The Realistic Optimist provides weekly, in-depth analyses of some of the hottest stories in our now globalized startup world. Subscribe below to receive it directly to your inbox and don’t hesitate to share it with like-minded people :)

A tumultuous economic history

A century ago, Argentina was one of the wealthiest countries on the planet, attracting swaths of European immigrants looking for better economic opportunities. Today, Argentina is seen as an economic anomaly, being one of the only countries to go from a “developed” to a “developing” status. Economist Simon Kuznets famously said: “there are four types of countries: developing, developed, Japan (no one knows why it grows), and Argentina (no one knows why it doesn’t).”

Although the reasons for Argentina’s economic debacle are still up for debate, the main culprit seems to be continuous, unsustainable government spending combined with an over-reliance on commodity exports, resulting in frequent boom-and-bust cycles responsible for consistently destabilizing the economy. Argentina’s infamous political polarization, referred to as la grieta (the rift), means the country’s governance alternates between Peronist, Argentina’s left-wing ideology, and pro-business center-right governments. The constant ping pong between these two governance styles makes it hard for the country to maintain a singular and coherent economic path, while both government styles have their own, erroneous, ways of dealing with inflation.

"Center-to-left governments tend to finance the fiscal deficit through printing more money, eventually leading to recurrent inflationary episodes. Center-to-right governments tend to finance that deficit problem with external debt, eventually leading to recurrent debt crises. And if you explore our past decades, we've been going like a pendulum from debt crisis to inflation crisis." - Source

Yes, Argentina has been living under constant economic stress for the past decades. However, it is also important to note that despite its major flaws, Argentina still manages to handle other sectors of the country relatively well, compared to its Latin American neighbors. The country is still one of the richest on the continent, key institutions are relatively independent, and the country has been a democracy since 1983. Argentina also has a strong history of entrepreneurship, birthing one of the continent’s most prominent entrepreneurial successes in the form of MercadoLibre.

"We see a country with strong economic credentials. The Supreme Court in Argentina is very independent and actually very opposed to the government. The government does not control fully the Congress. The media and the press are very independent and mostly very critical of the government. And the actual chances of the opposition winning the elections are very high. So, despite this economic uncertainty and an economic inflationary crisis, we still have solid institutions working so far, which is good news because this will help Argentina go through this crisis in a potentially orderly way.” - Source

Crypto’s appeal

The constant inflationary cycles and economic instability have led to a devastating consequence: the near complete devaluation of people’s hard-earned money, due to the incompetence of their government. The breakdown of Lebanon’s economy, largely caused by the central bank’s corruption and mismanagement, is another painful example of a similar situation.

“If you’d saved $100,000 USD worth of pesos in 1995, they would be worth about $310 USD today. In the mid 1990s, 1 ARS = $1 USD; as of July 2022, the value is 322 ARS = $1 USD. Anyone who held onto pesos in that time would have had their life savings obliterated.” - Source

Holding onto Argentinian pesos is essentially a death sentence for one’s wallet. Historically, Argentinians have tried to fight back by buying stacks of US dollars on the black market as soon as they got their salaries in Pesos. Today, a lot of key transactions in Argentina such as buying an apartment are done through suitcases of dollars. This system has its flaws, including the safety risk of transporting and stacking wads of $100 bills under one’s mattress.

The use of crypto in Argentina is an incremental improvement of the aforementioned process. It’s a digital way to protect against inflation, enabling people to buy a basket of cryptocurrencies that decouples their savings’ value from their government’s actions. Crypto also enables Argentines to forego the historically painful capital controls imposed by the government, which hinders money transfers in and out of the country. Additionally, subsidized electricity makes mining attractive, and the country’s pool of educated, tech-savvy individuals makes local crypto innovation flourish.

Crypto in countries such as Argentina operates within a fundamentally different paradigm than in the West. A lot of the mainstream conversation about crypto in the USA and Europe has been about crazy speculative episodes and the perceived value, or not, of NFTs.

