Many experts have suggested using dollarization as a way to rescue the ailing Argentine economy, but it also needs bitcoin.
This is an op-ed by Carlos Cárdenas, an institutional account manager who has worked on legacy banks and cryptocurrency exchanges.
Argentina is on the brink of financial collapse with record inflation and the devaluation of the Argentine Peso (ARS) hitting the market. according to research From Steve Hanke, Professor of Applied Economics at Johns Hopkins University, the peso has depreciated 47% against the US dollar (UD) and the inflation rate is now higher than 118% every year. His solution: dollarization of the Argentine economy.
While dollarization already works in Argentina to some degree (many Argentines save with dollars and accept dollars into their businesses), the peso is still the de facto currency of the country. the blue dollars The rate, which is an unofficial measure of the cost of buying and selling a bill in actual dollars in Argentina, has increased 23 times since 2018. At the time of writing, it is 465 Argentine pesos for one US dollar. Factors such as the high cost of living, poor economic practices, and the COVID-19 pandemic have led to this outcome for Argentina.
Domestic pundits, politicians, and citizens advocate full dollarization as the solution, but is this the best way, or can we find something better? Given the inherent issues with the US dollar, perhaps a hybrid approach that implements the superior qualities of bitcoin could serve Argentina better.
A case study in Ecuador
To analyze this, let’s look at Ecuador, which was one of the first Latin American countries to leave its national currency, the sucre, and Adoption of the US dollar in 1999.
By the end of 1999, Inflation in Ecuador hits 60% Sucre was Its value decreased by about 300%.. To prevent bank failure, the government Banks closed and began to “bail out” the financial system. As expected, this did not work and not only did poverty spread in the country, but the monetary base expanded by 552%. Consequently, Ecuadorian citizens abandoned Sucre, and by 2000, the government officially adopted the US dollar as legal tender. The short-term consequences of dollarization were dire: people lost their lifelong savings, some committed suicide and many left the country to work in the United States and Europe. This direct cost caused the collapse of the government and the country suffered a depression from which it eventually recovered.
rapidly, as a result of dollarization, Ecuador’s real GDP grew by 75% in total from 2000 to 2013, while inflation and interest rates fell.. This may have seemed like a happy ending, but due to corruption and mismanagement of resources, Ecuador’s full economic potential has not been realized and has not been realized. Today it has a below average economy.
Dollarization has been so successful in Ecuador, that it has posed a constant threat to politicians and central bankers. They no longer have the ability to manipulate the currency, so, inspired by the blockchain technology, they came up with a program to develop a Central Bank Digital Currency (CBDC) through a fintech program called “Electronic moneyBetween 2014 and 2018. Due to the lack of effective data controls, this program allowed the government to print more dollars and allow users to transact via their phones, thus creating a currency that ran parallel to the dollar. This added to the privacy concerns and mistrust that drove the program into collapse and turmoil.
Lessons for Argentina
Given the initial success of the US dollar in Ecuador, I believe that dollarization is the most prudent way that Argentina could take to reform its monetary policy. However, Argentina could also formalize bitcoin as legal tender in order to reduce the immediate shock to the economy, modernize its financial system and offer alternatives to its citizens.
A few years ago, bitcoin did not exist. today, Bitcoin has a market cap of more than $500 billion It is leveraged by sovereign wealth funds, hedge funds, insurance companies, technology companies and retail users around the world. And as institutional adoption grows, so do cross-border business opportunities. Bitcoin’s Lightning Network is now 1000 times cheaper To be used from major credit card providers such as Visa or Mastercard. The potential for companies that depend on capital and international remittances will be huge and will bring confidence to the country.
Argentina also already has one of the highest indicators of cryptocurrency adoption in Latin America, with more than 31% of hash-sized crypto transactions made with stablecoins, a way for citizens to protect themselves from ARS inflation. In addition, More than 60% are Argentines We believe BTC has potential as a store of value with the potential to outperform the peso.
Recently, Argentina’s Comis Nacional de Valores, which is its National Securities Commission, authorized the launch of a Bitcoin futures contracts that snap into ARs. In addition, the price of Bitcoin has increased 105% year-to-date, as quoted in the Argentine pesoreflecting the conviction that citizens and the government own the orange currency.
There are many challenges that could slow Bitcoin adoption in Argentina, such as the lack of infrastructure or regulatory clarity. However, with a community already educated in crypto assets and in need of a lifeboat, mixed dollarization of Bitcoin may be a better experience than Ecuador’s. Additionally, incorporating Bitcoin adoption would provide for a better social contract between the government and its citizens.
This is another guest post by Carlos Cardenas. The opinions expressed are entirely their own and do not necessarily reflect the opinions of BTC Inc or Bitcoin Magazine.