Reviving Argentina’s economy: dollarization and bitcoin as catalysts for change

Argentina is on the brink of financial collapse as record inflation and the Argentine peso devaluation hit the market.

According to research by Steve Hanke, professor of applied economics at Johns Hopkins University, the peso has depreciated 47% against the US dollar, and inflation is over 118% annually.

His solution: dollarize the Argentine economy.

While dollarization is already underway to some degree in Argentina (many Argentines save in dollars and accept dollars in their businesses), the peso is still the country’s de facto currency.

The blue dólar exchange rate, an unofficial measure of the cost of buying and selling a physical dollar bill in Argentina, has risen twenty-three times since 2018.

Factors such as the rising cost of living, poor economic practices, and the Covid-19 pandemic have led to this result for Argentina.

Experts, politicians, and domestic citizens advocate for full dollarization as a solution, but is this the best method, or can we find something better?

Given the inherent problems with the US dollar, a hybrid approach that leverages the superior qualities of Bitcoin may serve Argentina better.

CASE STUDY IN ECUADOR

To analyze this, it is worth looking at Ecuador, one of the first Latin American countries to abandon its national currency, the sucre, and adopt the US dollar in 1999.

By the end of 1999, inflation in Ecuador had reached 60%, and the sucre had depreciated by about 300%.

To prevent bank failures, the government closed the banks and began to “rescue” the financial system.

As expected, this did not work, and not only did poverty in the country explode, but the monetary base grew by 552%.

Consequently, Ecuadorian citizens abandoned the sucre, and in 2000, the government officially introduced the US dollar as a legal tender.

The short-term consequences of dollarization were devastating: people lost all their savings, some committed suicide, and many left the country to work in the United States and Europe.

These immediate costs led to the collapse of the government and depression, from which the country eventually recovered.

As a result of dollarization, Ecuador’s real GDP grew by a total of 75% between 2000 and 2013, while inflation and interest rates fell.

This could have looked like a happy ending, but due to corruption and mismanagement, Ecuador’s full economic potential was never realized, and today the country has a sub-par economy.

Dollarization was successful in Ecuador, so it constantly threatened politicians and central bankers.

Since they no longer had the power to manipulate a currency, they used blockchain technology to develop a central bank digital currency (CBDC) through a fintech program called “Dinero Electrónico” between 2014 and 2018.

Without effective data controls, this program allowed the government to print more dollars and allow users to transact through their phones, creating a currency that worked parallel with the dollar.

This led to privacy concerns and a lack of trust that doomed the program.

LESSONS FOR ARGENTINA

Given the initial success of the US dollar in Ecuador, dollarization may be the most prudent way for Argentina to manage monetary policy.

However, Argentina may also officially recognize Bitcoin as a legal tender 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 capitalization of well over $500 billion and is used by sovereign wealth funds, hedge funds, insurance companies, technology firms, and private users worldwide.

And as institutional adoption grows, so do business opportunities across borders. Bitcoin’s Lightning Network is now 1,000 times cheaper than major credit cards providers like Visa or Mastercard.

The potential for businesses that rely on international capital and remittances would be enormous and bring confidence to the country.

Argentina also already has one of the highest indices of crypto adoption in Latin America, with over 31% of retail crypto transactions conducted with stablecoins, a way for citizens to protect themselves from inflation.

In addition, over 60% of Argentines believe BTC can outperform the peso as a store of value.

Recently, Argentina’s Comisión Nacional de Valores, the national securities regulator, approved launching a Bitcoin futures contract that will be settled in pesos.

In addition, Bitcoin has risen 105% in Argentine pesos a year, reflecting both citizens and the government’s belief in the coin.

Many challenges could slow the adoption of Bitcoin in Argentina, such as the lack of infrastructure or regulatory clarity.

Nonetheless, with a population already highly educated in cryptocurrencies and needing a lifeboat, bitcoin hybrid dollarization could be a better experience than in Ecuador.

Furthermore, including Bitcoin adoption would lead to a better social contract between the government and its citizens.