Blockchain settlement layer: how Argentina can digitize their economy
Javier Milei has won Argentina’s presidential election.
A populist candidate with radical economic ideas of deregulation, dollarization and pro-west views, won a second-round runoff vote on November 16th, 2023, winning some 56% of the vote to rival Sergio Massa’s 44%. Massa enjoyed an endorsement from the leftist president of neighboring Brazil, Lula da Silva. Much of the Argentine media and a powerful state apparatus stood behind Massa, who also had the backing of the country’s deeply entrenched public sector unions. All of this makes Milei’s upset victory even more stunning.
Argentina’s president-elect Javier Milei defines himself as an “anarcho-capitalist” who believes in the free market. Mr. Milei is an astute tenured economics professional and a publisher who wrote books supporting the Austrian School of Economics. Mr. Milei campaigned for a laissez faire economy and has declared since his victory that abolishing the Argentine central bank is “non-negotiable”. He has expressed his determination to rid the country of the ‘leftist’ socialist ‘invisible hand’ that he claims has ‘robbed people’ of their wealth through decades of inflation.
Could this be an opportunity for the Argentinian economy to modernize, digitize and radically shift their modus operandi, perhaps by leveraging widespread Bitcoin wallet adoption that accelerated President Nayib Bukele’s amazing transformation of El Salvador?
Let’s first take a closer look at the macro economic status quo in Argentina, so we can better understand the depth of the problems facing the Argentine government, municipalities, and the private sector.
In this research piece, co-authored by Cryptoken Board and Quantum Economics, we will be presenting information on two fronts 1] ARG Monetary Policy (Inflation Rates, Interest Rates, Foreign Exchange and Sovereign Debt), and discuss2] How ARG Bitcoin (Digitization) can ride to the Argentines rescue, in helping the South American nation overcome what has been one of the most intractable FX crises of the 21st century.
Failure could lead to the already embattled country suffering another sovereign debt default, exploding poverty and possible social unrest. So let’s take a brief look at Mr. Milei’s background to better understand his position, his qualifications for the difficult job of reviving the Argentine economy, and his ability to possibly lead a recovery from the depths of monetary catastrophe.
Per Wikipedia, “He became the chief economist at Máxima AFJP (a private pension company), a head economist at Estudio Broda (a financial advising company), and a government consultant at the International Centre for Settlement of Investment Disputes. He was also a senior economist in HSBC Argentina. He served as chief economist at several national and international government public bodies. Since 2012, Milei has led the division of Economic Studies at Fundación Acordar, a national think tank. He is also a member of the B20, the Economic Policy Group of the International Chamber of Commerce (an advisor to the G20), and the World Economic Forum. In the past, he worked at the private company Corporación América, where he served for fifteen years as the chief economist and financial adviser to Eduardo Eurnekian.”
1] Argentina’s Failed Monetary Policy
Dollarization has been pursued by previous Argentine administrations, with the peso being pegged to the dollar in the 1990s and then President Carlos Menem vowing to make USD full legal tender in 1999. But the USD-peso pegs invariably collapsed due to excessive issuance of pesos to finance the country’s chronic fiscal and trade deficits.
The question is, can dollarization be done correctly in Argentina, without creating a critical shortage of dollars for the banking system–especially in the absence of a central bank, if President-elect Milei moves to abolish it? Giving away powers over the interest policies, capital funding rates? Particularly in the face of fierce opposition from the country’s powerful unions and other Peronist stakeholders? Can Argentina apply new technologies to avoid the previous dollarization failure, above all blockchain ledgers with Bitcoin and dollar-pegged stable coins overcoming the inefficiencies associated with paper greenbacks?
It should be mentioned that compared to a much smaller country like El Salvador, that Argentina enjoys rich natural resources, including abundant agricultural and ranch lands as well as enormous potential shale gas reserves. Argentina also has a highly-educated labor-force and relatively robust infrastructure, with dollars already widely circulating the private sector. So how is the Argentine economy in such a deep dark hole of hyper-inflation?. Let’s review.
