Why Latin American Countries Are Turning to Bitcoin

Latin America's economic outlook for 2016 is grim. Political instability in some of the region's largest economies, combined with a general slump in oil and other commodity prices, is hurting businesses and consumers, while Venezuelans are suffering from an economic collapse. The Chinese stock market crash has severely hurt the Chinese economy, which is the largest commercial partner for many Latin American countries.

Many Latin Americans have turned to Bitcoin as a solution, and the recent crisis has accelerated its adoption.

Last year, Latin Americans set new records for Bitcoin adoption. Payment processor BitPay reported a 510% increase in merchant Bitcoin transactions in mid-2015. But even greater growth occurred at the end of last year, when Latin American merchant Bitcoin transactions increased by a staggering 1,747% compared to the beginning of 2015. Other key companies in Brazil’s Bitcoin ecosystem also showed a 322% increase in Bitcoin exchange volume and a 461.4% increase in Bitcoin wallet penetration. Bitcoin exchange transactions in Mexico grew 600% in 2015.

Among Latin American countries, Bitcoin is most well known in Argentina. While Argentina used to have the highest percentage of Bitcoin supporters, that may be starting to change. Brazilians and Venezuelans also have good reasons to embrace Bitcoin, with Bitcoin holders earning more than 400% of Venezuelan bolivars, more than 92% of Brazilian reals, more than 65% of Mexican pesos, and more than 41% of Argentine pesos in 2015.

Inflation and payment problems leave consumers and businesses looking for alternatives

The crisis that Latin American economies are facing did not begin in 2016. Argentina, Venezuela, and Brazil experienced serious economic problems in 2015, including soaring inflation rates. Inflation in Venezuela reached 275% in 2015 (63% in 2014), in Argentina it was around 30% in 2015 (36.4% in 2014), and in Brazil it was 10.4% in 2015 (6.3% in 2014).

The problems started in previous years, and government controls continue to affect these economies. The International Monetary Fund predicts that Venezuela's inflation rate will be 720% in 2016. Brazil's economy has also entered its longest recession since 1930 and 1931, according to the International Monetary Fund. Argentina's finance minister predicts inflation will be as low as 25%, while analysts predict that Argentina's inflation rate will be as high as 38% in 2016, and the Argentine peso will depreciate by 30% against the US dollar.

As the crisis in Latin America deepens, some governments are tightening capital controls. Brazil’s government has imposed new taxes on payments made abroad, including remittances, tourism purchases and other services, which has increased payment costs by 25% (and up to 33%). Businesses and consumers making cross-border and local payments face other big problems: Settlements can take weeks and cost more than 10%.

7 major uses of Bitcoin in Latin America

Many of the problems caused by inflation and subsequent capital controls can be solved with Bitcoin. While workers and merchants initially used Bitcoin as a hedge against the depreciation of local currencies, Bitcoin is beginning to find multiple practical applications in Latin America as a method of payment.

As a universal currency, bitcoin allows consumers to shop and transfer money around the world. From Apple to Walmart, international companies may not accept local payment methods in Latin America, but online shoppers in Latin America can use bitcoin to make purchases.

Bitcoin may help Latin American tourism survive the current economic crisis. Since Bitcoin can be used by anyone with an Internet connection, it can reduce foreign exchange costs for tourists and merchants. Since tourists in Latin America do not usually carry credit cards, well-known tourist destinations outside Latin America can use Bitcoin as a means of payment to attract more consumers.

Latin American companies use Bitcoin to pay international employees faster and more easily without the costs and delays of wire transfers. ExxonMobil has more than 1,500 employees in Argentina, so the company and other international oil companies can more easily pay Latin American employees through Bitcoin.

Online marketplaces such as OPSkins have already used Bitcoin to pay international sellers with great success, and companies such as eBay (which entered Latin America in 2014) and Amazon may find that using Bitcoin as a payment method for Latin American buyers and sellers is the best solution.

With capital controls making it difficult for Latin American businesses to pay suppliers and affiliates outside of Latin America, chains like McDonald’s and KFC may find Bitcoin perfect for paying franchise fees and other supply costs during this ongoing economic crisis.

