Unless you’ve been living under a rock, you’ve probably heard of cryptocurrencies like Bitcoin, decentralized digital money whose unprecedented growth has sent the financial world into a tizzy. Yet, remarkably, cryptocurrencies have very little practical use, causing some economists to speculate the investment bubble is primed to burst. But that’s not the case in South America, where a number of regional factors have seen Bitcoin become a viable transactional currency for the masses.
Famous for its peaks and troughs, Bitcoin has seen savvy investors enjoy truly astronomical returns or, more recently, some heartbreaking losses. Nevertheless, a relatively reliable international banking system coupled with Bitcoin’s excessive transaction fees has meant few people in the developed world actually use the currency outside of investment.
In South America, however, Bitcoin and other cryptocurrencies are now in the domain of everyday users as well.
One reason is a lack of access to the traditional banking system. A 2014 study by the World Bank found as few as 49% of Latin American adults had a bank account, largely due to the complex bureaucratic process and costs involved. But what the majority do have is access to a smartphone or computer meaning it’s easier for them to manage certain financial transactions through Bitcoin than a bank.
Furthermore, substantially fewer Latin American adults have a credit card so everyday payments are typically made with cash. To an extent, cryptocurrencies are filling the gap by acting as a secure online alternative for both small and large transactions. Conversely, credit cards are already well established in more developed countries which explains why high-fee cryptocurrencies have failed to take off as transactional currencies in the Western world.
Then there are the migrant Latino workers who live in prosperous countries abroad and send wire transfers back home each month, losing up to 5% of their paycheck in international transfer fees. Bitcoin is much cheaper, meaning their often impoverished families receive considerably more.
Finally, inflation is endemic to South America. Many countries in the region have suffered through periods of severe hyperinflation, causing the hard-earned savings of countless citizens to become seemingly worthless overnight. Even today, Argentina and Venezuela still have strict controls over the purchase of foreign currency. Bitcoin provides a unique way to circumvent such regulations by converting savings into a decentralized currency which is impossible for any government to control.
In Venezuela, for example, inflation has become so bad that cash is now unfeasible. Despite its notorious volatility, many Venezuelans are turning to cryptocurrencies to store their savings as well as purchase everyday essentials.
So does the case of South America demonstrate that cryptocurrencies have the potential to become true transactional currencies? Perhaps, but only time will tell. For now, at least in the developed world, they largely remain in the domain of high-risk, high-yield investors.