In Argentina, hyperinflation drives crypto adoption, with local exchanges recording high Bitcoin deal flow. However, the government’s response to the trends is to bar adoption of crypto. The central bank’s May 4 decision has wide ramifications.
Argentina has a long history of economic instability and high inflation, experiencing hyperinflationary episodes. One of the reasons hyperinflation can drive crypto adoption is that cryptocurrencies can offer a way for people to protect their savings and wealth from devaluation of the national currency. In the case of Argentina, the government has implemented various measures to control inflation. Such as currency controls and price freezes.
However, these measures have often failed to stabilize the economy, leading many people to look for alternative ways to store their wealth. Yet the government does not smile upon innovation.
Crypto Adoption in Argentina
Cryptocurrencies, such as Bitcoin and Ethereum, have become increasingly popular in Argentina as a way for people to protect their savings and investments from inflation. Unlike traditional fiat currencies, which can lose value rapidly during hyperinflation, cryptocurrencies are designed to be deflationary, with a limited supply that governments or central banks cannot easily manipulate.
Last month, Bitcoin price reached a record high in the Argentine peso (ARS), with the BTC exchange rate crossing over 6.59 million ARS, according to aggregated price data tracked by Google Finance. The statistics went up more than 100% year-to-date.
On the other hand, In March, inflation in the country soared by 104.30% on an annualized basis, following a 102.50% jump in the previous month. To make things worse, the Argentine central bank’s reserves have dropped by half to an estimated $1.30 billion since 2019.
Such instances have allowed locals to lower their dependence on the national currency. Instead, look for other decentralized safe havens such as Bitcoin. This is evident in the data below, which shows Bitcoin’s peer-to-peer weekly volume in Argentina.
Here, it reached a record high of nearly $30 million in March on the Paxful exchange.
Seeking the Safe Haven
Multiple reports of some cities in Argentina have emerged exploring using cryptocurrencies to address the economic challenges they face. For example, in 2021, the mayor of the city of Vicente Lopez announced plans to launch a local cryptocurrency to incentivize local commerce and promote economic development.
The idea behind the initiative is to offer a local currency that can be used within the city to encourage residents to shop at local businesses rather than purchasing goods and services from outside. The city is reportedly partnering with a blockchain company to develop the cryptocurrency, which is expected to launch later in the year.
Other cities in Argentina, such as San Lorenzo and Bahia Blanca, reportedly explored using cryptocurrencies to address economic challenges. Such as high inflation and a lack of access to traditional banking. In some cases, local governments pay employees in cryptocurrencies as a way to provide an alternative means of payment subject to a different level of control and inflationary pressures from the national currency.
It is worth noting, however, that the use of cryptocurrencies at the local level is still relatively new and untested. There are challenges and risks associated with these kinds of initiatives. For example, there may be legal and regulatory barriers to overcome, along with concerns about the security and stability of digital money.
Government Bars Crypto Despite Struggles
Argentina’s central bank issued a new resolution that effectively banned payment providers from offering services related to cryptocurrencies. The resolution, published on May 4, prohibits financial institutions and payment providers from participating in any activities that involve cryptocurrencies or facilitating payments through cryptocurrencies.
“Payment service providers that offer payment accounts […] may not carry out or facilitate operations with digital assets, including crypto assets, that are not regulated by the competent national authority and authorized by the Central Bank of the Argentine Republic,” said the resolution.
The move did foster wide speculation and uncertainty on social media platforms. For instance, Argentina’s fintech chamber urged the government to reconsider the decision. The organization stated, “It limits access to a technology that offers multiple benefits and opportunities for our society.”
Prominent leaders also have raised red flags on the global banking system. One of the leading names is Robert Kiyosaki. He encouraged using other mediums such as Gold, Silver, and Bitcoin.
Although many central banks have implemented monetary measures. Such as reducing interest rates and providing liquidity to banks to support economic activity and prevent a credit crunch. Governments have also rolled out fiscal stimulus measures, such as providing financial support to businesses and households, to help soften the impact of the pandemic on the economy.
But will it work to offset the brewing crisis in Argentina?
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