Why Argentina's 2023 Presidential Election could be bullish for stablecoins

On the backdrop of the OpenAI drama this past weekend, a very large and historical event took place: Argentina elected Javier Milei, a pro-Bitcoin Presidential candidate (though some disagree he is pro-bitcoin)

Here are the current macro statistics on Argentina:

• Inflation Rate: Argentina’s annual inflation rate is >140%. (vs US most recently reported a 3.2% YoY inflation). To put that into perspective, Argentina has the 5th highest inflation rate in 2023 as reported on the IMF database.

• The Argentine Peso has lost >99% of its value against the US dollar over the last 15 years.

• Poverty Rate: 40% of the population live below the poverty line and 29.6% of households live below the poverty line.
• Real GDP growth: GDP growth adjusted for inflation sits at -2.5% which is only behind Iraq (-2.7%), Equatorial Guinea (-6.2%), and Sudan (-18.3%) of reported numbers in the IMF database
• Population: 46.6M (31st largest population among reported countries)
• Total GDP: >$621B (24th largest GDP among reported countries)

Milei’s Economic Plan

We won’t get into Milei’s entire campaign platform as that’s outside the scope of this article. However, at the heart of Milei’s core economic plan is to dollarize the Argentinian economy and replace the Argentinian Peso with the US dollar to battle inflation and dismantle the central bank. This is in addition to eliminating 11 ministries and reducing 15% of GDP in expenses

Note: Milei isn’t without controversy having endorsed a project CoinX as a way for Argentinians to “escape from inflation” but Milei was later sued by connsumers for promoting what was later unveiled as a crypto scam

There are many arguments against dollarization. Among them:

1. Countries like Ecuador have dollarized and led to lower inflation (2.3% YoY in inflation rate in the most recent IMF read) but economic and fiscal issues continued to persist (+1.4% YoY in GDP growth) and the country had trouble accessing global financial markets:

“In the case of Argentina, it is a fallacy. Ecuador is dollarized and has very big fiscal problems, which is why it does not have access to financial markets. That’s why Ecuador’s bonds trade similarly to Argentina’s, like an economy in distress. So, thinking that by putting you in this straitjacket, society understands that you have to do the rest, I think it’s fallacious. From the economic point of view [of the] size, diversification and sophistication of Argentina, dollarization is clearly not an optimal exchange rate regime.” —Alejandro Werner, former director of the Western Hemisphere department of the International Monetary Fund (IMF)

2. By effectively having a fixed exchange rate by swapping the Peso for the US dollar and re-imposing capital controls in 2019, Argentina would be giving up the ability to have a sovereign monetary policy (per the Impossible Trinity that Central Banks face) which could potentially weakens its ability to service its $400b in government debt. Further, reducing inflation may not directly help address Argentina’s $44b debt restructuring deal with the IMF and doesn’t provide clear paths to growing GDP, increasing innovation, improving productivity of the labor force, managing fiscal policy, etc.

3. Argentina tried a “convertibility plan” in the 1990s by pegging the Peso to the Dollar, but “fiscal deficits and debt weren’t reined in” and “Argentina lost external competitiveness. Growth collapsed while unemployment and the current account deficit soared”. Mark Sobel, the US Chair of Official Monetary and Financial Institutions Forum goes on to share “Argentina was unable to finance its external deficits and lost market access. Given large dollar-denominated external liabilities, investors sold Argentine paper, interest rates soared unsustainably, heavy capital controls were imposed and the convertibility plan collapsed amid huge economic, social and political dislocation.”. In short, Argentina tried in the 1990s to dollarize but it didn’t work.

