The Bitcoin market in Argentina is small but expanding (having doubled since February) and TradeHill, the recently resurrected Bitcoin exchange, is betting that the digital currency will take off in Argentina.

In an interview last week TradeHill founder Jered Kenna said that “Argentina possibly has the most demand I’ve seen out of Latin America for Bitcoins,” adding that his business has been talking to local banks and is planning a local office.

Joseph T. Salerno sees the silver lining here arguing that Cyprus may bring about the unravelling of the current banking system and expose “the true nature of fractional-reserve banking for all to see.”

“The ‘Cyprus deal’ as it has been widely referred to in the media may mark the next to last act in the the slow motion collapse of fractional-reserve banking that began with the implosion of the savings-and-loan industry in the U.S. in the late 1980s.”

“This trend continued with the currency crises in Russia, Mexico, East Asia, and Argentina in the 1990s in which fractional-reserve banking played a decisive role. The unraveling of fractional-reserve banking became visible even to the average depositor during the financial meltdown of 2008 that ignited bank runs on some of the largest and most venerable financial institutions in the world. The final collapse was only averted by the multi-trillion dollar bailout of U.S. and foreign banks by the Federal Reserve”

“Even more than the unprecedented financial crisis of 2008, however, recent events in Cyprus may have struck the mortal blow to fractional-reserve banking. For fractional-reserve banking can only exist for as long as the depositors have complete confidence that regardless of the financial woes that befall the bank entrusted with their ‘deposits,’ they will always be able to withdraw them on demand at par in currency, the ultimate cash of any banking system.”

“Ever since World War Two governmental deposit insurance, backed up by the money-creating powers of the central bank, was seen as the unshakable guarantee that warranted such confidence. In effect, fractional-reserve banking was perceived as 100-percent banking by depositors, who acted as if their money was always ‘in the bank’ thanks to the ability of central banks to conjure up money out of thin air (or in cyberspace).”

“Perversely the various crises involving fractional-reserve banking that struck time and again since the late 1980s only reinforced this belief among depositors, because troubled banks and thrift institutions were always bailed out with alacrity—especially the largest and least stable. Thus arose the ‘too-big-to-fail doctrine.’ Under this doctrine, uninsured bank depositors and bondholders were generally made whole when large banks failed, because it was widely understood that the confidence in the entire banking system was a frail and evanescent thing that would break and completely dissipate as a result of the failure of even a single large institution.”

“the deal does convey a salutary message to bank depositors and creditors the world over. It does so by forcing previously untouchable senior bondholders and uninsured depositors in the Cypriot banks to bear part of the cost of the bailout. The bondholders of the two largest banks will be wiped out and it is reported that large depositors (i.e., those holding uninsured accounts exceeding 100,000 euros) at the Laiki Bank may also be completely wiped out, losing up to 4.2 billion euros, while large depositors at the Bank of Cyprus will lose between 30 and 60 percent of their deposits. Small depositors in both banks, who hold insured accounts of up to 100,000 euros, would retain the full value of their deposits.”

“The happy result will be that depositors, both insured and uninsured, in Europe and throughout the world will become much more cautious or even suspicious in dealing with fractional-reserve banks. They will be poised to grab their money and run at the slightest sign or rumor of instability. This will induce banks to radically alter the sources of the funds they raise to finance loans and investments, moving away from deposit and toward equity and bond financing.”

“If this indeed occurs it will be a significant move toward a free-market financial system in which the radical mismatching of the maturities of assets and liabilities in the case of demand deposits is eliminated once and for all. A few more banking crises in the Eurozone—especially one in which insured depositors are made to participate in the so-called ‘bail-in’—will likely cause the faith in government deposit insurance to completely evaporate and with it confidence in the fractional-reserve banking system.”

Read the post in its entirety here.

“There’s a shift in power from the traditional to the emerging world.”

The move is seen as a way for BRICS to protect themselves from the US and Europe’s financial trouble and as a way to increase their global financial influence.

Details here  and here.

• Russia to ban cash transactions over $10,000

• Bitcoin’s market capitalization briefly hits $1Billion!

• Texas want’s its gold back from the Fed.

