WBD178 Audio Transcription
Bitcoin World #1 - What Argentina Can Teach Us About Bitcoin with Ariel Muslera and Diego Gutierrez-Zaldivar
Interview date: Sunday 15th December 2019
Note: the following is a transcription of my interview with Ariel Muslera and Diego Gutierrez-Zaldivar. I have reviewed the transcription but if you find any mistakes, please feel free to email me. You can listen to the original recording here.
In this interview, I speak to Ariel Muslera and Diego Gutierrez-Zaldivar about the current state of monetary policy in Argentina, the political landscape, and how more and more Argentinians are using Bitcoin to hedge risk.
“In Argentina, banks screwed up a lot of people many, many, many times. People forget about those things, but every 5, 7, 10 years we are reminded that the banks are not there to protect our assets.”
— Ariel Muslera
Interview Transcription
Peter McCormack: Hello Diego. Hello Ariel.
D. Gutierrez-Zaldívar: Hello Peter.
Ariel Muslera: Hello!
Peter McCormack: We are here for a time of forgiveness for 1986, despite the fact that your name is Diego ... and you're an Argentinian!
D. Gutierrez-Zaldívar: And I look like Maradona.
Peter McCormack: We can still be friends.
D. Gutierrez-Zaldívar: Not only that, they call me Dieguito.
Peter McCormack: What does that mean?
D. Gutierrez-Zaldívar: Little Diego and that's how they also call that Diego that we don't want to name.
Peter McCormack: For the whole of England, I offer forgiveness. We've moved on from that! No, but guys, great to meet you. It's great to come out to LaBITConf. Wow, what an amazing event! I would say, one of the events I've been to that has the most cohesive kind of feel for people, like everyone felt like one.
I've never experienced it as much as that and now, here we are in Uruguay, and the most beautiful view and a great place to do an interview. But look, I really want to learn a lot more about Argentina. With Bitcoin, Argentina comes up as a lot as a very good use case for Bitcoin because of the history of the government monetary policy. I've been reading recently about the Corralito. Have I said that right?
D. Gutierrez-Zaldívar: Yes, you said it perfectly.
Peter McCormack: And we're in a similar situation now. But before we start, we'll start with you Diego and then you Ariel, for people who don't know you, just to tell them who you are, what you do, and why we're here.
D. Gutierrez-Zaldívar: Well, I'm Diego Gutiérrez-Zaldívar, also known as Dieguito and I was one of the pioneers of the Web back in the 90s. In 1995, I created a website for the main newspaper in Argentina, Clarín, that was launched in March 1996. So I saw the whole boom and bust of the web and the final realization of what was our view on how the web was going to change the world. Then in 2011, I got in touch with Bitcoin. I didn't get it and in 2012, a good friend of mine brought me back into Bitcoin and I had one experience that was very impactful for me.
Amid I mean capital controls in Argentina, he sent me 5,000 Bitcoins, back then, that was like $50,000, from the Silicon Valley to Argentina and I send them back. The whole thing happened in an hour. We didn't have to ask permission from anybody and then I said, "okay, this is how an open financial system would look." Since then I'm doing this, spreading the word, creating technology, creating organizations that spread the word in Latin America and make this open financial system a reality.
Peter McCormack: Great! And Ariel, I've just met you, but please do tell people your background and what you do.
Ariel Muslera: Yeah, so actually we have a point in common in this story. So my background was I've been working on the venture capital entrepreneurship space for the last probably 10-12 years and in 2012, the same friend that Dieguito just mentioned, had a conversation with me and he kind of implied that Bitcoin might be worth a million bucks. He's a very smart guy, very well-respected and I said, "well, maybe he's right."
So I did an internal process, and I said, "how much money do I want to leave my daughters, so that they are not two brats?" And I bought my first 6 Bitcoin in 2012, which I still have, they're theirs and then I forgot about it. A few years later I remembered, because I looked at the pricing and I said, "whoa! This is for real" and I called the Dieguito, which we know each other for over 10 years, and he got me into it, basically and I've been working around Bitcoin since 2017.
Peter McCormack: Okay, so one of the interesting reasons to have this conversation is I'm from the UK, so I'm clearly aware I'm from a relatively privileged position, financially. Whilst the UK has had recessions, I've never experienced any kind of situation where I've had any kind of capital controls, any controls from the government how I can use, spend my money, or access foreign money from foreign markets. Not that I've ever had a massive need, but I've never lived in a position where I've had controls over me. Often, Argentina is brought up as a use case.
Venezuela is seeking the limelight recently because of mass inflation, but often Argentina has been brought up as a use case. You have suffered from inflation recently, but also, somebody mentioned to me the Corralito, which is something I've read about. So it would be really good, either of you to go first, as a starting point, just give me an understanding of the financial system in Argentina, and the reasons why people kind of have a distrust of it.
D. Gutierrez-Zaldívar: I think, Ariel is an economist, so he will explain it very well, but I think we have it all in Argentina. It's not only the Corralito, it's hyperinflation, it's everything you can think of in terms of macroeconomic crises, we have them. So maybe Ariel can go ahead and share some of those things that we live.
Ariel Muslera: The description of the Corralito is actually hard to grasp for most people. It's basically the government deciding, from one day to the next, that you're not able to access your funds in your banks or in any other official financial system. That happened for the first time in Argentina in 2001. We had a huge crisis then, so it was combination of... At that point we had a pegged currency. So 1 peso was equivalent to 1 dollar and for everyone, for the last 10 years, you could transfer money from one account in pesos to another one in dollars. It was exactly the same.
Suddenly one day, they decided that you could not extract your dollars from the system. You go to the ATM and they start to stay, "okay, today you can only extract $100 per day" and then a few weeks later, they say, "well, now you cannot extract anything." The only way you could spend your dollars was by transferring those dollars within the financial system to other person.
So basically, the dollars didn't exist, we were just fictitiously transferring money, or paper money, from one account to another and that, of course, came in combination with saying, "well, now that we have all this money or value locked into a system, now instead of 1 peso, 1 dollar, we're going to decide that it's 1 peso is equivalent to 25 cents of a dollar." So from one day to the other, you lost 75% of the value.
Peter McCormack: Historically, this peg of 1 peso to the dollar and you have it in your bank accounts, were the banks therefore buying dollars on the open market to represent this?
