The Argentine economy and the startup ecosystem may seem frankly chaotic for the casual observer, but the situation is actually governed by countless subtle factors and shades of gray. In this context, cryptocurrencies add a touch of color – and a touch of optimism – to the dense financial landscape of the South American country.
Much has been written about the current state of finance and technology in Argentina, a country whose already troubled economy has lost 5.8% in May this year, leading to fears of a looming recession. As a result, the country has sought an emergency loan from the International Monetary Fund (IMF), an agreement that involves important constraints.
The $ 57 billion bailout – which is an increase compared to the originally planned $ 50 billion – includes a zero deficit commitment by 2019. But the decision to work with the IMF did not go very well in Argentina.
Thousands of Argentinians organized a national strike last Tuesday to protest the current president's austerity measures. It is no surprise, as many accuse the IMF of encouraging policies that led to the country's worst economic crisis in 2001.
But behind this background of financial crisis and unrest, there is a glimmer of hope.
Blockchain technology projects and associated associated token events have generated more investment in the region than traditional VC funding recently.
AstorGame raised over $ 11 million in January. Flixxo followed him up by $ 5 million, and Decentraland grabbed $ 24 million.
These crowdfunding rounds followed the success of Ripio Credit Network, which last year raised $ 37 million and is one of those rare beasts – a blockchain startup with a working product and hundreds of thousands of users.
This is $ 77 million in total in only four projects, and the current landscape is seeing a hockey stick growth, with cryptocurrencies impacting the economy.
While the number of Bitcoin users in Argentina would not appear in many world rankings, it is one of the few countries where Bitcoin is used by ordinary consumers for real retail transactions.
One bank has even stated that it will stop using the international SWIFT payment protocol in preference for Bitcoin.
To get a better sense of why blockchain and cryptocurrencies are doing so well in the country, I sat down with Ripio's CEO and cofounder Sebastian Serrano at the Future in the City conference in Moscow at the start of this year.
Serrano explained why crowdfunding through cryptography is taking speed.
"It's a feasible alternative to raise funds and finance large-scale projects," said Serrano. "This is a huge thing in Latin America and other emerging economies because venture capitalists who can afford big projects are practically non-existent in the region."
It's true. While the country is witnessing an increase in VC business, there are only three VCs with a significant fund available to them, and all three are small compared to US standards.
"The result is that fintech entrepreneurs have to turn to Silicon Valley investors, which is quite difficult for most of them," said Serrano. "In addition, the inherent bureaucracy of getting those funds into the country makes it even more difficult to achieve."
This bureaucracy is a challenge that many startups can not reach – despite the government has announced radical reforms to improve the situation. It will take a long time before it becomes a major impact and does not alter the often prohibitive terms that VCs apply to financing operations.
All this means that start-ups must find new ways to build their businesses, a perspective that, albeit exciting, presents some warnings.
"Ico has already become the best way to finance projects," said Serrano. "This year, Argentina-based teams have raised more capital from ICOs than from VC. How the ecosystem evolves and, most importantly, how future regulations will affect it, is something that remains to be seen. "
It is important to underline that, since more blockchain technology startups are able to raise funds, the whole ecosystem will be strengthened.
"The Argentine case is quite special, because there are many good projects, and even the government is leading the fintech ecosystem to evolve, but there are no ways to get funding," Serrano said. "ICOs have emerged as the first ever alternative for technology startups to be funded as companies in developed countries do."
And blockchain financing has other integrated benefits by default.
"Two extraordinary things about this technology are that, in the first place, it is truly global and allows [startups] to capitalize a project from a global community. And, secondly, it also solves a major problem in the region, which is liquidity. The lack of developed capital markets poses a problem for traditional venture capital investors – which is access to liquidity to obtain investment gains – which also creates friction to reinvest that capital ".
With the action of the government, new ways of financing and many solid networks of founders offering mutual support, Argentina seems, from a startup perspective, in continuous growth.
"Argentina is poised to be the next technology hub in Latin America, mainly because there are disruptive ideas around and even better professionals," said Serrano. "If we add a feasible way to make these ideas finance the mix, we could reach great conclusions".
But many, including Serrano, feel that the acceptance and the increase of that IMF loan has thrown a dark cloud on the future. The $ 50 billion target was already a significant amount to repay (and pay interest), and the $ 57 billion set makes the task even more daunting.
"The IMF loan only finances public debt," said Serrano. "Argentina currently has a large account deficit (public spending is greater than that produced), so the loan will not solve the problem alone." Argentina has to reduce its deficit and increase its exports in so as to have a trade surplus again. "Taking this loan is forcing the country to reduce the deficit, which will most likely affect the country's growth".
And Serrano has little confidence that the government will manage it effectively, especially after the IMF's last intervention.
"If the IMF loan means an improvement for the country or a priceless burden over time will depend on the financial capabilities of the government," said Serrano. "Unfortunately, our past experiences that have taken the same type of loans from the International Monetary Fund have not had a positive outcome, neither for the country nor for its people".
With all these complexities at stake, startups in Argentina's growing technology scene face an uncertain landscape, but many believe that blockchain could be the answer they were looking for.
So, how does Serrano see Argentina take this technology and its crowdfunding element associated with the next level?
"ICOs are the first step, because they represent the financial side of the equation," he said. "The second step would be the reinforcement of new companies and disruptive projects that can offer real solutions to financial inclusion.If these companies manage to give access to the entire segment of the population without access to a formal economy, there can be truly radical change In Ripio, being one of the leading fintech companies in the region, we aim to democratize access to the new digital economy, and all our products are built with this in mind. "