Although Latin American importers can pay cash on delivery, long shipping times can expose them to currency value fluctuations. Multinational companies with subsidiaries in Argentina can use Bitcoin to significantly reduce these costs.

While many Latin Americans don’t have credit cards, services like Advanced Cash in Belize offer consumers debit cards and electronic wallets that can be used at merchants that accept major credit cards. Consumers can use Bitcoin to top up these accounts while eliminating bank transfer fees. Because Bitcoin can be transferred anywhere in the world, Latin American consumers can also use it to receive remittances from abroad.

The Roots of Bitcoin Adoption in Latin America: The Mobile Revolution

Despite its unlikely success in Latin America, Bitcoin is growing very fast as the internet is rapidly gaining popularity in Latin America. Latin America’s share of internet users is still small compared to developed countries, but the e-commerce market in the region has reached nearly $50 billion, growing at an annual rate of about 24%. Latin American social media users are almost four times as many as web browser users, showing the importance of mobile e-commerce and social networks to the people of Latin America.

Facebook, Twitter and WhatsApp have been the main beneficiaries of the rapid growth of Internet access in Latin America since 2014. Latin Americans account for 38% of WhatsApp users and 20% of Facebook users worldwide. Argentines and Brazilians spend more time on social media than anyone else in the world.

As Latin Americans become more accustomed to the freedom and global connections provided by internet technologies such as social media, Bitcoin will continue to be an attractive alternative payment method for a world that has not yet entered the digital age.

Governments begin exploring Bitcoin

After 12 years of the Kirchner family ruling the Argentine government, the new Argentine President Mauricio Macri took office, bringing political changes. Mauricio Macri's government has shown signs of welcoming Bitcoin. Argentines call Mauricio Macri the "Facebook President" because of his good use of social media. Mauricio Macri said on Facebook that he had met with BitPay investor Sir Richard Branson and called Bitcoin one of the most interesting things the billionaire has done.

Before becoming president, Mauricio Macri was mayor of Buenos Aires, and during his tenure, the Buenos Aires City Government organized the first Bitcoin Forum in July 2015. The city government also endorsed the Bitcoin-Friendly Buenos Aires initiative announced in Banking Magazine, saying that “due to our monetary history and the rapid adoption of the Argentine Peso, we have played an important role in the popularity of Bitcoin.”

The popularity of Bitcoin in Argentina has also attracted the attention of local politicians. Martin Yeza, Argentina's youngest mayor, tweeted that his mid-term agenda will include deploying Bitcoin and approving the popular ride-sharing platform Uber.

Embracing Bitcoin would be an important step in the Argentine government’s goal of achieving economic freedom. Argentina has already ended capital controls imposed by the previous government. Mauricio Macri’s government has also announced a reduction in import and export restrictions and other liberalization policies.

While it is unclear whether the governments of Brazil and Venezuela will treat Bitcoin as Argentina does, Bitcoin will become the backbone of the Argentine government's fight against the economic crisis.

Barriers to Bitcoin’s adoption

Although bitcoin adoption is growing rapidly in Latin America, it still faces many obstacles. E-commerce is not as influential in Latin America as it is in North America and Europe. While some Latin Americans do not trust their own currencies, they are not ready to use bitcoin in daily transactions or as a store of value.

Another challenge to Bitcoin’s adoption is the inconvenience for consumers to buy and sell Bitcoin. There are basically no major Bitcoin dealers or Bitcoin wallet services in Latin America, and it is difficult to transfer funds to Bitcoin exchanges outside of Latin America. While Mexicans and Brazilians have a number of exchanges such as Bitso, MexBT, Volabit (Mexico), Mercado Bitcoin, FoxBit and Bitcointoyou (Brazil), Argentina and Venezuela still have limited Bitcoin exchange resources.

Summarize

Latin America will be the land of opportunity for Bitcoin in 2016. In Latin America, real need, not interest, is driving adoption of Bitcoin, and Brazil, Venezuela, Mexico, and Argentina may be the best places to bring Bitcoin to the mainstream.

Editor’s Note:   Sonny Sing is BitPay’s Chief Commercial Officer. Alberto Vega is BitPay’s Regional Manager for Latin America.