oil industry. Don't forget that Venezuela's oil industry has collapsed along with the nation's economy.

The end result of all of this is that BTC and LTC are more valuable in Venezuela than the country's own coin. Smart government leaders want both coins to continue being traded and spent, so they have to find a way to walk that fine line between pushing their own crypto and not driving away Bitcoin and Litecoin.

Cryptocurrency in Argentina

On the other end of the South American continent is Argentina. The economy there is stronger than in Venezuela, but it is not as strong as leaders want it to be. Indeed, 2018 was a very turbulent year for Argentina's economy. Inflation hovered around 47% while the peso lost quite a bit against the U.S. dollar.

Experts expect that 2019 will be a better year, but they are also expecting the economy to shrink further. One of the things working against Argentina is the continuing strength of the U.S. dollar. Enter cryptocurrency as a means of addressing the country's economic woes.

Currency rates and economic activity

A fundamental truth of world economics is that economic activity is intrinsically linked to the strength of a nation's currency. This plays out in Argentina's favor in at least one key area. As the peso has lost value, Argentina's economy has become more competitive on the world stage. The weaker peso means cheaper goods offered on the world stage.

In that sense, Argentina would welcome a weaker peso against a stronger dollar. But cheaper goods alone will not solve the country's economic woes. Why? Because a less valuable peso encourages inflation. Cryptocurrency could be the answer if Argentinians were willing to embrace it as a payment system instead of continuing to use the peso.

The government is on board

Argentinians are not quite there yet, but it appears as though the government is. According to CryptoNews, a recent deal between companies in Argentina and Paraguay resulted in a Bitcoin transaction worth some USD $7,100. The seller was a company in Argentina that deals in pesticides and fungicides. The buyer was a company in Paraguay.

The governments of both countries provided the customs clearance needed to complete the transaction. That essentially means those two governments approved of not only the goods, but also Bitcoin being used to pay for those goods. It turns out that the payment was faster and less expensive than a traditional bank payment made through the SWIFT system.

Over and above individual transactions, Bitcoin trading has already reached new records for 2019. Record high weekly volumes have been reported along with estimates suggesting roughly 20,000 people in Argentina now own cryptocurrency.

How cryptocurrency could help

It is evidently clear that Venezuela is looking to cryptocurrency to shore up its failing economy. While the situation in Argentina is not so desperate, leaders there are increasingly more open to cryptocurrency transactions as well - both cross-border and domestically. The question here is, why? How can cryptocurrency help address economic woes?

It is commonly believed that the strength of a nation's economy lies in people buying and selling. That is not really true. Take the Great Depression that hit the United States in late 1929. There was plenty of buying and selling going on; it is just that the U.S. dollar was worthless.

At the height of the Depression, people were buying and selling via bartering. Farmers would trade their crops with merchants who had the materials they needed to keep running their farms. Doctors would provide services in exchange for food, knowing they could get more food in a bartering arrangement than they could accepting a cash payment and then trying to buy food at the store.

The reality is that buying and selling alone does not make for a strong economy. That's why consumer spending really is not an indicator of economic strength. No, the strength of any economy is production. When strong production is linked to strong buying and selling, you have something to talk about.

Encouraging production with crypto

Once you understand the production basis of a strong economy, you begin to see how cryptocurrency can help. Imagine being a merchant in Venezuela with the ability to produce a lot of goods. You might be reluctant to produce those goods knowing that they will have little real value if purchased with fiat currency. Remember that the bolivar is largely worthless right now.

You are not likely to spend your limited resources on maximizing production because you know your customers do not have the money to pay for your products anyway. However, bitcoins and litecoins change the game. They have value that easily eclipses the bolivar. If you and your customers can do business with those coins, you now have a reason to produce your goods.

You produce and people buy. The money you have earned gets spent on meeting your own needs and growing your business. Other vendors produce in order to meet your needs, and you buy from them. This continues with every crypto transaction that takes place.

In essence, introducing cryptocurrency to the Venezuelan economy gives consumers something that represents a store of value. Merchants willing to accept their coins as payment for goods and services also gain a store of value as well. This jump-starts production for the simple reason that there is now a motivation to actually produce.

Of course, all of this is theoretical. We already know that production is the basis of a strong economy, but we don't know how willing people are to buy and sell with bitcoins and litecoins in an environment like Venezuela's. The good news is that we will not have to wait much longer to see the results. By the end of 2019 we should have a pretty good idea of how cryptocurrency has impacted the economies in Venezuela and Argentina.