Brazil in Deep Trouble: Bitcoin and Blockchain are what Brazil needs right now?
Recession stricken Brazil is the world’s seventh largest economy with a population of 207.8 million and GDP of US$1.775 trillion. Brazil’s worst recession in recent history continued as rising unemployment and deepening political turmoil dragged the economy into further decline. In the second quarter, Brazil’s economy contracted 3.8%, after shrinking 5.4% in the first three months of the year. It’s the longest recession since the 1930s for Brazil, Latin America’s largest economy.
The situation went from bad to worse as the President Dilma Rousseff was impeached owing to large scale corruption. While the proceedings in Brazil are currently bleak, let’s look into the possibility of Bitcoin adoption setting things right:
Bitcoin adoption currently:
The Bitcoin adoption in Brazil has been on the rise owing to the varying economic conditions. The recession cycle followed the pattern where Brazilian Real appreciated first and then went on to depreciate starting a probable hyperinflationary cycle. During the course of this pattern, there has been a significant uptick in the Bitcoin trading volume from Brazil. The dynamics of the economy and exports prompted people to look for alternatives, which turned out to be Bitcoin.
Brazil is the largest exporter of soft commodities in the world. During the deflationary part of the cycle, the Brazilian Real appreciated due to significant capital inflows. For major exporters, this was a setback as they wouldn’t be getting more local currency in exchange for their goods. Hence an alternative, they turned to receive payment in Bitcoin to be later converted into local currency when Real depreciated.
How Bitcoin can be a solution:
For an economy that is struggling, people’s faith in its currency fading, an alternative system has to be opted. Just like Government bonds where the Government backs fiat currencies, the central bank can alternatively back Bitcoin based assets. What makes this even more feasible is the transparency the underlying technology provides in such arrangements.
This decentralized system can be in place till the economy achieves stability. Later the asset holders can cash in for local currency. These assets unlike bonds can be transacted peer to peer without any processing fee.
How Blockchain adoption would be a relief:
The settlement time in Brazilian market is abnormally slow. The average settlement period for credit card transactions in Brazil is D + 28 which is very slow compared to western markets. Slow settlement times amount to loss of value of transactions due to holding up of the money. This would mean the loss of investment opportunities in time. A study by PWC revealed that Brazil has over 22 million [small and medium-sized enterprises] and micro-businesses. The mobile penetration is upwards of 132%, which has created a fertile ground for mobile payments.
Hence Blockchain based settlements which are quicker and more transparent are exactly what Brazil is looking for. Fortunately there has been significant development on this end with major banks and Mastercard trying to implement Blockchain based transactions in Brazil.