In Argentina, crypto is a matter of survival, a viable way for the population to protect themselves from the inflationary curse eating up their bank account. When Vitalik Buterin, the founder of Ethereum, visited the country, he met an ex-president, the mayor of Buenos Aires, and was recognized by people in the streets. Crypto in Argentina has a different taste to it, just like it does in Venezuela. Stablecoins are Argentinians’ weapon of choice, essentially enabling one to buy, exchange, and hold more trusted currencies, albeit a digital representation of them, seamlessly.

“For many crypto enthusiasts around the world, decentralised and digital currency is primarily about ideology or profit. But for many Argentines, it fills more basic needs.” - Source

Company spotlight: Lemon Cash

A deep-dive into the Argentinian crypto ecosystem would be a topic for a whole other piece (although I have written a deep-dive on Argentina’s startup ecosystem). Interesting trends have been popping up recently, including the city of Buenos Aires allowing people to pay taxes in crypto, remote workers asking to be paid in crypto, or even the cuevas (people exchanging pesos for foreign currencies on the black market) using crypto in the background. However, in this article, I want to shine the spotlight on a startup that exemplifies what the widespread societal use of crypto in Argentina could look like: Lemon Cash.

Lemon Cash was founded in 2019 by Borja Martel Seward and Marcelo Cavazzoli, two young Argentine founders with an international background. The company started as a way for Argentinians to buy various cryptocurrencies, but in 2021, it added its most ambitious feature to date: a physical card.

The card, powered by Visa (my piece on why Visa and Mastercard power the world’s fintechs) enables users to spend the money they have on the app (in crypto) in regular stores and merchants that accept Visa cards. Following the transaction, the user’s crypto account is debited, while the store/merchant receives the transaction in Argentinian Pesos. On top of that, the card offers users a 2% cash back in Bitcoin on every purchase made.

In my opinion, Lemon’s card is building the bridge between the crypto world and the “real world”, providing Argentinians with a way to use crypto to hedge against inflation while simultaneously being able to spend their newfound buying power from the same app. This “real-world” use case is essential to getting more people on board.

Lemon has raised $17M to date, and their app reached the number #1 spot on the Argentine app store, surpassing TikTok. With 35% of their users under the age of 25 and a very “crypto” branding strategy, one of Lemon’s current challenges is to reach larger swaths of the population, other than the young, male, and tech-savvy demographic that still makes up a preponderant part of the Argentine crypto scene.

The very tangible, everyday use case Argentinians have for crypto has spurred a true “crypto card boom”, with companies such as Binance and Buenbit entering the game as well.

Obstacles to overcome

While the widespread use of crypto in a country with runaway inflation makes sense, many obstacles remain before Argentina can liberate itself from the shackles of the Peso. The Central Bank has recently blocked banks from offering digital assets, forcing two banks who had recently allowed it to backtrack. This move is closely tied to the country’s most recent loan with the IMF, which came attached with conditions such as a crackdown on crypto.

The crypto ecosystem in Argentina is also still restrained to the tech-savvy population, although that is rapidly changing as older generations are willing to overcome the technological gap if that means salvaging the value of their savings. Once again, the existential importance crypto can have in one’s life in Argentina makes it easier to convince people of all ages and walks of life.

As in all emerging crypto markets, the amount of scams related to cryptocurrencies is still a problem, potentially damaging the image of the sector and making discussions with regulators harder. On that front, more and more education is needed.

Conclusion

Compared to El Salvador where the adoption of Bitcoin was forced down people’s throats, the crypto scene in Argentina developed in a bottom-up manner, stemming from a deep need Argentinians have to protect their money from devaluating. It will be interesting to see how the government of Argentina thinks about this long-term, and how they can find a balance between supporting the crypto scene while simultaneously rebuilding trust in their own currency.

On a personal note, I believe that the use of stablecoins, cryptocurrencies pegged to fiat currencies such as the dollar or the euro, will enable people worldwide to diversify their savings, protecting them from the runaway inflation that has ruined so many lives. That, for me, will be crypto’s biggest impact on the world: closing the era where the value of one’s life savings can be ruined by a government you probably didn’t even choose.

The Realistic Optimist provides weekly, in-depth analyses of some of the hottest stories in our now globalized startup world. Subscribe below to receive it directly to your inbox and don’t hesitate to share it with like-minded people :)