Ariel Muslera: The government's promise was that they were not issuing any local fiat currency, unless they have the backing of 1 dollar in their Central Bank. So, in theory, there were exactly the same amount of physical pesos in the system, that it was dollars in the Central Bank account.
Peter McCormack: Right, so they were claiming to be full reserve?
Ariel Muslera: Yeah.
Peter McCormack: But do we know why they changed things? Were they stealing the money because the government was running out of money or were they not operating the system?
Ariel Muslera: Well, what happened is this system worked very well because before this, we had hyperinflation and people were running out of the local currency, so something needed to be done and they came up with this idea of pegging the dollars to the local currency and for 10 years, it kind of worked. Some of the things that helped this, during those 10 years, because we suddenly became a dollarized economy, all the local assets, became valuable and the government sold out or privatized a lot of the utility companies etc, so they got a lot of dollars into the system, as well as from foreign investors.
Eventually, the economy started to cool down and basically, the accounts of the government, they didn't close anymore. There's no specific point in time, but they started to say, "hey, what if we issue a little bit more money and we don't tell anyone?" And then a little bit more, and then a little bit more and of course there's no way to know exactly how many dollars are in the system. But then at one point, it became clear that the dollars were flowing out of the system and then you have a run against the banks.
D. Gutierrez-Zaldívar: Yes and also, they were issuing bonds. There were like a combination of things, and also the commercial banks. So it's related to 2008 crisis, in a way, on a local scale, because also the local banks were investing heavily in these high-risk bonds, so when it exploded, they were not able to cover either for all the investments they did. So it was like a total collapse of the whole financial system and that created a lot of distrust in the banking system as well for a while. But only for a while because then, after a few years, people started going back to the banks.
Ariel Muslera: Yeah, but the basic premise of having your currency pegged to another foreign currency is that you lose monetary policy, you only have fiscal policy. So you can increase or decrease the taxes, but you cannot issue, in theory, more money to cover for deficits or maybe for a short-term crisis in your economy, where you need to inject money like the Federal Reserve does all the time, because they're able to print dollars if they need to. When you peg your currency, you lose that ability.
Peter McCormack: So the Corralito, essentially, was a way of giving them control of a monetary policy.
Ariel Muslera: It was like an alcoholic getting into recovery basically. It's like you don't touch your... The issue with machine of money, we cannot touch that because we came from hyperinflation, we cannot deal with printing money as a society, so let's get rid of that possibility and that kind of worked. There were other problems that this generated, but it kind of worked for at least five to six years and then it started collapsing.
Peter McCormack: And what was the impact of the Corralito on people? Talk me through what the rules were, but what was the impact on people and business?
D. Gutierrez-Zaldívar: Well not only on business, because you have to think that retirees had all their savings in the system, so it was devastating for the population. That triggered good things, in terms of, for example, one of the biggest barter networks appeared, and then it broke because the means to register the bartering and everything, were not good enough. Then the lack of transparency made the system fail, but you have maybe, I don't recall exactly the number, but half a million people in this barter network.
So I think it created this awareness that people should take, in a way, the economy in their hands. But also, it was devastating because people that were in their retirement years, suddenly they didn't have access to their money. There were very bad situations, you could feel it in the streets, you could see the sadness in the faces of the people. It was very, very strong. Our country always recovers somehow, but it was very, very strong and I think that created an awareness of how macroeconomics can impact on people's daily life.
Ariel Muslera: I think that a secondary effect on all these crises that keep repeating in Argentina, is that most people know that there is another crisis, big crisis, coming soon and so when things are kind of good for yourself, you try to, if you can, because not many people can, you try to save money in something that is not local currency or assets. A lot of people buy, if they can afford it, an extra house and by the way, there's no credit, so you have to actually have the money to buy the house.
Peter McCormack: I heard a story, the other day, Stacy Herbert, Max Keiser's wife, told me that they were in Buenos Aires and they met somebody, they told a story, somebody bought a house and they turned up with two suitcases of cash.
Ariel Muslera: That is how you buy a house.
Peter McCormack: Yeah! And the person they bought the house off had a coat created where all the money was in all the pockets of the coat, zip the coat up, and the reason they did that is to kind of hide it and protect the money!
D. Gutierrez-Zaldívar: Yes, that's correct. Usually you are asking a couple family members to go with you because you are walking through downtown with the bills on your body.
Ariel Muslera: I like to say that Argentina is the only country where you buy your groceries in installments and you buy your house in cash.
Peter McCormack: So what do people do with the cash? They don't want to put it in the bank, because they don't trust the banks.
D. Gutierrez-Zaldívar: Under the mattress. That's the traditional way of... I mean now maybe you have other ways, but the traditional way of saving was getting US dollars and putting them under the mattress.
Peter McCormack: Okay, but the secondary problem is, there's not only the fact that you couldn't access the money, but the money was losing value.
D. Gutierrez-Zaldívar: Yeah, well that's after this one-to-one peg we had with the dollar, then inflation started again and indeed, we had like 25%. People say, "oh, you have hyperinflation," because now we have 50%, but the truth is, in the previous 15 years, you have 25% or 30% per year.
But it was kind of predictable in a way, so people were just adjusting to it. It's like the renting contracts were being done with that into account, so I think it's the unexpected inflation which is a problem, not necessarily the inflation itself, because people just adapt to it and do this, in that sense. The inflation was caused because they started printing money again, so that that was...
Ariel Muslera: The interesting thing, and what I think that you start to see some aspects that make Argentina a hotbed for Bitcoin or other cryptocurrencies, is even the people, the lower income people in Argentina are free to have a bank account. Everyone can actually open a bank account and the banks are forced to give you a free account.
So the people that have a free account, and they're lower income, they trust the banks so little that they go at the beginning of the month and they take all their cash out, in an economy with 50% inflation rate. So at the end of the month, you lost at least 5% of your purchasing power by keeping it under the mattress, because these guys are not the guys that are going to buy dollars, they keep it in pesos. But they are risk-adverse, they don't want to deal with banking and financial institutions.
Peter McCormack: And I guess they're living paycheck to paycheck? So they'd rather have it in their pocket.
Ariel Muslera: Absolutely.
