Throughout modern history, emerging economies have suffered from political, social and economic instability. Bad monetary policy - namely, unbridled money printing - led to hyperinflation in many countries in LATAM (in December/2022 numbers, Argentina - 95%, Venezuela - 156%), and with the lack of basic financial infrastructure, many people have been left at the margin of the financial system (despite the recent advancements, still 70% of LATAM population is unbanked or underbanked).

Along with the historical context of the region, there are many possible explanations for this scenario. Traditional financial services tend to come with high costs; bureaucracy, physical distance, distrust in the economic/political system, lack of education, and proper identification data on file (for instance, the lack of a utility bill) tend to make it harder for these populations to have access to financial products.

However, the lack of infrastructure combined with distrust in the status quo makes people in developing economies keener to adopt new technologies and solutions, such as Blockchain. Maybe LATAM is the best example. Many people in the region resort to Blockchain solutions in order to make transactions such as cross-border remittances, or even to get exposure to strong currencies -  use cases that we will discuss further in this article.

Another good example is Brazil - the strongest economy in the region -, where the Central Bank has been assuming a pro-crypto/tokenization position (tests with the Brazilian CBDC, Real Digital, are in progress and a pilot is scheduled to start in the second half of 2023). Around 7% of its population has investments in cryptocurrencies, while only 2% invests in the stock market.

What is driving this adoption?

It can be seen that necessity is driving crypto adoption throughout LATAM. Due to the long-term volatility of national currencies and the potential loss of purchasing power, many people in these countries use crypto as an alternative method of capital preservation. For the same reason, some also resort to purchasing stronger currencies, such as dollars. Yet, due to transaction limits imposed by local regulators, this is only possible in small amounts.

This situation is often seen in Argentina. Facing an economic crisis, high annual inflation rates, and mistrust in the government, Argentineans are increasingly turning to stablecoins as a way of keeping hard currency in their wallets. For instance, in 2021, after  Martin Guzmán - Argentina’s Minister of Economy - resigned, Argentineans rushed to buy stablecoins to hedge against inflation. At the time they bought more than two times the volume of stablecoins than in a typical weekend. For them, cryptocurrencies are a valid means of defense against financial volatility.

Beyond capital preservation, Blockchain has been widely used as an enabling tool to access affordable financial products and services such as payments, savings, credit, and insurance. In this context, DeFi services are key, since even without a bank account, people can buy and store cryptocurrencies and send and receive payments instantly.

Maybe one of the best examples of this use is cross-border remittances. Many people in LATAM rely on cross-border remittances. It’s not uncommon for people who are seeking work in, or to move to, developed countries to send money to their families and friends this way. In fact, this represents a huge market. According to the World Bank, in 2022 US$ 142 Billion was sent to LATAM through cross-border remittances, an increase of 38% when compared to 2020.

However, sending cross-border payments via traditional financial means can be costly, slow, and error-prone. In this context, cryptocurrencies have been increasingly used as a cheaper and more efficient option for international transactions.

According to Deloitte’s study on Cross-border Payments on the Blockchain, international remittances through crypto have the potential to reduce transaction costs by 40% to 80%. Additionally, according to the World Bank, the global average fee for conventional international transactions is nearing 6.09% (approximately US$ 8.5 Billion in transaction fees only for LATAM). In contrast, for some exchanges with a P2P solution, transactions worldwide are free of charge. Moreover, beyond making transactions cheaper, they could be made faster with crypto, shortening the time frame from 2-3 days to a few minutes.

For these reasons, people in LATAM are adopting the use of Blockchain as an enabler for this type of transaction. According to a Chainalysis report, 89% of the value received in the region between Jul ’19 and Jun ’20 came from abroad. When looking globally, it represents almost 10% the total volume of transactions in the same period.

Nevertheless, retail transactions inside the country's borders are also relevant. Users from LATAM are generating more web traffic to P2P cryptocurrency platforms than more developed regions (around 30% of the total). People are using those platforms not only for remittances and to make on-ramp transactions, but also as a payment method to trade and buy goods.

Regulation

Regulation usually lags in comparison with technology. The United States approved the General Data Protection Regulation (GDPR) only in 2018, almost 30 years after the birth of the internet. However, despite the lack of consensus, many LATAM regulators are signaling a favorable stand regarding Crypto. On one hand, markets like Brazil, Argentina, Venezuela, Chile and Mexico commonly accept crypto as a payment method. On the other hand, Bolivia has banned cryptocurrencies and exchanges from the country.

Brazil has been dealing with the class of crypto assets via a specific bill, which was created in partnership with ecosystem agents, in addition to regulators such as the CVM (Brazilian SEC) and the Central Bank. This bill is being regarded with a lot of enthusiasm from the crypto community given its inclusive and participatory nature.

In December, before the recent election of Lula, Brazil’s former president, Jair Bolsonaro, approved a crypto regulation bill. The bill rules that the Brazilian Central Bank will be the crypto-assets regulatory institution in the country (except for utility tokens) and it will also be up to the Central Bank to define and adapt National Financial System rules for crypto companies. The bill provides specific KYC and money laundering protection rules. Exchanges interested in operating in Brazil must obtain authorization from the Central Bank and maintain individual customer transaction records, in addition to being required to deliver legal information and implement measures to combat financial crimes, such as money laundering and terrorism. The definition of a specific crime for financial pyramids is also considered in the bill, which should bring comfort to Brazilian investors.

Furthermore, the Brazilian Central Bank‘s leaders are following a pro-consumer agenda, creating innovations such as PIX (Brazilian instant, 24/7 and free P2P payment method), the implementation of the Open Finance agenda, tests with RWA tokenization, and even stating that the Brazilian CBDC should coexist with cryptocurrencies. For our part, we believe that these moves can contribute to Brazil’s status as an economic leader in South America.

Conclusion

The many regional structural problems and difficulties, alongside its population's cultural  acceptance of new technologies and the regulator's willingness to implement crypto, makes LATAM an extremely fertile ground for blockchain and DeFi solutions.

We believe that this environment, coupled with its growing community and the emergence of local VC investors committed to the Web3 thesis - as we have been experiencing over the last couple of years - will make more capital available for entrepreneurs building the next generation of disruptive companies. And as we experienced with web2, these new projects may not only have global significance, but also revolutionary potential for local consumers.

We believe that in the coming years, these countries will adopt crypto at a faster rate than traditional banking, thus demonstrating the potential that LATAM has to lead the mass adoption of blockchain technology.

If you like this content, you can find a deeper discussion about the state of crypto on our Crypto Paper, or if you are an entrepreneur with a Web3 / Fintech / Embedded Finance product, contact us, we are investing!

DISCLAIMER: This material is provided to you for informational purposes only. This is neither an offer to sell nor a solicitation of any offer to buy any securities in any fund managed by Iporanga Ventures (the “company”), nor is it an offer to provide investment advisory services. And the targeted performance contained herein is provided for illustrative purposes only and is not intended to serve as, and must not be relied upon by any person as, a guaranty, an assurance, a prediction of a definitive statement of fact, a probability or as investment advice.