Over the past several weeks, a number of Latin American countries have been enacting or even signaling their interest in Bitcoin. Both El Salvador and Paraguay started the shift after voicing their intentions of legalizing Bitcoin, with El Salvador already leading the way. Jason Simon, an expert in cryptocurrency and FinTech, explains why Latin American countries are quickly adopting digital currencies and what might be coming next.
After El Salvador and Paraguay made their announcements, other Latin American countries acknowledged similar intentions, including Brazil, Panama, Mexico and Argentina. One of the reasons for El Salvador’s pro-Bitcoin position is the US Federal Reserve. The Fed has been printing more dollars since last year, which is devaluing the currency. Explains Simon, “The Federal Reserve has expanded the supply of outstanding. Dollars from $15.35 trillion in February 2020 to $20.26 trillion in May 2021. That’s a 32% increase and is unprecedented in modern peacetime.”
While printing money has helped mitigate the economic impact in the US, countries like El Salvador have begun to lose purchasing power due to US inflation. So far, the Fed has shown no signs of easing its policy; on the contrary, it continues to announce new and greater stimulus measures. El Salvador hopes that, through Bitcoin, it can stabilize the country’s economy.
El Salvador’s president, Nayid Bukele, believes that it is necessary to allow a private digital currency to circulate, independent of the control of the central bank. However, he is also motivated by the desire to improve economic well-being and financial inclusion in a country where 70% of the population does not have access to banking or lending services. “About 20% of El Salvador’s GDP comes from money sent through remittances by migrants,” states Simon. “This causes additional difficulties with international transfer fees and inefficiencies in the system. Sometimes, sending such funds can take several days.”
People in Latin America tend to use cryptocurrencies to protect their wealth. Many countries in this region of the world are experiencing economic problems. Their inflation rates are soaring at a parabolic rate, making citizens’ wealth worth less and less. Rising inflation and a lack of faith in government are causing these countries to turn to digital assets. Storing money on a blockchain helps people maintain the value of their money. Regardless of the performance of a country’s economy, storing value in something that is not established within a country’s borders allows people to feel much safer.
According to the World Bank, at least 50% of the Latin American population does not have access to banking. This leaves many people with no way to protect their money, other than keeping it “under the mattress.” This unbanked segment is able to benefit greatly from cryptocurrency.
Due to difficult economic conditions and authoritarian regimes in many countries, people are beginning to emigrate. They leave their families and go to work in other countries with a stronger currency. This creates another problem in that they have to send the money they earn to support their relatives. Remittance services are often very expensive and subject to high fees. Moreover, if the system is inefficient, it can even take days to send money. With cryptocurrency, the money arrives, in most cases, in a matter of minutes, directly to the recipient – no middleman, no third party to take a substantial percentage.
Latin Americans are the ones who use the most cryptocurrencies because the population there is composed mainly of young people. Hispanics tend to have a greater share in the use of technology, especially mobile technology. As is well documented, younger generations are more apt to embrace digital solutions, and this is where cryptocurrency can flourish.