D. Gutierrez-Zaldívar: In the best case when they have a paycheck. Then you have people that are living like with their financial horizon maybe 20% or more now, because poverty scale up. So maybe 30% of the population is living with one week of financial horizon. So, they live day by day with cash and that's how it works.
Peter McCormack: What about the wealthier class? You can't keep $10 million dollars under a mattress. Are people trying to access accounts offshore? Are they trying to buy gold? Are they trying to buy other assets?
Ariel Muslera: Real estate and offshore, mainly. Offshore bank accounts, that's typical.
D. Gutierrez-Zaldívar: That's the big way. So if you are wealthy enough, you have ways to get out. Unless you have capital controls, and that's also what happened. Because they started printing money, so they have this inflation rate, but also they have debt in USD, external debt, so they started, not in the last government, but the previous one, they started converting external debt into internal debt and then they fixed the dollar-to-peso ratio in order to maintain the cost of paying out the debt at a certain level.
But then anything that you can use as an arbitrage mechanism, becomes a way of doing instant money. So that's why they started with the capital controls, and they will say, "okay, you need to keep your balance between what you import, what you export." Then people were using stock that was being traded outside the main companies. The oil companies in Argentina trade in Argentina but also in NASDAQ or in...
Ariel Muslera: I think another symptom of how this country is, in many ways, unique, is that you can take a taxi and talk to the taxi driver and he will know exactly what the price of Bitcoin, and the dollar, and any other hard currencies is at that particular moment. At the same, when you speak to anyone, they know how much is the dollar that particular day.
D. Gutierrez-Zaldívar: Yeah, people are hedging all the time. It's like the regular people are hedging and there are very weird patterns. Like at points of hyperinflation for example, merchants automatically start keeping the goods because they know they would preserve value more than the cash. So they start taking off the goods off the shelf, because it's better to stock, than to actually sell. So it changes many of the dynamics of the economics, like traditional...
Ariel Muslera: It's a story of constant abuse of the government to the people.
Peter McCormack: Well yeah! I was going to say, why is there this endemic problem? I've got to know a few people from Argentina and it seems like there are smart people, hard-working country, people work hard. Is it just mismanagement of money, or is it corruption, or is it both? What is the problem that keeps happening?
D. Gutierrez-Zaldívar: Both, for sure. I think corruption is very high, and mismanagement also. Yeah, I think it's a mixture of things. Also the lack of long-term economic politics, because for example, if the political party changes, they usually destroy whatever the previous one was doing. So it's like you're in constant change, you cannot do long-term planning, in terms of how the economics will be developed and that's also very bad for the people.
Ariel Muslera: You can also track this down to historical aspects. Sometime, way in the past, in the early 1900s, we were a very rich country and for some reason, that memory of being rich is still ingrained in most of today's middle class. So we think we're a rich country but we're not and we have this crazy agreement, as a society, we are a country that we have 30% plus people that are poor and yet, we offer a lot of free universal services, paid by the government. But in their minds, in the minds of most people, they don't connect those two things. They think that this is free, and actually there's nothing free, someone's paying for it.
Peter McCormack: Of course, but there is a history of socialism through South America, right?
D. Gutierrez-Zaldívar: Yes, Argentina is a little bit different than the rest of South American in certain things. Maybe Uruguay is more alike, in the sense that usually in Latin America, you have 20% included into the system and 80% left out. In Argentina, you have a huge middle class.
So that creates a different dynamic, and also maybe what we were discussing, this awareness of how macroeconomics impact your life, this constant hedging. Also, Argentina has been the leader in adoption of new technologies in the region, like internet, the first cable TV. So, in many areas, like social networks, it was... That's why I think Bitcoin is actually at the crossroads of finance and technology, and I think that's why Argentina picked this up earlier than other places.
Peter McCormack: Okay, so we'll come to Bitcoin. Just, another thing I'd like to understand, what is the political structure? Is it two main parties? Is it a socialist and a conservative party?
D. Gutierrez-Zaldívar: Now it is consolidating, but historically you had one very strong party, that is the Peronist movement, that is very diverse. It's not a single thing, it's like multiple entities that come together for the elections. So they have all these internal negotiations and then they come together for the election and then they distribute the power afterwards. Then you have different opposing parties that come and go. You don't have actually like a big partisan model.
Peter McCormack: That seems like a way to maintain and control power, as no other party can really get enough votes to challenge.
D. Gutierrez-Zaldívar: Yes and now actually, the country is split in two, because in the last elections, the Peronists won by little. So basically you have the people that are fully aligned behind the Peronist movement and the people who is against it.
Peter McCormack: What were they voting for? What's the new leading party?
D. Gutierrez-Zaldívar: The Peronist is the one, they are the new government.
Ariel Muslera: But the thing here is that they win the election, and then we're all scratching our heads to understand who exactly won within the Peronist party, because it's not a single thing, they are redistributing power and at the end, you don't know exactly who will win within the Peronist movement.
Peter McCormack: It almost sounds like it's still a dictatorship, as you can't vote for change.
Ariel Muslera: You can vote for change, but then reality comes and you go back to zero. That's what Dieguito was saying, that we have this tragedy of trying to change for a few years, and then it's not that you accept some of the good things that come, they just go back to the original ones.
So we're kind of like circling in the same area for the last maybe 20-30 years and it's sad because even though in the early 1900s, we were super rich, 20-30 years ago, we weren't super rich, but we were a leading Latin American country. That's not true anymore. When you look at other Latin American countries, they advanced a lot in many ways, and we kind of stayed the same.
D. Gutierrez-Zaldívar: Yeah, historically Brazil was the leading country, then Mexico was half of the GDP of Brazil, and Argentina was half of the GDP of Mexico and then Colombia was maybe, 60% of Argentina. Now, it's no longer the case. The other ones are growing and Argentina is lagging behind more and more.
Peter McCormack: So what's the impact of the voice of the people? Is there apathy towards politics, or is there a bit more kind of activism, a bit more kind of the demand for change?
Ariel Muslera: I think it's a super politicized country. Everyone has a very strong opinion and it's really, really active. In this last election, I think we have a turnout of over 80%.
Peter McCormack: Wow, that's really high!
Ariel Muslera: It's mandatory to vote. But even if you don't vote, nothing happens.
Peter McCormack: So, it's not really mandatory.
