Argentina Was at the Cusp of a Crypto Boom. The Central Bank Had Other Plans

Argentina is enjoying a true crypto boom. Millions of users entered the market and the stablecoin segment grew sixfold in 2021. The country is tenth in the crypto adoption index published by Chainalysis. Local conditions are ripe for adoption: 58% inflation, devaluation of the national currency and lack of access to U.S. dollars. For many Argentines, crypto is the best way to safeguard their savings.

Banks were also getting into the action. On Monday last week, Banco Galicia (GGAL), the largest Argentine private bank by market value, added the option to buy and sell cryptocurrencies on its platform. The bank added a feature in its app’s investment section for users to acquire bitcoin (BTC), ether (ETH), USDC and XRP. That same day, the domestic digital bank Brubank began offering similar services. Both appeared to be a major step toward crypto’s mainstream adoption in Argentina.

Then, Argentina’s Central Bank (BCRA) tried to slam the brakes.

On May 7, only days after the banks’ announcements, the BCRA barred banks from offering services for any digital assets not regulated by the central bank. In other words, the banks themselves can no longer directly facilitate the buying or selling of crypto. Banco Galicia had to suspend its brand-new service.

It wasn’t a total crackdown, however: When Argentines trade on local cryptocurrency exchanges, they can still use their bank accounts to send and receive pesos.

The prohibition came as a shock to the banks involved in crypto. Banco Galicia had the BCRA's verbal approval to launch its new feature, sources close to the matter told CoinDesk, explaining that a Nasdaq-listed bank would not get into crypto without a real endorsement from the local regulator. Moreover, up to that point, there was no clear regulation preventing financial institutions from operating in the crypto sector.

But now there is.

According to Lirium, a Liechtenstein-based crypto company that was going to operate the feature offered by Banco Galicia, there were four other Argentinian financial institutions planning to launch a crypto trading service after Banco Galicia.

Speculation about the reasons for the BCRA's decision is varied. One of the strongest suspicions is the BCRA's need to please the International Monetary Fund (IMF), after a $45 billion debt deal that the country signed in March with the organization, which includes a provision discouraging the use of cryptocurrencies.

However, after an information request made by the local Nongovernmental organization Bitcoin Argentina weeks ago, the BCRA said that “crypto assets are not explicitly a target or benchmark of the program.”

Sources close to the matter not authorized to speak publicly told CoinDesk that the BCRA's ban simply reflects a lack of knowledge of the crypto world, and its fear that banks will ask for U.S. dollars to buy and sell crypto.

Currently, the main concern of the monetary authority is the scarce amount of U.S. dollar reserves, especially the liquid reserves, estimated by consulting firms to be negative. Due to that lack, for example, Argentines are prevented from acquiring more than $200 per month through banks and companies of different industries face production struggles due to import restrictions.

However, Banco Galicia was not going to get its crypto with dollars from the BCRA’s reserves, but through a liquidity circuit provided by OSL, a Hong Kong-based digital-asset trading platform that began operating in Latin America last October.

Exchanges are wary

The BCRA’s decision hasn’t directly affected Argentine crypto exchanges. But they are nervously watching for signals.

According to sources, the BCRA's decision generated bewilderment among the numerous exchanges operating in Argentina, which have recorded high growth rates in the last three years, largely because Argentines are not prevented from acquiring dollar-pegged stablecoins on their platforms. Consequently, in 2021, for example, the use of stablecoins increased sixfold, with DAI leading the way.

In Argentina alone, crypto exchange Lemon already surpassed 1 million users weeks ago, the company said. Belo, an exchange that began operating in September 2021, has already surpassed 170,000 users and, at a 100% monthly growth rate, plans to surpass a million users before the end of the year.

But despite the high growth rates, the exchanges are still nervous about the regulatory scenario. They all operate without a financial institution license, such as those held by Banco Galicia and Brubank, and most of them interact with the Argentine market — taking and returning Argentine pesos — as payment service providers, an activity regulated by the BCRA, since there is no special identity for exchanges in the country.

The BCRA, for now, has no measures planned against exchanges, sources at the monetary authority told CoinDesk. It's understandable: Exchanges are helping address Argentines' desperation to get rid of their pesos amid a foreign exchange restriction that prevents locals from acquiring dollars through banks. And all the companies provide their services without using BCRA’s reserves.

In any case, exchanges are wary, as it becomes increasingly clear that the current administration is not crypto-friendly. This isn’t the first time the BCRA stepped in. In June, it began an investigation of nine fintech companies for allegedly offering unauthorized financial intermediation through crypto assets. There were no further updates on that inquiry.

But at least for now, the monetary authority has not yet impeded these financial institutions from transacting with exchanges. That, directly, would be a shot to the heart of the Argentine crypto ecosystem.