It is a common misconception in the general financial world that cryptocurrencies are a highly speculative fad and therefore viewed with a lot of suspicion and often vilified. Most sceptics believe it will end in a bust which is seeing regulators in various countries rush to discuss regulation to tame this ‘wild west’ asset class. But surprisingly in the developing world crypto is getting deeply entrenched into their financial system by the day. These countries experience severe exchange rate volatility, costly regulations and untrustworthy currencies. The underdeveloped financial services sector especially related to banking, payments and remittances is also the reason why they have become an ideal breeding ground for crypto. Latin America leads in cryptocurrency ownership, with 30% of adults there holding the digital assets. Within the region, ownership jumps as high as 45% in Argentina. In second place is Asia-Pacific, where 24% of adults are crypto owners, while the US and Canada come in third, with 19% investing in these digital currencies. So why is crypto adoption booming in developing countries?
Banking and payments
On September 7, 2021, El Salvador made bitcoin legal tender and introduced Chivo – a bitcoin wallet to facilitate cheap and efficient payments. Its adoption has grown rapidly since launch. In 2017, only 29 percent of the El Salvadoran population had bank accounts, two months after the new legal tender was introduced, 46 percent of the population, or two million citizens, had downloaded Chivo. This network allows bitcoin to be used for micro-transactions such as buying grocery or a cup of coffee and the wallet also supports free cross-border payments. All major chains and companies operating there, such as McDonald’s, now accept Bitcoin. Other Latin American countries such as Panama, Cuba and Paraguay may follow El Salvador soon. Most of the Latin American countries use the US dollar as their reserve currency.
Cross border remittances
Sending money across borders costs too much. While fintech companies recently have made strides in this area by bringing down transaction fees from double digits, it still costs around 4% and there is also a huge disparity. While the cost of a transfer between consumers or small firms in g7 countries can now cost 2% or less, remittances, or the practice of foreign workers sending money to relatives back home costs are still sky high at about 7%. Developing countries remittances are in excess of $550 billion and the unreasonable charges hurt the 266m migrants who use this method to send their hard-earned money back home. Enter crypto where remittances in Latin America and sub-Saharan Africa are happening on the fly and at costs of less than 2%. El Salvador migrant workers alone are projected to save more than $400 million in remittance fees per year.
A decade ago, the Turkish economy was hailed as a success story all around the world, the Turkish lira was stable and the per-capita income had grown to $10,000. When I first visited Turkey in 2007, I could exchange $1 for 1.3 lira. Fast forward December 2021, and the lira is repeatedly recording new lows against the US dollar and now stands at 13.7 lira for $1. That’s a more than ten times debasement of their currency since 2007. If the above is unbelievable then the story of the Latin American currencies like sucre in Ecuador, the Argentine and Cuban peso or the Venezuela bolivar will shock you. The expansionary policies of the central banks directly lead to the debasement of currencies which disproportionately affects the poor as inflation soars in these countries. Bitcoin and cryptocurrencies become the refuge for them as people see them as a better store of value than their own currency.
The above issues are common and affect almost all the countries in Latin America, which is therefore experiencing a massive adoption of cryptocurrencies. According to the World Bank, at least 50% of the Latin American population does not have access to banking. This leaves many people with no way to protect their money, apart from keeping it under the mattress. Likewise, only 113 million people have access to payment cards. On the other hand, Statista reports that 387.2 million people are connected to the internet. So, it seems that people have more access to the internet than to a bank account. This is the reason why people are keen on cryptocurrencies. It is simply an easier option for them.
2TM – building Latin America’s fintech infrastructure
Crypto related businesses are in a race to replace the existing inefficient financial infrastructure in Latin America and 2TM is leading the way. Recently I got an opportunity to wet my beak into a highly sought-after deal backed by Softbank - 2TM. 10% of Softbank’s investments in Latin America are in crypto related businesses. 2TM owns a number of entities such as Mercado Bitcoin, Brazil's largest crypto exchange and also its first crypto unicorn, Meubank, a multi-asset wallet, Bitrust Custody, a qualified digital custodian and Clearbook, an equity crowdfunding platform, among others and is fueling the growth of alternative asset investing in the region. In the first half of 2021 Mercado Bitcoin added 700,000 new customers, bringing its customer base to 2.8 million. The company recently raised its Series B and is using the funds to expand into countries such as Mexico, Argentina, Colombia and Chile and is creating a fin-tech infrastructure powerhouse in Latin America. Am bullish on digital assets, web3 and blockchain related businesses and excited for what's in store for 2TM in the future.