Ariel Muslera: No, exactly.
D. Gutierrez-Zaldívar: You have people in the streets for both sides, in a massive way. The Peronist were present in the street and also Cambiemos, that is the opposite party, was also in the streets with massive amounts of people. So people get engage a lot in politics.
Peter McCormack: Okay, and is the division a hard division and does it lead to social unrest?
Peter McCormack: It does?
D. Gutierrez-Zaldívar: Yes, it has been polarizing more and more over the last 20 years. Right after the first Corralito, everything has been polarizing more and more. Yeah, it's very divisive.
Ariel Muslera: It's actually interesting, because the manifestation of this is the Peronist party, people that are in favour, of whatever favour and people that are against whatever favour. It doesn't matter, it's just, "as long as it's Peronist, I'm against." But if you look a little bit underneath, there are a lot of real values that are being fought.
I think that historically with the Peronist party, there's one thing that they all agree, which is big government that controls resources and allocates in the way that they think. So that's what they are for. So then you have like people that are against that, but they are not organized against a unique idea. It's not, "well, I'm against that and I am a Libertarian" or, "I am a capitalist extremist," it's like, "everything that is not Peronist."
Peter McCormack: So the Corralito was in 2001. When did you come out of that?
D. Gutierrez-Zaldívar: It started to recover ... I mean for one year, money was completely locked, then they started to give some chances or ways to get out and as Ariel said, that was at a discount. So you already had lost like 75% of your money.
Peter McCormack: Thanks!
Ariel Muslera: The other interesting thing that happened during those years, which is crazy, is that the local governments, the different states and provinces, started issuing their own money.
Peter McCormack: Okay, wow! Hold on, that's not a small thing.
Ariel Muslera: No, it was crazy, because the government was broke, effectively, and they still had this limitation of... They didn't want to issue lot of national fiat money. The governments of the province, they needed to pay salaries and so they issued different currencies, local currencies.
Peter McCormack: So they just created a currency?
Ariel Muslera: They just created currencies! You should try to get one of those papers. It looks like funny money, it's like Monopoly money.
D. Gutierrez-Zaldívar: Yeah, so you had regional money and then you have this barter network, so it was interesting because the system kind of created buffers...
Ariel Muslera: And you could only spend them within the specific state.
Peter McCormack: Within the state? So how much power does a local government have? Did the national government not issue any directive that said, "you can't."
D. Gutierrez-Zaldívar: That was a crisis, so they had... The national government didn't have much choice because they could not also offer an alternative. But in general, I would say Argentina is not really a federal nation, in the sense that a lot of things go to the nation state, and then get redistributed to the provinces or states. Yeah, I think it's a very centralized way of managing the nation.
Ariel Muslera: The thing is that there are several provinces and states, where maybe 60% of the working population work for the state. So imagine if the state doesn't have money to pay the salaries, that is impossible. So you call the national governments, say, "hey, I need this money," and the government says, "I don't have this money", the governor needs to make a decision on how to solve that problem.
Peter McCormack: So were goods priced in the national currency and the local currency?
D. Gutierrez-Zaldívar: Yeah, because these local currencies were pegged one-on-one with the national currency. But, of course...
Peter McCormack: But that drives inflation as well, because that's still money printing?
D. Gutierrez-Zaldívar: Yeah, but people were discounting on that.
Ariel Muslera: It was a way of cheating this one-to-one peg. So what happened was, "we don't print national money, everything is backed by dollars, but this other money on the side that the provinces are printing? Yeah, that doesn't count." But it did and that was part of what ended up in...
D. Gutierrez-Zaldívar: One of the most famous ones was the Patacón and the Patacón now is like the way of talking of things that have no value. It's like, "are you paying me with Patacónes?" Is like you're paying me with Monopoly money or something that.
Peter McCormack: Is there a black market for dollars?
D. Gutierrez-Zaldívar: Yeah, now that you have capital controls again, then the black market appears.
Peter McCormack: Actually, we should go back a step. So you came out of currency controls, you came out of the Corralito...
Ariel Muslera: We then had a 12-13 year run of relative normality with inflation, which put us in the top three countries of inflation, with several major macroeconomic problems, but kind of making it. Then in the last year or so, things started to get bad again, really bad. Then at the end of the previous government, after they had lost the election, they had to basically lock the system again because a lot of dollars were coming out of the system.
Peter McCormack: So this is it here, right? Wow, okay. I'll share on the show notes. It does look like it's been on a computer printer!
D. Gutierrez-Zaldívar: Yes! When you feel it, it's even worst. I think the image doesn't represent how bad the Patacón is.
Peter McCormack: I can imagine I can get some of that on eBay, right?
D. Gutierrez-Zaldívar: Maybe! Maybe you can get them.
Peter McCormack:So you had a 12-13 year, I don't know want to say "good run" because you still had massive inflation, but at least you had control of your money. So what's happened recently? Because are people calling it Corralito 2, or they're just calling it currency control?
Ariel Muslera: Well not yet, but it's coming and it's coming fast. So the first thing that happened is, when the previous government lost the elections in October... That's the other thing that we have in this country, that is kind of crazy. The Election Day is at the end of October, and the new government doesn't take power until mid-December. In a country like us, which is full of volatility, having that huge gap, without being actually powerless, but you already won but you don't have power, that creates a lot of additional unnecessary uncertainty.
Peter McCormack: What happens in that gap?
Ariel Muslera: Well what happens is that you have a government that lost, so they know that they're going. You have a government that won, which is in this case a Peronist party, but you're not really sure exactly what they're planning to do. So people get crazy! What do they do? They start buying dollars and the Central Bank at one point, there was week that maybe 8% of the total dollars in the Central Bank went out of the window.
So after a couple of weeks like that, the Central Bank, ran by the government that already lost the election, which actually won the election four years ago saying, "the first thing we're doing is eliminating this crazy capital controls type of thing."
So they had to backtrack and set up this currency control, which is crazy. It's like today, Argentinians cannot buy more than $200 per month and this is already confirmed by the new government, that this is going to stay for a while at least. Then I think yesterday or this morning, they announced a new legislation where if you want to use your credit card outside of Argentina to spend dollars, this equivalent of spending dollars, there is an extra tax of 30%.