The Dollar Vigilante‘s editor-in-chief and Bitcoin ATM CEO, Jeff Berwick, is planning the first Bitcoin ATM. “If we did this now, and we are moving quickly to make this so, we would be the only functioning ATM on the island.”

The planned ATM will allow users to deposit fiat and receive Bitcoin as well as send Bitcoin and receive fiat in return.

Jeff explains the motivations behind this new business venture…

“In Europe, institutions like the International Monetary Fund, European Central Bank & the German Federal Government have forced individuals to suffer through the confiscation and devaluation of their savings through techniques like taxes, levies and inflation.”

“The European Central Bank published a report in October, which stated that increased demand for Bitcoin ‘could have a negative impact on the reputation of central banks,’ particularly if the public perceives Bitcoin’s value is due to ‘a central bank not doing its job properly.’ Yet another reason why I know this idea is a good one.”

“These reasons and others are why I feel that Bitcoin ATM’s time is now. We picked our slogan, ‘Your Future Now,’ to demonstrate the immediacy with which we feel we must roll out this technology.”

“I’ve founded many successful internet companies, and rarely have I been as excited about an idea as Bitcoin ATM. I’ve got a great, knowledgeable team who has already contacted important people within and without the ATM and bitcoin communities to make this feasible. You’ll be intrigued by the unexpected relationships we’re forging to bring Bitcoin to more people across the globe. In gauging shop owners in the digital currency unfriendly state of California last week, the Bitcoin ATM team discovered great interest from not only those who knew Bitcoin, but also from those who did not. Stateless currencies will be a way of the future, and that’s why Bitcoin ATM, and why now.”

Bitcoin ATM is actively seeking franchisees and investors. If you’re interested you can reach them at [email protected].

In a bailout deal with the Eurozone Cyprus’s bank account holders are being forced to pay the bill…not troubled bank bond holders, depositors. “The illusion that depositors don’t need to yank their money out of threatened banks because they’ll be protected has been shattered.”

Come Tuesday morning Cyprus’s bank account holders could see their balance shrink as much as 10%.

From the Business Insider:

The Eurozone powers-that-be gave Cyprus a bailout — but with a startling condition that has never before been imposed on any major banking system since the start of the global financial crisis in 2008.

The Eurozone powers-that-be (mainly, Germany) insisted that the depositors in Cyprus’s banks pay part of the tab.

Not the bondholders.

The depositors. The folks who had their money in the banks for safe-keeping.

When Cyprus’s banks reopen on Tuesday morning, every depositor will have some of his or her money seized. Accounts under 100,000 euros will have 6.75% of the funds seized. Accounts over 100,000 euros will have 9.9% seized. And then the Eurozone’s emergency lending facility and the International Monetary Fund will inject 10 billion euros into the banks to allow them to keep operating.
Cyprus’s government tried to explain this deal by observing that it was better than the alternative: Immediate bankruptcy and closure of the major banks. In that scenario, depositors would lose a lot more of their money. Businesses would go bankrupt. And tens of thousands of people would be instantly thrown out of work.

But, still, not surprisingly, news that deposits in Cyprus’s banks would be seized triggered an immediate run on the banks.
Depositors rushed to ATMs and tried to withdraw their money before it could be seized. But the ATMs weren’t working. And the government has now made it impossible to transfer money out of the country.

So, assuming Cyprus’s government approves the deal (still pending), depositors will have some of their money seized on Tuesday morning.
But ever since the Great Depression wiped out a big percentage of the world’s banks, vaporizing the bank depositors’ savings in the process, banking system regulators have tried to do everything they can to protect bank depositors.

And they are smart to do so. Because the moment depositors think that there is risk to their savings, they rush to banks to yank their money out.

That’s called a run on the bank.

And since no bank anywhere has enough cash on hand to pay off all its depositors at once, runs on the bank cause banks to go bust.

That’s what happened to hundreds of banks in the Great Depression.
But now, thanks to Eurozone’s bizarre decision in Cyprus, the illusion that depositors don’t need to yank their money out of threatened banks because they’ll be protected has been shattered.

Depositors in Cyprus banks will lose some of their deposits.

They will be furious about this.

And they will, rightly, feel that it is grossly unfair — because depositors in the bailed-out banks in Ireland, Greece, etc. didn’t lose their money.

And they will feel like fools for not having taken their money out.

