Bitcoin Can Help Save Argentina’s Financial Meltdown
As the Argentinian Peso continues to tumble, many are looking at Bitcoin as a potential way to resolve the countries broken financial system. Here's how.
Argentina, the third-largest economy in Latin America, is staring at yet another of its perennial financial disasters.
For the larger part of the last three decades, the country has floundered from one economic crisis to another. The latest one comes amid heavy government borrowing and fears that the country could default on its debts.
And all the while, the Argentine peso has crashed to new lows against the U.S dollar.
Several attempts at finding a solution have so far failed, leading some to ask whether the Argentine authorities would do well to think outside the box.
According to Michael Casey, an advisor at MIT’s Digital Currency Initiative, it is perhaps time to propose a crypto-friendly approach.
It is a proposal that can help emerging markets and developing countries avoid sliding into similar chaos.
A financial system must be built on trust. After all, if a population can’t trust the value of a currency, the currency becomes essentially worthless. Casey calls it a ‘social problem of trust’, one that crypto and the underlying blockchain technology can help restore.
In simple terms, the use of a decentralized public blockchain will instill accountability and transparency through immutable recordkeeping. Argentina can look to the value of a decentralized network that relies on math-driven protocols and is censorship-free.
If Argentina chooses to outsource its record-keeping system that is responsible for payments and value exchanges, it will remove the mistrust that accompanies human institutions. It will also ultimately do away with avenues for corruption, the biggest challenge so far.
Bitcoin could provide the platform upon which the civil service can restore sanity into its institutions, cultivating trust from the population.
The blockchain will also help the poor population access a system that is more trustworthy; where they can record and easily monetize personal assets and identities.
Cryptocurrency has steadily found a footing in many parts of the world with similar, if not worse, financial crises.
However, there is one common base: they are all seeing a surge in crypto-related activity and demand for bitcoin. It is a basis that can help launch a Bitcoin-driven solution to the problems bedeviling the country’s financial system.
A novel idea
According to one Santiago Siri, the central bank can play a role, using bitcoin to help the economy.
The San Francisco-based crypto enthusiast is the developer of Democracy Earth, a blockchain based voting system. He has an idea that he thinks will work, if Luis Caputo, the President of Argentina’s Central Bank, took approved its implementation.
Siri says that the central bank should have up to 1 percent of its reserves held in bitcoin. It is a proposal that observers think can have potentially positive impacts on the economy.
His idea has led to comparisons being drawn with past strategies that had similar approaches. One of them is the ‘convertibility plan’, a 1990s dollar-focused plan that sought to hold the Argentine peso in reserves of one-to-one against the U.S dollar.
The strategy was taken as a constitutional commitment, targeting to hold the equivalent of Argentina’s currency supply in U.S. dollar reserves.
Though the strategy worked for a while, a lack of alignment between the economic interests of the two countries led to its demise.
The U.S. Federal Reserve’s decision to hike interest rates hit Argentina’s economy, which had begun to slow down. The peso became heavily overvalued, ultimately becoming highly unsustainable.
That was the beginning of what has since become a persistent problem for Argentina. Its deflationary system turned into an inflationary one, the main cause of the present financial crisis.
Adopting Siri’s proposal about bitcoin would mean that Argentina could hold about 0.5 percent of the crypto. That would give it what he calls ‘first mover’ advantage to benefit.
Bitcoin reserves could be a nod to financial innovation and catalyze the development of decentralized solutions that would restore the public’s confidence in the system.
A few challenges may arise, like who would control the private keys. Siri suggests that the president and the central bank can jointly operate a multi-signatory wallet.
The enthusiast has also proposed that the country changes its laws to see the proposal work. Some of the areas he wants to change include laws about custody and cryptocurrency taxation.
It may just be a proposal, but it could be the key to unlocking a new solution to the country’s financial crisis.