Peter McCormack: Wow!
D. Gutierrez-Zaldívar: Yeah and then they are doing de facto capital controls as well. They don't say it openly, but they are also... I know companies trying to do exports or imports and they are doing capital controls as well. So that's happening.
Ariel Muslera: So the result of this is that you have a dollar, that is the official dollar, which is around 60 pesos. Then you have a black market which we call the Dólar Blue, which on Friday, was around 72-73 pesos. I think that on Monday, it's going to probably go to 80 pesos
Peter McCormack: Wow! But the kind of body language from both you is not like, "I'm expecting social unrest and demonstration on the street." It's like, "Here we go again."
D. Gutierrez-Zaldívar: Yeah, this happened already, so it's nothing new. People are just trying to understand how bad it will be. But it's not that it's something new.
Ariel Muslera: I think the other crazy thing is that a lot of people think that this is the right thing to do. They think that, "the US, the capitalists, are coming after us to screw the country." So, all these capital controls...
D. Gutierrez-Zaldívar: But I think it is strategy. It's like what they are saying is, "we close the doors, we start printing. In that way we control the exchange rate", because the printing money goes to subsidies, to jobs in the state, like what Ariel was saying. So it's money that goes to the bottom of the pyramid, and that activates the economy. So it's a strategy, but it's a strategy that...
Ariel Muslera: For a while. Until the next crisis!
D. Gutierrez-Zaldívar: Yes, exactly. But it's a strategy that detaches you, in a way, from the global economy. because then, as you have so many distortions in the local economy, it's almost impossible for the outsiders to participate there. But again, the main problem is whatever economic policies that you define, the main problem is that we are going back and forth between completely opposite economic policies, and it's impossible to plan and or to have any kind of predictability on how to develop your business in this environment.
Ariel Muslera: The other thing that happens is that because we have these crises over and over again, the cycles where you can actually cheat and make people think that this is good, become shorter and shorter, because by the way, the dollar that everyone sees is the black-market dollar, because the other one is unavailable. If it goes from 72 pesos to 80 pesos, so let's say 10% increase in one day, that immediately will transfer to the prices in the local currency.
So all the economy will adjust, within days, to the new pricing. So that is like a cycle that never ends and so the government actually thinks it has a lot of tools, but it doesn't.
D. Gutierrez-Zaldívar: That's the other thing that is very interesting. As people don't trust the government and they are always hedging, actually you have a bi-monetary system in place, even if it's not formalized. because people are storing their wealth in dollars, the ones that can. So the government is managing the peso economy, but there's completely a parallel economy that is fully denominated in USD. So monetary policies have limited effect. Like what Ariel was saying, it's like people are always looking at the USD and then adjusting accordingly.
Peter McCormack: Just sounds like you need smaller government. Just less government, privatization...
D. Gutierrez-Zaldívar: But then again, that's a discussion in our society. It's like you have half of the population in favour of less government and then you have half of the population in favour of more government.
Peter McCormack: Because they are employing them, yeah?
D. Gutierrez-Zaldívar: Not only that, but yeah, it's a mindset. It's like you have a split society in that sense.
Peter McCormack: Do you get Libertarians in Argentina?
D. Gutierrez-Zaldívar: We have.
Ariel Muslera: This last election, I think it was the first time that the Libertarians have a significant role. It ended up playing out in favour of the Peronist party, because it divided a little bit, the electorate of anyone that was not Peronist. But at least they had a voice, and it has a lot of repercussion in terms of starting to put in the agenda the problem that it is to have a such a huge government. The other interesting data point, to understand Argentina, is that we are a country that has 30% of people that pay taxes, because one third of the population is poor so they are not in part of the formal economy. Another third, basically, avoids paying taxes somehow.
Peter McCormack: Cash economy?
Ariel Muslera: Yeah, cash economy and all that stuff. Then one third pays taxes to fund the government, so it's not viable. The solution that we've been trying over and over again and in my view the wrong way, is, "let's increase taxes," instead of saying, "why don't we... " It's not even about reducing government, it's about being more fair in terms of who pays and who doesn't.
D. Gutierrez-Zaldívar: But also you have very recessive taxes, because you have 21% VAT. So on one side, you have this thing that a lot of people avoid taxes, a lot of people cannot pay taxes because they're outside the system. But also, when somebody's buying food, they are paying 21% in taxes.
Peter McCormack: So they charge VAT on food?
D. Gutierrez-Zaldívar: Yeah.
Peter McCormack: Okay.
D. Gutierrez-Zaldívar: Well they tried to remove it on certain articles, but that was just recent, like a month ago or two months ago. So, you have this thing where you're trying to have an equal opportunities or an egalitarian system on one side, but then you're creating a model that is completely recessive and that hits the same... Somebody that is trying to survive and somebody that is well above the survival line.
Ariel Muslera: Historically, the government has had a lot of power to go and interfere in people's and companies' lives and in my view, too much. I give you an example, which is something that happens almost every time in Argentina. We have a crisis, a huge unemployment rate and then again, on Friday, last minute, 10 in the evening, the President decides that for the next 6 months or 12 months, you cannot fire people or if you fire someone, you need to pay double the penalty of firing them, which you could argue whether that is good or bad.
No one wants people to get fired, but we all know that the minute you do these discretional decisions, the companies already knew that something like this was coming so they stopped hiring people many months ago and they start actually, accelerated firing them because they knew that, probably, when the change of government happens, it would have more cost to them.
Peter McCormack: How bad is poverty in Argentina, and how is it distributed? Because Max and Stacy were in Buenos Aires recently and they said that it seems like quite a wealthy city. I don't know much of the geography of Argentina, outside of Buenos Aires.
D. Gutierrez-Zaldívar: The poverty in the countryside is maybe stronger in the sense that they are lacking everything. So it's lacking enough infrastructure, lacking of, well everything. But you have a lot of poverty in Buenos Aires that is, I don't know, concentrating in half of the population of the country and sometimes you have it inserted within the cities. If you go to Buenos Aires and you walk in the touristic part, it's true that it looks like a wealthy city. It has a lot of influence from Europe, so it's a very beautiful city. But right there, in one of the best neighbourhoods, Retiro, you have Villa 31, that is a slum.
Peter McCormack: Like a favela?