And … here’s the important part …

Other depositors at weak banks all over Europe, in places like Spain, Italy, and Greece, will rightly wonder whether this is the beginning of a new era of bank bailouts, an era in which bank depositors are going lose some of their money.

What do you think those other depositors in Spain, Italy, Greece, etc., are going to feel like doing when they realize that, if their banks ever need a bailout, they might have their deposits seized?

That’s right. They’re going to feel like yanking their money out of their banks.

And if some of them yank their money out of their banks, well — then the financial condition of those banks will go from weak to insolvent.

Update: Cyprus parliament rejects bank deposit tax, putting bailout in disarray.

This frightful thought has not been lost on GoldMoney’s Alasdair Macleod who today writes “The US, UK, Europe and Japan are all implementing economic policies that must ultimately result in the complete destruction of their currencies; and if you destroy the means of exchange of goods and services, your people will starve.”

“We all look to government to supply what we used to provide for ourselves, in the naïve belief that it is our servant, it has our interests at its heart, and that it can deliver. Collectively we have chosen not social co-operation, but the disintegration and ultimate destruction of society itself. We labour under so many misconceptions about where our true interests lie that we have completely lost our bearings. We have in our time witnessed other nations destroy their own economic and social structures and do not see it happening to ourselves.“

“When reality intervenes, we deny it. The state controls money and prices. It makes economic calculation meaningless. It takes our property in the name of the common good to dispose of as it sees fit.”

“The cost is our own impoverishment and loss of freedom. The state only values us for our contributions to it. We must be controlled for our own good. The state does not fear for itself so long as there is any wealth left to sequester from us and any freedom left to us to pursue non-statist objectives.”

“governments … are running out of their citizens’ money. Together, they are destroying their capital at an accelerating rate, just so that they may survive. They rely on mutual planning in the erroneous belief that it will save them, when the only chance for any one state to survive and eventually prosper is to stop conspiring and face up to the problems of its own making.”

“Instead, next year – when the weaker governments begin to collapse under the hammer-blows of economic reality – when they cannot hide the insolvency of their state-regulated banking systems, the stronger governments will sequester the remaining resources of their own citizens to prop them up, as Germany is doing to her people today.”

“To paraphrase Macbeth at his lowest ebb: It is a tale, full of sound and fury, destroying everything.”

Read the post in its entirety here.

Bloomberg’s Business Week spoke to a few Iranians who have found a solution in Bitcoin. “Iranians are resorting to virtual currency to move money into and out of the country in a way that Western authorities find hard to detect.”

“Under sanctions imposed by the U.S. and its allies, dollars are hard to come by in Iran. The rial fell from 20,160 against the greenback on the street market in August to 36,500 rials to the dollar in October. It’s settled, for now, around 27,000. The central bank’s fixed official rate is 12,260. Yet there’s one currency in Iran that has kept its value and can be used to purchase goods from abroad: bitcoins, the online-only currency.”

“The advantage for Iranians is that bitcoins can be swapped for dollars that can then be kept outside the country. Another plus: Regulators can’t easily track the transactions, since bitcoins aren’t issued from a central server. Bitcoin users can conduct business on virtual private networks, which hide customers’ identities.”

“At online store coinDL.com, shoppers can use bitcoins to buy Beyond Matter, the latest album from Iranian artist Mohammad Rafigh. Anyone in the U.S. downloading songs, which fetch .039 bitcoins or 45¢ each, risks violating U.S. sanctions. That doesn’t bother Rafigh, who’s studying computer engineering as well as playing music. ‘Bitcoin is so interesting for me,’ Rafigh wrote in an e-mail. ‘I wish the culture of using digital money spreads all over the world, because it does not have any dependency on anything like politics.’ Rafigh has translated some bitcoin software into Farsi for his friends. ‘I love Iran, and if bitcoin is good for me, it can be good for more Iranians like me.’”

“Iranian-American bitcoin consultant Farzad Hashemi recently traveled to Tehran and talked up bitcoin to his friends. ‘They are instantly fascinated by it,’ he says. ‘It’s a flash for them when they realize how it can solve their problems.’ Iranians working or living abroad can send bitcoins to their families, who can use one of the online currency matchmaking services to find someone willing to exchange bitcoins for euros, rials, or dollars. Bitcoins are useful to Iranians wishing to move their money abroad, either to children studying in Europe or America or simply to stash cash in a safe place.”

