Publish in Perspectives - Wednesday, January 29, 2014
Bitcoin is attractive as an alternative asset and currency to hedge against the debasement of the local currencies in countries like Argentina or Venezuela, experts say. (Photo: BBB)
Bitcoin use is attractive in Latin America as an alternative to credit cards and inflationary currencies.
BY LATIN AMERICA ADVISOR
Use of the Bitcoin digital currency is expected to expand in Latin America after the Tokyo-based Mt. Gox exchange in December announced a partnership with AstroPay, a prepaid card processor, which will allow users in Mexico and several South American countries to trade dollars for Bitcoins. Over the past year, the value of one Bitcoin has spiked to more than $1,000 as the virtual currency has raised concerns about its lack of regulation and possible use in illicit activity. What are the implications of Bitcoin use in Latin America for areas such as commerce, remittances and money laundering? Will it gain in popularity in the region? Is the notion of a global "virtual" currency here to stay?
Juan Llanos, co-founder, executive vice president and compliance officer of Unidos Financial Services, Inc.: Bitcoin would definitely help enable commerce, as it would allow both online and offline merchants of any size to receive payments for their goods and services from anywhere in the world. Remittances are ripe for disruption too. They are considered the primary use case for Bitcoin both in Latin America and globally due to the low costs and the peer-to-peer nature of the transfers. An additional use is as an alternative store of value and even medium of exchange in countries with high inflation. With respect to money laundering, the potential for illicit movements of funds exists, as with any other payment system. However, the nature of the technology-a distributed network and database where every transaction gets recorded and is publicly viewable, makes it unattractive to individual financial criminals, as they would leave a digital, albeit anonymous, audit trail that could eventually be linked back to them. Of the three use cases: payments, remittances and asset/currency, I'd venture to say that what's most attractive today to Latin Americans is the last one, as an alternative asset and currency to hedge against the debasement of the local currencies. Bitcoin is particularly attractive for this reason in countries like Argentina or Venezuela. Bitcoin is also poised to become popular as a payment medium in Latin America, where only 10 percent of the population has credit cards and where payment services are expensive and slow. However, whether Bitcoin gains popularity in the region is in the hands of governments. An unregulated environment like Latin America may seem like a good culture for alternative currencies and payment services, but it's in countries with weak democracies or strong presidential regimes where Bitcoin could be perceived as a threat to the status quo, and therefore be tightly restricted if not banned outright. There may be a rocky evolution toward a set of stable, reliable, widely-accepted solutions, but I have no doubt that the future of payments lies now with cryptography- and math-based technologies.
Adam Stradling, founder and CEO of Coin4ce.com, a Chile-based Bitcoin company: Bitcoin is definitely growing in Latin America in terms of awareness and adoption. There are numerous startups now located in the region. For commerce, accepting credit cards in Latin America can be quite a hassle and very expensive for the merchant. By accepting Bitcoin, merchants will be able to quickly reach a global customer base at vastly reduced rates. Another area where Bitcoin will have a large impact is with remittances. Remittances in Latin America are very expensive and slow. The region needs a better inter-country money transfer system. Bitcoin will replace some existing business models while actually leap-frogging other payment technologies all together. Historically, Bitcoin has been singled out by the media as a hot-spot for illicit activities because of its 'anonymous' nature. The majority of these opinions are uninformed, mainly because Bitcoin is not anonymous and the vast majority of early Bitcoin adopters are technologists, payment and financial professionals, and other forward-thinking enthusiasts; not criminals. First, Bitcoin is the most transparent monetary system in the history of man since all transactions are public via the Blockchain. Second, although there is clear evidence of Bitcoin being used for illegal activities, on a percentage basis compared to cash, you'll find that fiat cash still dominates black-market transactions. Just compare the scandals at HSBC and other banks where alleged monies laundered were astronomical to the closure of Silk Road, which had a marginal long-term effect on Bitcoin's daily transaction volume. Yes, virtual currencies are here to stay, and we're just getting started.
Sebastien Galy, senior currency strategist at Societe Generale: Bitcoin should gain significant interest in Latin America as it has in Asia and other regions. Much of it has to do with the structure of the product. Bitcoin offers a very limited supply of virtual coinage. As the product develops and reaches a new continent, its price rises in anticipation of the increased demand. This demand should be strong in countries with a history of high inflation. Lack of liquidity in this narrow market increases the price swing as does the fact that many professional traders are now involved in this market. Once the new demand is priced in, the price of Bitcoins collapses. From a commercial point of view, a peer-to-peer system is the latest improvement in the technology of payment, a technology steadily spreading. This will challenge financial intermediaries where they are deeply inefficient, forcing them to provide more efficient offerings and as such will eventually benefit all. From a legal point of view, Bitcoins offer the perception that they can be used to evade the heavy regulatory controls over the financial system. The coin is said to be untraceable and has been used for illegal activities in the United States, to circumvent capital controls in troubled countries, and its gains are far more difficult to tax. As usual, regulators and central banks are likely to react to such developments. Historically, such private monies eventually collapse as their underlying drivers, mainly wars and extremely lax monetary policy, disappear. The technology stays and evolves to the next stage.
Carlos M. Parra, clinical professor in the College of Business at Florida International University: Hopefully, global virtual currencies are here to stay, especially in Latin America, where ill-conceived macroeconomic policies have led to excessive and harmful inflation rates in the past (such as in Peru and Brazil) and currently (as in Argentina and Venezuela). Arguably, inflation is the most expensive and burdensome tax on the poor. If an electronic currency like Bitcoin is able to provide stability and protection for the purchasing power of those at the bottom of the pyramid, then a plausible social policy for an embattled but truly concerned and progressive public-finance regulator could be to suggest that the poor receive welfare program benefits or government subsidies such as conditional cash transfers in Bitcoins instead of that country's increasingly volatile and/or devalued currency. Also, remittances, which for many developing countries constitute a significant portion of GDP, could be sent and received in Bitcoins (once again for senders to protect the purchasing power of receivers). The challenge is at least twofold: first, we do not yet know exactly how much more stable, and for how long, Bitcoins will be in comparison to Venezuelan bolívars or Argentine pesos; and second, there's no widespread acceptance of Bitcoins in local markets, so individuals at the bottom of the pyramid cannot be expected to easily find vendors willing to accept Bitcoins for their products or services. Notice, however, that these two conditions are fundamentally related to each other; widespread Bitcoin acceptance would reduce their volatility. But by the time all this happens, a change in government and of regulatory approach could end it all.