On The Brink with Castle Island - Matt Ahlborg (UsefulTulips.org) – Bitcoin as a Bridge Currency (EP.79)

Episode Date: May 13, 2020

Peer to peer marketplaces are a wealth of data on genuine demand for Bitcoin – but not in the way you might think. As it turns out, a large fraction of the volume in these markets relates to complex, multi-step trades designed to use Bitcoin as a bridge currency to move fiat-denominated remittances, especially into countries like Venezuela. Matt Ahlborg, data scientist and creator of UsefulTulips.org, has done great work compiling this data and engaging with these traders to determine what exactly is happening on these opaque marketplaces, and what Bitcoin is being used for. In this episode we cover: How Matt went from working in the Navy to pursuing a career in Bitcoin data science Why p2p exchange volume is more reliable What a massive blackout in Venezuela tells us about foreign exchange flows in Latin America How exactly Bitcoin works as a bridge currency on p2p exchanges The under-reported role of Chinese exporters in Venezuela on LocalBitcoins Matt's investigation into how Argentine capital controls are driving p2p Bitcoin volumes Why Bitcoin still dominates in p2p markets rather than stablecoins Why p2p volumes are likely significantly larger than the reported numbers

Hello and welcome back to On the Brink with Castle Island. I'm Nick Carter. This is yet another installment of our crypto dollarization miniseries, or should I call it a maxi series, because it's starting to run on pretty long now. So we've covered the dollarization phenomenon in Venezuela a little bit with our prior episode with Alejandro Machado. I wanted to revisit the topic because it's so interesting and such a genuine validation of Bitcoin's Valley proposition and the crypto financial infrastructure that's been built over the last 10 years. For a long time, Bitcoiners have had this fascination with local Bitcoins volumes. Local Bitcoins is a peer-to-peer Bitcoin marketplace, and the volumes are considered to be more reliable than other Bitcoin exchanges

because it's actually quite difficult to execute a trade. So in theory, it's a better barometer of where there's genuine demand for Bitcoin on a global scale. And for a long time, Latin America has really been the leader when it comes to local Bitcoin's volumes. And a lot of Bitcoiners thought, well, you know, this is a straightforward case of Bitcoinization. The reality though, when people started to dig into it was a lot more complex and a lot more interesting. As it turns out, Bitcoin is primarily being used as a bridge currency in these places. So one of the analysts that has done the best work in elucidating this phenomenon and really investigating what is actually happening on the ground, what these numbers mean is Matt Alborg.

Matt is a data scientist who runs the site useful tulips.org, which is devoted to tracking and explaining the volumes of these peer-to-peer Bitcoin marketplaces. like local Bitcoins in Paxville and analyzing their trends around the world to get a view for what the geographical penetration of Bitcoin is like and where it's having the most impact in any given time. Matt's work has definitely increased my understanding of these issues. He has really shed a lot of light on these pretty complex marketplaces. I'll post his articles in the show notes. I very much recommend you go to useful tulips.org to get a better feel for where Bitcoin is being demanded for genuine commerce and remittances worldwide, and also read his excellent

investigative pieces on Medium. Without further ado, let's jump right into it. Brought down by bad mortgage investments, Lehman, which has 25,000 employees, will be liquidated. The federal government loans American International Group, AIG, $85 billion. This is a different kind of market, and the Fed is asleep. The federal government is stepping it to stabilize Fannie Mae and Freddie Mac, the two mortgage giants that have been threatened by the housing crisis. the Bank of England has pumped 75 billion pounds more into Britain's ailing economy with a new round of quantitative easing.

