Defaulting on sovereign debt is never a good strategy. Just ask Argentina. The South American nation has defaulted 10 times (most recently this summer) on its international obligations, and has experienced sharp economic decline as a result. In the early 1900s, Argentina ranked among the world’s top 10 in per capita income. By 2012, it had fallen to 55th.
Is it possible, in order to duck default this time around, that Argentina may turn to the digital clandestine currency – Bitcoin? An exhaustive examination of the current currency problem and the potential cure appeared recently in the New York Times.
With its volatile currency again under pressure, together with a dysfunctional bond market, the country is perhaps the perfect place to experiment with the new electronic currency. In fact, not a day passes without significant transactions for Argentinians in Bitcoins. By using them they circumvent the myriad reporting rules that usually accompany currency transactions, require income reporting, and involves paper pushing which can lop as much as 30% off the deal. As a result, some money changers have cobbled together a living trading in Bitcoin.
Bitcoin is cheaper and less complicated, to say nothing about less regulated, than the traditional Argentinian currency system and the peso, but the scope of the situation extends far beyond Argentina for if it can be successful in mitigating Argentina’s financial woes, its success may well travel to the United States financial markets to disrupt its banking system’s most basic services. Many eyes are therefore watching Argentina closely, as it contends with a massive $30 billion threat to its foreign reserves.
A bit of perspective is in order to appreciate the country’s predicament. In 2005 and 2010 Argentina offered to exchange bonds that it had defaulted on at about 35 cents on the dollar. Eventually, about 93 percent of debt holders agreed to the swap. Some debt holders, however, held out and went to U.S. court, arguing that Argentina had to pay them the full value of their bonds.
In 2012, a U.S. judge ruled in their favor and further ruled that any financial institution that assisted in partial payment would be in contempt. It is precisely in this kind of court/government climate that Bitcoin may succeed where other remedies have failed.
Ironically ,Bitcoin proponents like to say that the currency first became popular in places that needed it least, such as in Europe and the United States, given how smoothly the currencies and financial services work there. It makes sense that a place such as Argentina would be fertile ground for a virtual currency. In this environment, Bitcoin emerges as a type of digital gold, whose value could appreciate over time -unlike its national currency or its bonds.
Bitcoin is estimated to have about a $2 billion float in worldwide circulation, but is misunderstood or eschewed by the general public mainly because of its novelty and its speculative volatility. Indeed, the value of a Bitcoin has fluctuated widely in the past two years, ranging between $70 and $1200 during this period. But this volatility masks its potential.
Bitcoin is a part of a new kind of online financial network, and runs on the computers of those who use the virtual currency. The details of how the network operates can be mind-numbingly complicated, involving lots of advanced math and cryptography, but at the most basic level, the network makes it possible for the first time to send valuable digital money around the world almost instantly, without moving through an intermediary like a bank , credit-card company or a service like PayPal.
In a sense, the Bitcoin network was designed to be a financial version of email, which enables messages to be delivered without passing through a national postal service, or like the broader Internet itself, which allows people to publish news and essays without going through a media company. Instead of just delivering words, though, the Bitcoin network makes it possible to deliver money from New York to Shanghai in a matter of minutes, without paying any financial institution.
But so far there has been little economic incentive for the average Argentinian to use the digital currency, so how will it actually become a sovereign savior for the country? In contrast, the best-known Bitcoin start-up in Argentina, BitPagos, is helping more than 200 hotels, both cheap and boutique, to take credit-card payments from foreign tourists.
The money brought to Argentina using Bitcoin circumvents the onerous government restrictions on receiving money from abroad, and thus an obstacle to commerce is removed. Because of the anomalies and vagaries of the Argentinian system, businesses lose about 10% of the value of a credit-card transaction.
As a result of the currency/debt debacle, the Argentine government has ordered PayPal to bar direct payments between Argentinians in an effort to slow the exchange of pesos into other currencies. As the policy went into effect, Argentinians watched the price of Bitcoin rise against the peso, and many figured that Argentinians were using Bitcoin to circumvent the government’s restrictions.
Bitcoin is also an easier and cheaper way to transact business and make money transfers. It is gaining traction even among traditional, stable, and developed economies such as the US and China, despite the fact that it lacks the trusted, venerable middleman. Newly formed companies such as Coinbase are filling that need, however.
Bitcoin use inevitably stirs up fears of money laundering and terrorist financing. Banks currently serve as the front line in stopping illicit money transfers, and if these regulated institutions are cut out of the business of moving money, banks and government officials say, who will ensure that terrorists and organized crime are not using the network to move millions across borders?
Perhaps counterintuitively, US banks are more friendly to Bitcoin, and may hold the key to its gaining popular acceptance. Spearheaded by efforts by the Federal Reserve to shorten the often three days it takes to process paper transactions, they are seriously looking at Bitcoin as a solution.
So ironically, a clandestine currency like Bitcoin- a possible savior for an embattled economy such as Argentina- might gain legitimacy in the world’s premiere financial system – the USA. In 2013, when he was chairman of the Federal Reserve, Ben Bernanke wrote a letter to a Senate committee studying Bitcoin, in which he praised its “long-term promise, particularly if the innovations promote a faster, more secure and more efficient payment system.” High praise indeed, and positive proof that the currency is gaining mainstream acceptance. Banks ignore Bitcoin at their peril.
For Argentina, the proof that it has potential lies in the hands of the wealthy investors who will signal its arrival by flocking to the currency. If it takes hold in Argentina as a storehouse and guardian of wealth, it is likely to attract attention in other developing economies around the world.