“As the value of the rial plunges, many Iranians are trying to acquire foreign currencies. ‘We have no idea what will happen,’ says Amir-Hossein Madani, who says he’s traded tens of millions of street market dollars in Tehran over the past two years. ‘These days prices change every 10 minutes.‘”

“The uncertainty has led some Iranian software developers to ask clients to pay them in bitcoins. ‘Anyone with a computer is able to own, send, and receive them. You can be at an Internet cafe in Iran and managing a bitcoin account,’ says Jon Matonis, a founding board member of the Bitcoin Foundation, a Seattle nonprofit that promotes the currency. The exchange rate in Iran is 332,910 rials per bitcoin. It isn’t known how many Iranians use bitcoins to skirt sanctions. According to localbitcoins’ Kangas, 32 people in Iran have contacted each other through his site.”

“For now, Iranians are using bitcoins to maintain a fragile connection to the outside world.”

View the post in its entirety here.

Forbes’ Robert W. Wood explains that this could have serious consequences for Americans living abroad.

“FATCA—the Foreign Account Tax Compliance Act—generally takes effect in 2013 and the IRS will start penalizing foreign banks in 2014 for failing to comply. The law was enacted in 2010 but remains in the ramp-up phase. Yet foreign banks and governments are on board and more of the law is being applied right now.”

“FATCA requires foreign banks to report U.S. account holders to the IRS. After identifying them, institutions must impose a 30% tax on payments or transfers to any who refuse to step up. Foreign financial institutions (FFIs) must file IRS reports by September 30, 2014.”

“At first, FFIs must report account numbers, balances, names, addresses, and U.S. taxpayer identification numbers. For U.S.-owned foreign entities, they must report the name, address, and U.S. TIN of each substantial U.S. owner.”

“U.S. persons living abroad may feel caught in the crosshairs of the U.S. war on undisclosed foreign accounts and income.”

“Many Americans already can’t open legitimate new accounts abroad and face closure of old ones. Mortgages are being denied or called, and the squeeze is getting worse. American Citizens Abroad complains that expatriates face an impossible position merely based on their nationality.”

“On top of annual FBAR TD F 90-22.1 filings for foreign accounts and reporting worldwide income on your taxes, FATCA’s Section 6038D requires U.S. taxpayers to report foreign accounts and assets with an aggregate value exceeding $50,000. Required reporting includes:

• Any financial account maintained by an FFI;
• Any stock or security issued by a non-U.S. person;
• Any financial interest or contract held for investment that has a non-U.S. issuer or counterparty; and
• Any interest in a foreign entity. That means taxpayers who purchase foreign real estate through an entity are covered by FATCA as well.”

The article can be read in its entirety here.

This post is a peep into the underground exchange markets for dollars and bitcoins in Argentina. For the last couple of weeks, I have experienced the informal exchange of bitcoin and dollars on first hand in Buenos Aires. Furthermore, I have realized how both locals and expats may reap significant gains by using bitcoins as a medium of exchange.

Inflation and Monetary Restrictions

Before we dive into the details of the underground markets in Argentina, let me try to paint the picture of the current economic situation in Argentina.

For several years the Argentine inflation rate has been bumping around 25-30% per annum, according to figures published by independent institutions. The Argentine government doesn’t recognize the independent estimates and has allied with INDEC, the National Statistics Institute, to calculate inflation figures 2-3 times lower than the independent figures. The interesting fact is that the peso’s fixed exchange rate with the dollar is only taking into account INDEC’s inflation rate of 8-12%, causing overvaluation of the peso by not incorporating the true higher inflation rate. INDEC is indeed a neat implementation of an Orwellian “Ministry of Truth”, and the magic calculations have raised concerns with IMF who is threatening to expel Argentina from the organization.

Naturally the high inflation rate has caused capital flight out of Argentina, and every Argentine with a bit of savings is looking to exchange their pesos into something more secure. In order to stop the capital flight and fortify the central bank’s reserves, the government has implemented strict measures to prevent Argentines from obtaining foreign currencies. For example, only if you are travelling abroad are you allowed to exchange pesos for dollars legally, but there is a limit of 100$ per day abroad. Recently the government also imposed a 15% tax on all foreign credit card purchases, and a 50% custom duty on any goods which Argentines purchased abroad. Aside from the outrageous taxes, this legislation completely flashes your personal banking details to government officials, who can then snoop on your shopping list.

