Carlos Mosquera Benatuil, the CEO of Mexico-based Solidus Group, which focuses on digital finance through its crypto hedge fund, Solidus Capital, and crypto OTC desk, Solidus Markets, talks to Profit & Loss about why cryptoassets are more than just a vehicle for speculation in Latin America.
Profit & Loss: What are some of the key differences you see between crypto trading in Latam compared to the US?
Carlos Mosquera Benatuil: So there are only a few places for cryptoasset price discovery in Latam, but the bigger exchanges are pretty good. The market still lacks sophisticated traders, however, which has actually been a challenge for us as we’re looking to hire staff for the proprietary trading desk that we’re building out.
There’s a lot of 20-year-olds who just discovered cryptocurrencies in December 2017 managing very small sums, like $1,000, and in general the whole crypto trading scene in Latam is made up of very unsophisticated retail traders.
In Venezuela you have some traders that are more experienced in the crypto space but they’re mainly trying to get at the arbitrage opportunity between the USD/BTC market and the USD black market. So they’re not trading the cryptoasset itself based on fundamentals or technical analysis or some kind of systematic strategy, they’re just running an arbitrage trading system and everything is done manually.
Even on the technology side, we’ve spoken to firms that provide software for FX and other parts of the financial markets and they don’t yet know how to effectively customise their technology for the crypto space.
So the short answer is that regional crypto trading still isn’t very well developed.
P&L: Has the excitement around cryptoassets and trading cryptocurrencies died down this year as the price has declined?
CMB: Of course, trading volumes are lower and there is lower interest overall from the retail segment. The clients that we deal with, however, are just as excited as six or seven months ago because when these big capital groups decide to pursue a business venture they’re taking a more long-term view. They’re not taking a step back just because the price has come down, because the fundamentals are still there and are in fact stronger than ever.
The reason why I am so bullish is because in Latam, bitcoin solves actual problems, even life or death situations like in Venezuela, it’s not just about eliminating inefficiencies in the market. There are real societal problems around government and corruption that bitcoin can help with.
P&L: Can you please go into more detail with regards to this last point?
CMB: Sure, here’s a great example: in Mexico, in order to open a regular bank account you normally need about $200 as minimum deposit and you have to maintain that minimum in order to avoid being charged fees by the bank. The problem is though, that the minimum wage is about $200, so you would have to keep 100% of your money in the bank just to avoid paying fees, which are generally about $10-$20 per month. This is crazy and it’s why about 70% of the country is still totally unbanked.
Cryptocurrencies can help with this issue. We see e-commerce growing bigger, Amazon is become more prominent, Rappi is like an Uber Eats/Postmates in Mexico, rapidly increasing new services, but since most people aren’t in the traditional banking system they need another way to pay. We’re now beginning to see cryptobased solutions, so Bitso – a Mexican crypto exchange – has launched a payment card that is now accepted across all the Oxo stores, which are the Seven Elevens of Mexico, in the country and people can hold money on the card in Mexican peso or crypto, but the payment rails behind the scenes of the debit card are crypto powered. You also have the case of Albo an all-digital bank in Mexico that does not charge you maintenance banking fees and the opening deposit is just about $25 with no minimum required deposit.
So now people are getting into this new financial system because of crypto, when they’ve never been included in a financial system before.
Then you have more drastic use cases, such as in Venezuela. When I spoke at the Profit & Loss Latam conference in April, we talked about how the situation in Venezuela was dire, but it has become worse since then and people are now dependent on this new payments rail to totally bypass the blockade of the government. People are literally surviving because they are receiving some money thanks to bitcoin. Same thing is starting to happen in Argentina.
So those are two use cases, but it’s also important to realise that middle and upper class people in many Latam countries have lived through hyperinflation – Argentina and Venezuela are the obvious examples of this – and so they are risky investors by default, because their currency is a risk. Their history has made them naturally more willing to invest in crypto, both to preserve the value of their assets and to speculate.
P&L: There was something of an ICO mania in more developed financial markets last year, was this replicated at all in Latam?
CMB: Not at all. The ICO scene is almost non-existent, both in terms of entrepreneurs launching them and also in terms of investors wanting to invest in them. Possibly only Argentina has the best few ICO cases in Latam. You have Ripio Credit Network, Flixxo and even Rootstock team there.
P&L: At the moment does most of the trading in Latam take place OTC or on exchange?
CMB: Mostly through exchanges. The OTC market is very, very small because most people don’t know who to trade with and there’s no one that you can really trust for, say, a $1 million transaction. The biggest exchanges in Brazil, Argentina and Mexico are beginning to offer OTC services, but it’s maybe less than 1% of all the volume going through those platforms. This is in contrast to the international global market where the notional volume of cryptoassets that trades OTC is thought to be larger than the retail volume on the exchanges, somewhere between two-tothree times larger.
P&L: Do you see crypto trading developing in a regional manner across Latam, or will there be distinct markets in each country?
CMB: So we’re currently deploying an OTC desk across the Latam continent, South Florida and Spain because we see a lot of uniformity amongst how the crypto markets are developing in each country and because they have the similar structural problems within their societies that cryptocurrencies can help solve. These are countries that heavily depend on remittances so respective regulations allow us to build a legal money transmission platform across the region and facilitate cross-border treasury services through crypto rails for individuals, small/medium businesses and corporations, another big part of the OTC market, not just family offices, high networth individuals and Institutions buying or selling crypto for speculation, trading or profiting purposes.
P&L: How does the regulatory environment differ across the continent?
CMB: Well the country that has the most regulatory clarity right now is Mexico; it has actual fintech laws that include a few paragraphs addressing the crypto space. Brazil is such a complex country in terms of legislation and regulation that they’re not even thinking about it yet, Argentina is supposedly looking at crypto regulation but they’re dealing with so many major problems economically right now that it probably won’t be a priority for Congress there any time soon. However there’s a proposal floating around to convert 5% of Argentina’s international reserves into bitcoin.
Chile and Colombia both blocked fiat accounts for the crypto exchanges focused on retail investors, but in Chile the courts ruled a few months ago that banks have to serve these exchanges and allow people to freely trade against crypto with fiat. Colombia’s new president is talking about inviting the crypto community to invest in the country and is supposedly looking to develop a more open regulatory scheme and even go further fully “blockchainising” the country’s governance infrastructure.
If these countries develop a good regulatory scheme for crypto trading it will ultimately benefit them because in all of these countries at least 10% of GDP depends on remittances, so if you make remittance more efficient, the people in these countries will receive more money and actually increase that country’s GDP. So ultimately it will benefit those governments with less welfare weight above the national balance sheets. This actually seems to be an approach that is taking off in Peru, where the political scene is a little more well developed than across other areas of the region.