D. Gutierrez-Zaldívar: Like a favela, right there inserted into. You need to go to certain places, but not too far away and it's like that favela is 10 minutes from one of the more posh neighbourhoods in Buenos Aires.
Ariel Muslera: So some statistics, as I said, a third of the population is below the poverty line, and 50% of the children are poor.
Peter McCormack: Wow! Okay, so the VAT thing was interesting, because in the UK, we have a similar VAT, but ours is 20%. I'd have to double check, but I'm pretty sure it's not charged on food, children's clothes, and books.
D. Gutierrez-Zaldívar: That would make sense.
Peter McCormack: Yeah and there might be some other things that probably are, but they're the three main things. But I guess like pretty much everyone in the UK is paying tax. There will be a small cash economy, but not a third. There will be people who are not working, but I guess if you're only collecting tax from a third, this is a way of still collecting taxes from others, right?
Peter McCormack: Okay, so we should talk a bit about Bitcoin. It's funny, like I said, for the UK, there's no use-case for Bitcoin for me really. It's a speculative asset, so that's interesting and it's also a good way I can invoice people, but there's not a natural, intrinsic need I can see now. Even if Bitcoin loses value over a period of time, generally speaking, on a long enough timeframe, based on the inflation rate of Argentina, like in four-year cycles, it makes sense to hedge, to hold some Bitcoin.
D. Gutierrez-Zaldívar: Yeah absolutely. I did the math once and I think if you bought a $100 worth of Bitcoin in 2013, you could actually get two months... And $100 dollars was not a lot of money back in 2013, it was not like even a week of expenditure. But you could, like six years later, have two-months' worth of living with the same amount. I think it was like going from 6,000 pesos to going to 600,000 pesos over a period of six years. So that's the appreciation that Bitcoin has against the local currency.
Peter McCormack: Do you have a Bitcoin strategy yourself? Outside of your interest in it as a technology for people and business, do you personally have a Bitcoin strategy which you use to hedge?
D. Gutierrez-Zaldívar: Yeah I do have a strategy for hedging Bitcoins. Over time, Bitcoin became like a major percentage of my wealth and as I'm a true believer, I really don't... I wouldn't recommend people doing what I do. But what I do is I just keep in fiat, in USD, enough for living a few months so I don't have to sell Bitcoin at a bad price. But it has to do more with my belief.
So I wouldn't say that it's the reasonable thing. What I recommend people, usually is like, "put something in Bitcoin, that if you lose it, it's not going to affect your personal economy, like 2% or 3% of your wealth, something that really is not going to impact." But if you keep it long term and that helps also to have the discipline of not trading, because what I saw is that people trading usually lose.
Peter McCormack: Well, 90% of people lose when trading, which I find ridiculous.
D. Gutierrez-Zaldívar: Yes. So what I tell them is, "set aside something that is not impacting your financial economy if it's lost. But, that over time, if Bitcoin becomes digital gold and the world reserve of value, it will be relevant, so you leave something to your kids and as a protection, as a safety net."
Peter McCormack: And Ariel, you said taxi drivers tend to know the price of the dollar, gold, but you put Bitcoin in that basket. So, is there widespread knowledge of Bitcoin in Argentina? The reason I ask, because people always say, "what do you do for a job?" And I'm like, "I'm a podcaster." Then, "what's it about?" And I say, "Well, it's Bitcoin." I never get people say, "oh, what's that?" Everyone's kind of heard of it now. It's that the same in Argentina?
Ariel Muslera: I wouldn't say everyone, but yes, I guess at over average. One thing that's interesting to understand and another example where Bitcoin becomes super, super useful as a use case for the daily use, if you are a service provider, for example, you're a designer, you sell your services from Argentina to rest of the world, today, based on the latest economic decisions that this government made, when someone in the US hires you as a freelancer through Elance or some other of these platforms, they pay you in US dollars in a bank account or they transfer you your dollars to your own bank account.
You are forced to sell those dollars at the official price, which I remind you, is 60 instead of 80, and then get pesos. Then if you want to save, you can only buy $200 per month. So if you're doing kind of a good job and you probably have more than that to buy back, just if you were able to buy back, you're basically losing that gap. But even that is impossible. So a lot of these service providers that are providing service outside of Argentina, are turning to the Bitcoin and other cryptocurrencies, to avoid being forced to liquidate the hard currency and get the pesos.
Peter McCormack: Yeah and I guess businesses can use them to avoid capital controls as well?
D. Gutierrez-Zaldívar: To a certain degree because businesses are regulated, so it's not that... Technically, what I just described, is not necessarily something the government will support. But hey, this is part of Bitcoin's.. You kind of like control your destiny without trying to break too many rules.
Peter McCormack: But you've got the dollar limit, is there... What's the regulatory environment like for Bitcoin in Argentina?
D. Gutierrez-Zaldívar: Well, it depends because you have multiple angles. So you have taxing and on the taxing side, they impose something that is ridiculous, that they impose the same... They assume any operation with Bitcoin is speculative, so they apply 15% tax.
Peter McCormack: To profits?
D. Gutierrez-Zaldívar: No, I think it's off the transaction, but the thing is that it's not enforceable. So they are treating all the activity in Bitcoin ... Like they didn't understand that you can use Bitcoin as a payment means and then, if the other side is invoicing you, then you're already paying tax on that transaction. So they didn't understand the difference, they just wanted to tax it somehow. But it's impossible to enforce, so people is not actually doing it that way.
So there is no understanding on the tax authorities of Bitcoin. Then on the AMLs, CFT bodies, the ones that are fighting money laundering and financing of terrorism, they do have a proper understanding. We have been talking with them from the Bitcoin Argentina NGO and they just extended regular procedures to cryptocurrencies, but they didn't do anything special.
Then the Central Bank said that Bitcoin is not money, so they don't have anything to say about it. It's like, "do it at your own risk" and then, the equivalent of the SEC in the US, also said, "we are not going to intervene unless we think we should." So it's basically, "do whatever you want and if we don't like what you do, then we will see what to do with it."
Peter McCormack: What's the infrastructure like in Argentina, in terms of exchanges? Are any of the major exchanges like Coinbase here, or is it localized?