Argentine Inflation Rates
Argentina devaluation of the local currency — the ARGENTINE PESO ($ARS) and long time capital account instability is mostly to blame. Argentine inflation is at 143% as of Q3 2023 (Bloomberg), the net reserves of foreign currency are deep in the red, savers are ditching the peso, and the recession is looming — if not already here. The recession is due to both global supply shocks and agricultural commodity demand weakness following the COVID-19 shutdowns and weakening of U.S., Chinese and European consumer sentiment. Four in ten Argentines live in poverty (IMF) and continued painful peso devaluation is likely before Milei’s team can implement any reforms. Argentina’s high inflation rate creates huge distortions in markets and for consumers, with prices changing weekly. A central bank poll of analysts forecast 185% inflation by the end of 2023 (https://www.bcra.gob.ar/).
Foreign Exchange
Argentina Foreign Exchange Reserves was measured at $21.4 bln in Sep 2023, compared with $21.0 bln in the previous month (Bloomberg). Can Argentina really move from the peso to the dollar? In his victory speech Sunday, Milei provided few details of the economic policies he plans to adopt when he takes office on December 10. Argentina’s financial markets were closed for a local holiday, but the peso weakened slightly in partial trade to stand at around 353.58 pesos to the US dollar (Bloomberg). Argentine stocks have rallied, a State-owned energy company YPF (YPF) jumped 40%, and banks Banco Macro (BMA) and Grupo Financiero Galicia (GGAL) gained 20% (Bloomberg).
Dollarization means Argentina would give up the peso and use the US dollar as its currency, effectively wresting control of monetary policy from the country’s central bank which is on the chopping block, and handing it to the US Federal Reserve.
In theory dollarization and any potential abolition would remove Argentina’s ability to print money — a tactic it has frequently employed to help the country’s spendthrift government avoid defaulting on its debts. That, in turn, fueled rampant price rises. However, given limited support both in the Argentine congress and memories of the failed dollarization attempts of the late 1990s and early 2000s, the likelihood of full dollarization remains low.
Argentine Bond Yields
Bond investors have been burned repeatedly in Argentina, which has defaulted on its debt nine times since winning independence from Spain in 1816. Now, just days ahead of a crucial presidential vote, another debt default crisis is brewing. Javier Milei vows to completely upend the economy by pursuing fiscal prudence and stop borrowing on the open markets in the face of triple-digit inflation.
Nearly every scenario points to further losses for investors in the near-term, as we can see per the chart below according to Collateral Default Swaps, there is a 95% probability of Argentina defaulting on its sovereign debt. See the next chart displaying Argentine bonds credit default swaps (FactSet).
Interest Rates
In a bid to tamp down inflation, Argentina’s central bank has hiked the benchmark interest rate to 133%. This is intended to encourage saving in pesos, but hurts access to credit and economic growth. The country is on the verge of a sixth recession in the past decade and inflation rose to 138% last month. With its geopolitical alignment also in flux (the outgoing government had deepening ties with China) (Reuters), interest rates will have to remain high. As recently as October 10, the central bank raised the country’s benchmark interest rate to 133% from 118% as inflation data came in worse than forecast. The hike came shortly after September inflation figures were released, landing above expectations at 12.7% monthly and 138% annually (Bloomberg). Surging prices have sapped wages and savings and pushed two out of every five people in Argentina below the poverty line.
2] Opportunities For Accelerating Adoption of Digital Settlement and a New Latin American Bitcoin Standard
With the advent of the Liquid (settlement) Network adopted in 2021 for the first Bitcoin bond issued in El Salvador, there are ample opportunities to digitize Argentine national, provincial and municipal government record-keeping, supply chains, accounting ledgers, and streamline transfer of payments using blockchain technology.
Without fully digitizing their payroll systems, Argentine governments and private sector employers would be merely putting a band-aid on an otherwise ‘wounded’ situation that has very little chance of recovering in full health. For this reason, this might be a perfect opportunity for Mr. Milei, who is also an advocate of Bitcoin, to promote private property rights and offer BTC wallets for all Argentines as a new national utility. What we propose here is deployment of the Layer-1 Bitcoin blockchain, as the main digital currency infrastructure network. Mr. Milei’s team can also explore various settlement layers to help rapidly dollarize the Argentine economy including legalizing governments and businesses accepting not only BTC, but USDT as legal tender. Tether as of this writing sits at a market cap of $88.5 bln and is the third most circulated digital currency in the world.
