Central Bank of Argentina bans crypto trading just days after private banks announce crypto acceptance

Last week, two major Argentina-based banks - Banco Galicia and Burbank - announced that they would allow their customers to purchase crypto assets.

It was reported that Banco Galicia released a poll to their customers, which found that 60% of respondents wanted more access to crypto. Both banks announced they would support Bitcoin (BTC), Ether (ETH), USD Coin (USDC) and Ripple (XRP) purchases. 

However, this exciting news for Argentinian crypto enthusiasts was short-lived. Just days after the announcement, the country’s central bank banned digital asset trading in the banking system.

The Central Bank of the Republic of Argentina stated: “Financial entities may not carry out or facilitate their clients to carry out operations with digital assets, including crypto assets and those whose yields are determined based on the variations that they register, that are not regulated by the national authority and authorised by the Central Bank of Argentina (BCRA)”.

The BCRA also added that the reason behind this decision was to reduce the risk that both users and financial institutions face when investing in digital assets. 

Why do Argentians turn to crypto?

This sudden turn of events has been nothing short of a blow to Argentina-based crypto holders. Argentina is reported to be one of the world’s top 10 countries with the highest adoption of cryptocurrency, with approximately 21% of citizens reporting to use or own crypto in 2021. 

But why do so many Argentians flock to crypto in the first place?

The private banks’ decision to accept crypto payment primarily comes from high demand. However, according to a data report by Trading Economics, the country’s inflation rate increased to 55% in April. Last month, the town of Sorradino purchased mining rigs and announced plans to start its own mining operations as a way to tackle inflation. 

But Argentina isn't the only one that sees crypto as an opportunity to tackle inflation. It was reported in April that cryptocurrency was seen as “the future of money” for inflation-mired countries, including Brazil, South Africa, Mexico and India. A survey conducted by Gemini’s 2022 Global State of Crypto report found that Brazil faced a 218% devaluation between 2011-2021, while South Africa reported a 103% devaluation within the same period. Meanwhile, Mexico and India experienced a similar pattern.

Can cryptocurrency be a hedge against inflation?

For a while now, it has been widely speculated that cryptocurrencies like Bitcoin can act as a hedge against inflation. An article by Cointelegraph commented that Bitcoin’s limited supply and decentralisation is the driving force behind this.

Specifically, Bitcoin’s supply is capped to 21 million coins. These pre-set limits in its circulation mean that there’ll never be an excessive supply, thus keeping inflation steady and controlled. It has also been reported that Bitcoin mining declines by around 50% every four years, which makes the token more limited and in turn, increases its value.

The possibility of Ether (ETH) potentially becoming a hedge against inflation has also been discussed. While ETH doesn’t have a limited supply, it could still hedge against inflation with specific monetary policies, such as its fixed assurance schedule. This means that for every block produced on the network, Ethereum issues two new coins into circulation. The supply is programmed to increase gradually, no matter the number of active users, number of transactions or ETH’s market price. As long as demand for ETH exceeds its supply growth, it will not become an inflationary currency.

However, not everyone is on board with this concept. For instance, an article by The Motley Fool argues that while Bitcoin was once an ideal hedge against inflation, this idea has now “crumbled”. The reasons for this include Bitcoin’s “missed opportunity” to tackle inflation during the Covid-19 pandemic and its “underlying problem” of only being valuable because investors believe it is, while allegedly not having any intrinsic value like traditional stocks do. 

Unfortunately, the news of this ban has stunted Argentina’s opportunity of potentially hedging against inflation for now. This isn’t the only drive behind cryptocurrency adoption, as many investors also recognise its benefits, such as easy accessibility, as well as fast and low-cost transactions. On the other hand, others are seeing potential capital gains and positive returns of crypto assets.

Overall, the drive for crypto’s mainstream adoption in Argentina is definitely there, but based on how quickly the BCRA slammed the brakes on crypto acceptance, this remains to be seen.

The above article references an opinion and is for information purposes only. It is not intended to be investment or financial advice. Please be aware of potential risk when you trade or invest. Please do your own research before investing.