D. Gutierrez-Zaldívar: Well, that's the thing. There's no proper regulation for exchanges, so banks don't want to open accounts. So you don't have actual, what would you call the equivalent of international exchanges. You have brokers and then you have exchanges that work mostly B2B. They provide services and mostly it's like remittances or offshore payments for service providers that are all using Bitcoin as a backbone.
Ariel Muslera: That is the legal part. We need to talk about the black market as well. Because as with the dollar, I think the black market is a big part of the driver of the Bitcoin economy in Argentina, for all the reasons that I mentioned. I don't think it's the right thing to do, but it's what's happening. So as with the dollar, there are people that are in the black market buying and selling, and it's relatively easy to access than probably much more than most other economies.
D. Gutierrez-Zaldívar: There is a big OTC market, but it's not huge in terms of volume, related to our economics, but it's something that is commonplace. You can do OTC transactions in Bitcoin.
Peter McCormack: So you can get Bitcoin okay, right? It's not hard to get Bitcoin in Argentina if you know.
D. Gutierrez-Zaldívar: I would say in Buenos Aires or Córdoba, Rosario, the main cities, it's okay to get it. Maybe in the countryside and smaller cities, it's not that easy.
Peter McCormack: Right and is there a premium being paid, compared to...
D. Gutierrez-Zaldívar: Well yeah, if you go through a broker or you do OTC transactions, there is a premium that depends on the state of the market. Usually, when you have old people wanting to come in, that's usually on the bubbles, then you have a big spread. It can be like 10% between the buying and the selling point. Regularly, you have maybe minus 2/plus 2, minus 1/plus 1.
Ariel Muslera: The other thing is that the Bitcoin price is, of course, tied to the black-market price of the dollar.
Peter McCormack: Yes, of course.
Ariel Muslera: That always happens. The other thing is that with capital controls, where you cannot actually take some dollars out of the country, if a company wants to send dividends to their matrix, they can't right now. Now of course, a publicly-held company will not do anything like using Bitcoin to jump the legal barrier, but a lot of smaller companies that have private investors etc, they want to get some money out of the country, then they go to dollar or they go to Bitcoin.
D. Gutierrez-Zaldívar: Yeah, there's like a lot of, one thing called Cuevas, that is like an alternative financial system that do these kind of arbitrage, where you give them the money in Argentina, and they somehow will manage to give you the...
Ariel Muslera: That is an infrastructure that has been there forever and it's a result of so many years of capital controls and crazy economics.
D. Gutierrez-Zaldívar: Yeah, it's like the whole society is already prepared to do that, to adapt to these capital controls and everything and Bitcoin is becoming more and more a part of that infrastructure. But the infrastructure was already there.
Peter McCormack: Okay, it's really fascinating actually. Let me ask you another question as well. So something that has come up a few times, like I'm a Bitcoiner and over time, I've looked at alt coins and I've kind of always come back to Bitcoin.
But a few times, some people who are in the Ethereum community, have pushed stablecoins to me and they've told me a specific story of one guy in Argentina who's been using stablecoins himself because Bitcoin has a volatility risk. Obviously the peso has a volatility risk, but it's usually downwards. But it's maybe a bit more useful to be able to have access to stablecoins as well. Is that also a highly relevant part of the market?
D. Gutierrez-Zaldívar: Well, I think not yet. I would say Bitcoin is still the most relevant part. But of course, I think if you have a stable asset, if you have a dollar-denominated crypto asset, then that can appeal to a broader audience. But I don't think the people that are getting into the Bitcoin space would like to get into it, because they have other ways to get dollars. But it's true that if you are lower middle-class or even lower class, that then you don't have access to the dollars, because these things are something that the middle class can access. So I think there is some opportunity there to socialize the access to the US dollars.
Ariel Muslera: I have a slightly different view here. I think that stablecoins are actually one of the biggest opportunities in a country like Argentina. The reason is because today, if I sit down with a friend, I have a lot of friends and they have no contact to the Bitcoin world and they're all economists. I am an economist so all my friends are economists, they did quite well! Every time I sit down with them and try to sell them the Bitcoin proposition, they laugh at me and they don't get it.
It will take a lot of time for them to understand how come this value is created out of nothing and no one controls. I'm telling them, "you should put some money in Bitcoin because the prices will go up." It's a very hard proposition for someone that is completely out of understanding how the technology works. If I tell these same people, "hey, here's a place where you can save dollars," or euro, or whatever other hard currency, outside of the risk that putting the money in an Argentinian bank brings, that is a much easier conversation.
D. Gutierrez-Zaldívar: Oh for sure.
Ariel Muslera: Especially when you start adding the limitations that is, even if they want to go and buy dollars at the bank, as I said, where can only buy $200, in theory, you can go to an exchange and buy Bitcoin, but only to buy stable assets, so you don't even have the exposure to Bitcoin, and then it's yours.
D. Gutierrez-Zaldívar: No, the value proposition is there. What I'm saying is, it's not happening yet.
Peter McCormack: It would still have to be a black market, right? Because, as soon as you're buying more than $200, the government is going to prevent that.
D. Gutierrez-Zaldívar: Yeah, this will be peer-to-peer, for sure. But yes, I agree with Ariel that the potential is there. What I was saying is, it's not the case yet, but the potential is very big.
Ariel Muslera: I think that today, it might be a black market because of the current situation. But I think once we break that, and people understand that owning cryptocurrency, even if it's a stable asset and not Bitcoin, has a lot of additional features, instead of putting your money in a bank.
Again, part of what we described before about the macroeconomic cycles in Argentina, banks screwed up a lot of people many, many, many, many times. So people forget about those things, but every 5, 7, 10 years, we are reminded that the banks are not there to protect our assets. So if you find a way of solving the problem, people will be willing to actually pay and pay taxes. I think that if someone comes and sets up a crypto bank, formal, official etc, they will be successful.
Peter McCormack: Wow, interesting. So what's your experience? Obviously, you're on the ground, you're talking to people, you're trying to educate people. Is it hard?
D. Gutierrez-Zaldívar: Well I think, and I agree with Ariel that we need bridges, and that's part... I started for example, putting a group of voluntaries in 2015, with whom we went into the slums, we invited social entrepreneurs to sell their products, dumplings and things on our meetups in Buenos Aires and at the beginning, we were doing that with Bitcoin. But again, for them, it was like going from physical cash into a digital economy.