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What’s fascinating about Milei’s economic plan to dollarize is that Argentina has already seen adoption of crypto (in some cases US backed stablecoins) by both consumers and businesses

• >51% of Argentine consumers already purchased crypto: according to the same report, 67% of the survey respondents purchase crypto as an inflation hedge.
• Argentina has a higher proportion of employees getting paid in cryptocurrency than anywhere else, according to Deel: Deel COO shares in this interview in March 2023: “Argentines want to be paid in U.S. dollars because that currency gives them a hedge against inflation. But we’re also seeing people choosing to be paid in cryptocurrencies.”
• Top 15 Country in Chainalysis 2023 Global Index: Chainalysis has Argentina ranked as #15 in the overall index ranking based on on-chain cryptocurrency value received at centralized exchanges, P2P volume, on-chain valued received via DeFi, etc.
• Lemon Cash, an Argentine crypto exchange, reports having >2.1m users in LatAm: anecdotally, I met with an Argentinian entrepreneur in NYC and he was showing me Lemon Cash (Lemon.me) and how he was able to convert Pesos → USDC → USD to pay for say the MTA and goods and services in the US. Lemon Cash touts that they enable users to “exchange crypto and pesos directly with other users in the P2P Market at the price they choose freely, safely and instantly” which effectively functions as an on/off ramp (especially in light of the discontinuation of LocalBitcoin )
• An Argentinian merchant sees 95% of customers choosing to pay with USDT on Tron: Tron’s low fees and quick transactions (despite concerns around centralization) have led more and more merchants to accept payments in stablecoins.

• World Coin Sign Ups: Worldcoin saw over 9.5K Argentinians verify their World ID in a single day which equated to roughly one verified human in Argentina every 9 seconds. The Worldcoin App was #1 in the Argentina appstore at one point as well.
• Number 1 Traffic Source to Binance: Argentina is the #1 country by traffic share to Binance.com (source: Similarweb)

There is a potentially interesting path forward where Argentians could lead a bottoms up adoption of US backed stablecoins as the government aims to dollarize

• In the up coming year(s), the US could pass a stablecoin bill that gives regulatory clarity to stablecoin usage abroad and give consumers and investors worldwide confidence in dollar backed stable coins. A US stablecoin bill could boost consumer and investor confidence especially after USDC briefly de-pegged in light of the SVB collapse and Circle having $3.3b of funds in SVB. One could imagine a world where merchants like Spotify, Shopify, Meta, Block and other global payment and commerce platforms allow consumers to pay for goods and services with USDC / USDT / dollar denominated stable coin as another payment rail. Stripe and Visa have woken up to this reality.
• Argentinians could potentially lead a grassroots and bottoms up adoption of US backed stablecoins in anticipation of the dollarization of the economy and pro-actively exchange Pesos for USDC / USDT through centralized exchanges or P2P marketplaces like Lemon Cash.
• While the Argentinian government and central bank find a path forward to swap Pesos for USD, consumers could proactively swap their Pesos for USDC / USDT and hold more and more crypto funds via self-custody (i.e their own wallet) or within their accounts on centralized fintech players or crypto exchanges.
• With a country of >40M people and >$600B GDP, even 1/5th of GDP or ~$120B shifting from Pesos to USDC / USDT could double the existing stable coin market cap of $123B (as of this writing on Nov 22nd, 2023).
• We may see for the first time in history, a country simultaneously moving off of their local country’s monetary system (e.g Argentinian Peso) and consumers swapping local fiat for stablecoins. We may see a dual tracked effort by both government agencies and consumers / businesses in shifting to a dollarized economy enabled by the ease of use and access of stable coins — a consumer just needs an internet connection and access to some sort of crypto exchange.

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Conclusion

Its very likely Argentina will ultimately not be able to dollarize. There are plenty of potential reasons ranging from Argentina not having enough dollars in the central bank to fully dollarize, Milei not having the political support to formally remove the Central Bank and enact his economic plans, the IMF not allowing Argentina from formally using crypto per the IMF’s discouragement of crypto in the IMF debt deal, to Milei ultimately deciding to change his political stance.

We will continue to research and keep the Artemis community posted as the story develops. We do believe Argentina electing Milei could be a potential black swan event that could drive stablecoin adoption in unexpected ways.

Special thank you to Felipe Montealegre for sharing the initial vision and idea and seeding the idea of this article. Thank you to Alex Weseley, Vincent Jow, Jimmy Zheng for feedback on this article.

The content is for informational purposes. None of the content is meant to be investment advice. Use your own discretion and independent decision regarding investments.