Venezuelans have been forced to find creative ways to avoid using their own currency.
By Aruba Khalid | January 30, 2017
In 2016, buying a bag of groceries in Venezuela was no simple task, with some locals forced to queue outside supermarkets for up to 12 hours. As time went on and the country’s economic crisis showing no signs of improvement, resulting in a currency crash and ongoing food shortages, consumers were left with few other choices. That is, until they started to look online, bypassing the bolivar in favour of bitcoin.
Online exchanges for the digital currency have attracted a growing community of locals who use it to pay for essential goods, including food, from external companies such as Amazon and Walmart. As a result, online exchange platform SurBitcoin saw its users increase from 450 in August 2014 to more than 85,000 by November 2016.
Consumers in neighbouring countries also going through economic stress, such as Argentina and Brazil, Latin America’s biggest economies, followed suit, driving bitcoin’s penetration in the region through the roof. As if further proof was needed, payment processor BitPay reported a record 510% gain in merchant transactions in mid-2015, a figure that had almost tripled by the end of the year to 1,747%.
There is good reason.
When the iPhone 6 went on sale in Brazil, so exorbitant was the price that the issue became a punchline on local late night talk shows. Exceedingly high import tariffs, which can run up to 60% of the original price, have led to Brazil becoming the most expensive country in the world to purchase one of the phones. With bitcoin, import taxes can be set aside. Brazilian consumers travelling abroad must also pay a 6.4% tax every time they swipe their debit or credit card, a costly chore that can be avoided by using a bitcoin credit card.
Bitcoin and other digital currencies continue to grow in popularity: At the 4th annual Latin American Bitcoin and Blockchain Conference, which took place last year in Buenos Aires, seminars were held on their potential. Discussions centred on legal and regulatory challenges, entrepreneurship, technology and innovation, and trust.
Although the obvious advantage bitcoin offers to Latin American consumers is access to the critical items they need, the main sell is that it circumvents banks and, therefore, governments. Why send your money through a system laden down with regulations and restrictions?
Bitcoin Performance in 2016 (% increase against $)
Source: The Money Project, 2017
Essentially, Bitcoin’s steep rise in popularity signals an important development in emerging market economies: Although users in developed countries continue to constitute the largest share of bitcoin users, more than 40% of total venture investments over the past three years have gone to startups based outside the US. Countries such as Kenya, Panama, and Uruguay have growing use and investment into the digital currency to tackle payment challenges. Technological innovations such as digital currencies could allow these populations to develop beyond the restrictions and limitations of their country’s governing or institutional structures. Emerging economies previously vulnerable to weak government policy could develop legal economic systems that bypass the traditional economic institutions that inhibit them.
Digital currencies that don’t rely on a purely centralised monetary system, a system controlled by government regulations or central bank policies, would not only allow consumers to avoid taxes, inflation, and capital controls, but, essentially, would allow them to enjoy entrepreneurial advantages such as reduced transaction costs, increased productivity, and better efficiency. Blockchain, the ledger through which digital currencies such as Bitcoin are transferred, has also received increasing interest from international financial corporations and consultancies including PwC, Swift, and Accenture.
This indicates that use of digital currencies and exchanges in the private sector is likely to grow. As a consequence governments will have to pay attention to these advancements, the likes of which will highlight institutional shortcomings.