So that was already like a learning step, a big jump in terms of understanding, and then they had to incorporate another currency or asset. So I think we need to create bridges that people... So we change one thing at a time and once they are into the digital economy, it's easier to... Yeah, I think it's tough when you have to teach them everything, because you have to tell them about digital money, which is not commonplace yet.
Now, that's happening already because many FinTechs are offering services on the smartphone, so that's getting more widespread. But then also, you have to start talking about short-term money that devaluates to a certain degree, and then long-term money. So yes, it's an educational process, but people can relate to it and as Ariel said, if you have money that is fully in your control, I think that's something that, it doesn't matter if it's a stable asset or if it's Bitcoin, people will value that.
Ariel Muslera: The challenge here is to convey that message in a credible way. I think that the minute that the average Argentine understands that there is a parallel financial system that is not centralized, they will jump. So I think that our job is, by creating new tools, new financial apps etc, to get them more comfortable getting into that.
D. Gutierrez-Zaldívar: Yeah I think that's the other thing. The technology was not reaching... We were working a lot on protocols, we were working on the low-level stuff that needs to happen to get to the end user and just now we are actually getting into the application level, creating user experiences that are tailored for the mainstream. So, if you ask me, I think 2020 will be a year where we will hit the ground.
Peter McCormack: Yeah, because you're not just teaching people why Bitcoin is important, and how it works, and why it's, like you said, a parallel financial system, but then you're also going to have to teach them about block times and transaction costs, and then managing your private keys. There's a lot of other things to teach people.
Ariel Muslera: I think the challenge is how can we avoid them to ... Can we figure out a model or a product that doesn't need the end users? The 30% that are poor, or even the other 70% that are not poor, but they cannot save money in a currency that they want, can we figure out a way so that the complexities are managed behind the scenes?
Peter McCormack: The problem is there's always a trade-off though, that's the thing.
Ariel Muslera: Yeah, but that's why I think Argentina is kind of a unique place, or as Venezuela, these are societies that have suffered so much, they have been exposed to so many crises, these are early adopters. If you throw something there to test, they are willing to lose a little bit of control because they know that when they send their money to the banks, they're losing all the control.
D. Gutierrez-Zaldívar: Yeah and I think again, it's building bridges. Once they are there, then you can teach them about the values or the ethos behind it. But the first thing is we have to provide value for them. Once we provide actual value, then they will listen and it's like everything, if you have a skin in the game, then a part of your mind will be present there. So we need to break that barrier so people has skin in the game, in this new financial system, and then we can educate them.
Ariel Muslera: Today, most people in Argentina, the ones that are able to save some money, a portion of them are able to buy assets that are tied to dollars or hard currency. Most of them just save in pesos and hope for the best. But the reality is that, last year, they lost 50% of that value. It's ridiculous.
Peter McCormack: Yeah, it's ridiculous! It sounds like the Corralito was awful and you clearly don't want to another one, but I guess if it happens again, it simplifies your job of explaining Bitcoin to people.
D. Gutierrez-Zaldívar: As I said, this huge barter network level was very successful. So I think if that happen again, now we have the tools for people to take that to the next scale. But really, if you ask me, I don't want to see that happen.
Peter McCormack: No, of course you don't.
D. Gutierrez-Zaldívar: There was much suffering in that.
Ariel Muslera: I also think that being through all these crises makes the average Argentinian mistrust a lot of these schemes. So yeah, on one hand, it should be easy. But on the other hand, people are like, "yeah sure, exciting. Are you sure you're not going to run away with my money? Who's this Satoshi guy?"
Peter McCormack: Does Argentina need any external support to help with Bitcoin, or do you have everything you need in the ground? Do you look externally for help?
D. Gutierrez-Zaldívar: No, not really. I think Argentina has one of the more developed Bitcoin and crypto ecosystems in the world, I would say. Buenos Aires is considered one of the... And you have leaders in the space in many areas, in Bitcoin, in Ethereum, in EOS even, you have some of the core developers there. But what I mean is the technology is being pushed there.
Peter McCormack: But also, we say Argentina, but there was clearly a LatAm community as well.
D. Gutierrez-Zaldívar: Yes, I'm saying Argentina because Argentina has been leading, but we have strong communities also in Mexico, in Brazil, with maybe a different focus. Maybe in Brazil, it's more about the trading, more about the financial aspects of it. But then in Colombia, you have very good teams working, Paraguay is starting to have some movement, Bolivia it is completely forbidden, but you have some people trying to do something there.
Then you have Central America where you have Panama, Costa Rica. So really, you have a Latin American community that is emerging and yeah, I think Latin America will be clearly... Because of the need, it will be one of the places, if not the place, where these tools will really hit the mainstream and be valuable for people.
Peter McCormack: Well, it's been really useful for me to learn more about it. It's a lot more interesting actually, in the world of Bitcoin, beyond just kind of like, "number go up," and speculation. The fact is, if you could actually solve a problem for people, if you could see a large, significant percentage of Argentinians actually realize that this is actually a very useful tool, there's a definite use case and if you were to see massive growth, that would be super interesting.
D. Gutierrez-Zaldívar: Yes, absolutely. I like one thing that Andreas said, that usually, when he goes around the world, he has to explain why. Here, when he starts talking about Bitcoin, he has to explain how.
Peter McCormack: I've heard him say about that! All right, well listen, look, if anyone wants to find out more about any of the work you're doing, I don't know how much that applies to you Ariel, but please do tell people your Twitter or your websites, anything you want them to follow.
Ariel Muslera: My Twitter @bluelabel. I'm easy to follow.
D. Gutierrez-Zaldívar: My Twitter is @dieguito and also I'm the CEO of IOVLabs, the company behind RSK, RIF, and now Taringa, the biggest social network in Spanish. So you can go to iovlabs.org and you will find all the information of what we are doing in technology and our vision of how this will come together on top of Bitcoin.
Peter McCormack: Amazing! Well listen, thank you to both of you coming on, because we did this at really short notice. But I think that was a useful one. Yeah, so thank you both for coming on. If you ever need anything, you know me now, so just reach out and let me know, yeah?
D. Gutierrez-Zaldívar: Thank you Peter!
Ariel Muslera: Thanks so much, it was a pleasure.
