The use of cryptocurrencies in Latin America has been growing fast, but recent volatility has highlighted the challenges. Could stablecoins provide an answer? Backed by traditional currencies to avoid the roller-coaster experience of crypto investment, they could offer a more sustainable future.
Fast-growing, volatile and potentially a big player in the global markets of the future – cryptocurrencies and Latin America’s economies have a lot in common. But when they come together, is it a perfect match?
The region has seen strong growth in the adoption of crypto in recent years. In Brazil, the region’s biggest economy, the numbers holding cryptocurrencies have grown rapidly, from 2 million people in 2021 to around 15 million today. At seven per cent of the country’s population, according to TripleA estimations – this makes it the seventh biggest crypto market globally.
Brazil is not alone, either. There are another 4.4 million users in Mexico and 33 million across South America as a whole – a little more than in Europe (31 million). Argentina, Colombia and Ecuador, as well as Brazil, are all in the top 20 of the Global Crypto Adoption Index, measuring where the most people are putting the largest share of their money into cryptocurrency. Lack of data means Venezuela is not ranked, but it would probably be in there, too. Mexico slips in at 28 out of the 146 considered.
And uptake is growing fast. Latin American remittances in crypto grew by up to 900% in 2021 alone, according to exchange platform Coinpay, and uptake is forecast to increase rapidly. Up to 36 million Brazilians had plans to purchase crypto in 2022, according to a survey by Latin American digital marketing agency Sherlock Communications.
“Latin America is poised to experience a huge uptick in digital currency uptake in several countries in the region,” the firm’s managing partner Patrick O’Neill told reporters.
Considering the alternatives
There are several long-standing drivers for that. These include poor penetration of traditional banking and, perhaps most crucially, instability in many of the region’s economies and fiat currencies (the money issued by governments). Countries such as Argentina and Venezuela have had double-digit inflation for decades – soaring further out of control in recent years.
With the pandemic and its aftermath, however, existing problems were exacerbated and have increased. By last summer, while employment and economic activity had rebounded, inflation not only persisted but accelerated. In 2022, inflation remained in double figures in not just Argentina and Venezuela (which was, in fact, in triple figures at 310 per cent) but in Chile, Colombia, and Nicaragua, too, according to the IMF. Across Latin America and the Caribbean, even excluding Venezuela, inflation averaged 14.7 per cent and is forecast to remain above ten per cent this year.
As Sergio Trujeque Rodríguez at RSM Mexico explains, with the value of traditional currencies so uncertain, the attractions of an alternative are obvious. “The use of crypto in Latin America is related directly to the volatility of its currencies,” he says.
The soaring value of some crypto – notably Bitcoin – during the recent period (from under $7,000 at the start of 2020 to a high of over $67,000 in late 2021) helped, too. “A lot of people started to dip more into the crypto world during the pandemic,” notes Rodríguez.
The pandemic boosted adoption in another way, too, by familiarising people with digital services, with the use of video conferencing, online shopping and apps all booming.
“The pandemic accelerated adoption of technology generally, and that lowered barriers to try new technologies such as crypto,” says José Gregorio Argomedo, Associated Director of Information Technology at RSM Chile. More specifically, it boosted uptake and possibilities for remote working not just within countries but cross-border. Given that the ease of international payments is one benefit cryptocurrencies bring, this, too, has potentially encouraged adoption.
A more stable future
But will the LATAM love affair with crypto last?
The answer, perhaps, is yes and no. On the one hand, if the post-pandemic period has been challenging for Latin America’s economies, it’s hardly been kinder to crypto. Again, to take the most popular, between November 2021 and the same month in 2022, Bitcoin lost three-quarters of its value. That puts some people off.
“After the crash, many people stepped back,” says Rodríguez.
On the other hand, Bitcoin is not representative of all cryptocurrencies. In particular, it has little similarity to stablecoins. This type of cryptocurrency is tied or pegged to another financial instrument, asset or, more usually, traditional fiat currencies (most often the US dollar). Consequently, stable coins see neither the rapid gains nor losses associated with other crypto currencies – although, they do, of course, still change in value as the underlying asset or fiat currency does.
Stablecoins can provide genuine protection from traditional currency devaluation and inflation. Consequently, in Venezuela and Argentina, where inflation is most out of control, they make up about a third (34 and 31 per cent, respectively) of all retail transactions under $1,000, according to the Global Crypto Adoption Index.
The problem is that, for some and possibly many, the volatility of crypto is the point. Adoption in the past couple of years has been boosted by the rapid rise in the value of many coins. As Rodríguez puts it, “People invest because they want quick, easy profits.” For these, the relatively boring world of stablecoins will have little appeal.
However, for others, stablecoins have the potential to bring the benefits of digital currencies, such as ease of use, speed, convenience, low cost, lack of bureaucracy and transferability, without the risks of other crypto coins – and, in many cases, of their domestic currencies.
In fact, as Argomedo explains, there is more than one crypto market: The speculative investors, on the one hand, and those for whom it serves another purpose, whether as a safe harbour for savings, easy access banking tool or low-cost method for transferring money across borders.
For now, these other crypto markets probably remain a minority across the region. Longer-term, however, such use cases may have even greater scope for growth, helping transform finances across the region. These uses won’t replace speculative investment in crypto, but they could build on it more sustainably.
Whatever else, it means that the crypto story in Latin America has a long way to run.