Estimated 200.000 people in the Plaza de Mayo demonstrating against government policies.

The complex regulatory environment has caused Paypal to suspend all domestic transactions in Argentina. Ebay and Amazon has followed suit with similar restrictions.

The Blue Dollar

In Argentina the dollar you care about is blue. The reason is that the difficulty for locals to acquire dollars through traditional means has fueled a secondary dollar exchange market. The unofficial exchange rate, known as the “blue dollar rate”, is approximately 25% higher than the official rate.

For expats, it’s a no-brainer that you are being ripped-off by withdrawing cash at ATMs from established banks, where the withdrawal is conducted at the official exchange rate currently around $ARS 4.70 pesos per dollar. In comparison, if you exchange USD on the “blue market” you get around $ARS 6.20  pesos per dollar.

Luckily before travelling to Argentina, my girlfriend and I were tipped off to this news and carried along dollars in cash when entering the country. One can exchange dollars at the blue market rate simply by heading to Bs. Aires main shopping street, Calle Florida. Here lots of street vendors are drifting around advertising their business to anyone who looks like a potential customer. The street vendors here are known as arbolitos by locals. Arbolitos means “little trees”, a reference to the street vendors are full of “green leaves”. If you are looking to exchange dollars the street vendors will quickly approach you and provide a quote. If you accept the quote, you just head to a nearby jewelry or electronics shop and complete the transaction.

Above approach is generally safe but I wasn’t too keen on exchanging dollars with street vendors. Instead I posted a small note on an online forum and got in contact with a couple living in Buenos Aires, who were eager to exchange dollars for pesos at the blue market rate. The snapshot below is the result of this exchange – and what an underground dollar market looks like.

The Bitcoin Hero

The dollars we brought into Argentina are soon running out, and we have been looking for alternatives to increase our dollar reserves. One approach is to cross the border to Uruguay – but you have the hassle of ATM withdrawal limits and the risk of travelling with lots of cash. There is also a service called Xoom, which allows you to transfer money from abroad to various pick-up locations in Bs. Aires. The magic of Xoom is that they somehow manage to provide the blue dollar exchange rate. Unfortunately they also require a US bank account to use its services.

Another possibility is Bitcoin, a new electronic currency, which has been flourishing online for the last couple of years. In our situation Bitcoin has turned out to be a great vehicle to transfer money into Argentina and achieve the blue dollar exchange rate. I completed my first bitcoin to pesos transaction last week and gained 25% in comparison to the official exchange rate.

The way it works is that you simply buy some bitcoins online through one of the many bitcoin exchanges. Mt.Gox is by far the largest but there are local alternatives as well, such as Bitcoin Nordic. Once you have your bitcoins you identify an Argentine who is on the market for bitcoins at the blue dollar rate. Given the economic situation there are lots of Argentines who are looking to get rid of pesos in exchange for other more secure assets.

In my case I circulated a note to Eudemocracia’s bitcoin mailing list announcing that I was interested in selling bitcoins. The price I offered was the Mt.Gox USD price converted to pesos at the blue USD exchange rate. Based on the number of replies this was an attractive offer, and after some email correspondence, I agreed  to meet up with one contact and conduct the transaction. After getting the agreed pesos in cash I made a one-click transfer of bitcoins to his online bitcoin wallet. A bitcoin transfer is instant and non reversible, and the picture below shows how we could confirm completion of the transaction on the spot.

Because of the dollar restrictions and the escalating inflation the demand for bitcoins in Argentina is greater than our personal need for pesos. Therefore, if you are an expat or just travelling through I encourage you to explore bitcoin as an alternative to finance your stay. Not only will you get a 25% higher exchange rate but you will also help locals protect their savings from being hollowed by inflation.

I believe the bitcoin adventure is just kicking off in Argentina. Also I’m keen to see how the 200.000 Argentines demonstrating for libertad in the Plaza de Mayo might use bitcoin to fight the monetary restrictions themselves. Maybe it’s an even better approach than banging a pot?