Bitcoin can introduce transparency into record keeping that has been lost in the most inefficient government agencies that lack proper supervision and accountability. Widespread BTC and USDT adoption could completely transform Argentina’s domestic and international balance of payments, monetary systems and international trade. As the world itches towards a new generation of instant settlement, and data-error mitigation best practices, the combination of Bitcoin and USDT (blockchain agonistic — any USD stablecoin qualifies) can provide Argentina with a scalable network, and real-time accounting at the national level.
To incorporate blockchain into its economy would mean that inefficient, slow and expensive legacy systems of data management, supply chains, and record keeping would be completely removed, and the new Latin American Bitcoin standard installed. With President Bukele’s team reportedly advising the incoming President-elect Milei team, this bold process could be implemented in a matter of months, far quicker than the markets and neighboring South American governments had thought possible.
In 2021, El Salvador became the first country in the world to use Bitcoin as legal tender, after the world’s benchmark digital currency was adopted as such by the Legislative Assembly.. In September 2021, El Salvador accomplished such a monumental feat, authorizing all businesses to accept the cryptocurrency. In an attempt to popularize and regularize BTC use, the government offered to the citizens financial incentives to download a special cryptocurrency app, called Chivo Wallet, built on the Algorand blockchain. These incentives included $30 worth of free Satoshis with each download, which was nearly one percent of the average Salvadoran annual per capita income at the time, and large discounts on gasoline paid for in Bitcoin. The key to widespread adoption though, was that Salvadorans and foreign legal residents did not need a bank account or a credit card to make transactions–only a mobile phone with Internet access, which two-thirds of Salvadorans possess.
Argentina can follow suit, and begin enacting legislation policies that would pave the way for rapid Bitcoinization and dollarization, not wasting months in legislative deadlock in the Congress over what monetary system would replace the soon to be abolished central bank. This radical reform would also avoid recreating from scratch a digital peso as a CBDC, and payment infrastructure that could take years of work on sand-box development, payment rails and security programming to avoid mass hacks or other system vulnerabilities. Let’s keep in mind that public cryptocurrencies have some of the best minds worldwide working in digital engineering, enhancing the public blockchain system around the clock in order to ensure that cryptocurrencies remain stable, products based off the blockchain are dependable and digital wallets stay secure.
In 2024, Argentina has the benefit of not having to reinvent the blockchain wheel!
An Salvadoran-Style Argentine Bitcoin Bond?
As in El Salvador, the Liquid Network could be deployed for Argentina’s first Bitcoin bond, helping to stabilize the capital markets and reduce the current extreme default risk premiums. The watershed effect on Argentine capital markets both in streamlining issuance and reducing borrowing costs and trading premiums could be enormous, boosting liquidity for the entire country’s fintech start-ups and traditional banking sector alike.
Blockstream Core is currently providing a ready to use side-chain network that piggybacks on the BTC security, by enabling institutions to deploy any and all blockchain services, with programming flexibility to address most of the sectors’ needs of the Argentine economy. The Liquid Network is a Bitcoin layer-2 solution enabling the fast, confidential settlement and issuance of digital assets, such as stablecoins, security tokens, and other financial instruments, on top of the Bitcoin time-chain. This would require, however, a wave of legislative changes, and deployment of the necessary staff and federal agencies policy resources that would play step by step in a smooth transition of digitizing the Argentinian economy. Road maps, capital requirements, digital infrastructure, would be part of this transition process, but by utilizing the Bitcoin and the Liquid Network, it would become realistic. Argentina with an opportunity to both ‘dollarize’ and ‘digitize’ their economy, and update what might be a 60 years old system — can efficate great government inefficiencies and change spending policies that are leading the Argentinian economy on a brink of financial abyss.
Join us in welcoming a widespread Bitcoin adoption, and the blockchain integration of the new world economy, we hope that President Javier Milei will take this opportunity to digitize a third largest LatAm economy.