You print a couple trillion dollars and all of a sudden people start to worry. So out of this worry, we have something called the Bitcoin. Bitcoin. Matt Alborg, welcome to the podcast. Hey, thanks, Nick. Thanks for having me. Yeah, I'm excited to get you on. You know, you've done so much good work on tracking P2P markets for Bitcoin. Really, your work, I'm not just pandering, but it very much increased my understanding of how Bitcoin is used as a bridge currency in Latin America. It, like, totally changed my view on this. I thought, you know, initially I thought all the local Bitcoin's volume in Venezuela was

just like people Bitcoinizing, just like adopting Bitcoin as a sink or like an alternative store value. Turns out the reality is like totally different. Yeah. Yeah, it is. And I'm glad I got that point across and I'm glad that it does seem like the community in general kind of understands that now. So yeah, I'm glad for that. Yeah. And you know, like our allegiance, I guess is really to the truth. It's not necessarily to narratives that make Bitcoin look the best, you know. So, you know, I'm not interested in like, whitewashing things. Like if there's ugly truths or truths which are just neutral for Bitcoin, like let's just accept them, right?

Absolutely. And I think that's kind of everybody's job in research and in learning things as, yes, pursue the truth. And ultimately that will result in the most, the greatest good, you know. So, well, before we get into the Bitcoin as a bridge currency idea, I'm just like, we met a while back, actually, I think it was at a bitdubs in New York. Yeah. Yeah. So just tell us a little bit how you got the idea to do this research and to pursue, you know, data as a career.

And, you know, in particular, within the context of Bitcoin. Sure. Yeah. So I got into Bitcoin in late 2013. I saw it on the news. It was really interesting to me. I bought my first Bitcoin for like $1,100 and a day later it was worth $600 or something like that.

But I was kind of hooked right at the beginning with a lot of the virtues of Bitcoin. And I love technology and I love history and the way that the future is shaped by the past and globalism and all of these things that are happening at once. And so Bitcoin really appealed to me for that reason. During that time, I was full time in the US military. I was a Chinese linguist in the US Navy. So by day, I was doing that stuff. But by night, I was really obsessed with Bitcoin.

And I would spend three to four hours a night just reading about Bitcoin and stuff. During the kind of lull of 2014 and 15 when there wasn't really much price action, I noticed that, so Coin Dance did have was showing volumes of local Bitcoins at that time. But they were only showing, as they still show, just the Bitcoin value. They weren't even showing the Fiat value of this stuff. Oh, really? They didn't even have it against the currency pair. So if you looked at the volume back then, it was very hard to tell, but I just did a hand,

handwritten or hand calculation, and I found out that during 14 and 15, there was a lot of increase in usage in particular set of countries or a particular set of currencies. And so that really spoke to me. And I think that the reason why I've been interested in peer-to-peer markets is because they have, the majority of their users do come from places that Bitcoin is supposedly supposed to be helping. And so I feel like if you really want to test whether or not Bitcoin is living up to its promises, that's where you need to look. And so that's why they were always so fascinating to me.

I kept tracking peer-to-peer markets until late 2017. That's when I ended my contract with the Navy, and I finished my degree in Chinese, a semester later. I was also about halfway through a computer science degree. That was in Hawaii at that time. I dropped out in the computer science degree and I went to a data science program in New York City. And basically the reason that I wanted to go to this data science program was because I was so interested in local bitcoins and packs full volumes. And I wanted to learn how to dive into them. So I did that and like in the data science program, I was, you know, the crazy Bitcoin guy.

everyone else was doing, you know, all of these other data science projects related to advertising and financial analysis and things like that. And all my projects were related to Bitcoin. But, yeah, I got out of the program and then I started writing blog posts and they started getting attention and that kind of brought me to where I am now. Yeah, you've created a great resource. I'll link it in the show notes, of course. useful tulips.org, tongue and cheek name. Yep. Very good. It's, you know, it's like you got to own

the like the slur, you know, the epithet. You know, let's let's like retake it for ourselves. Absolutely. Yeah. And I've always been, I've always been kind of detractor to a lot of the Bitcoin critics and just in general. There are so many. very smart people, but they become too relied upon. I feel, you know, they, maybe they win a Nobel prize and then all of a sudden their opinion on every topic matters and where they know a lot about one domain, but all of a sudden they think they know things about every domain. And so there's a lot of people like that who don't like Bitcoin. And so I love kind of responding to those types of people. And in fact, I regularly kind of email my articles to those types of people

to kind of challenge them. And I try to be respectful. And usually they are respectful back. So it's fun. So what is it that's so special about local bitcoins and taxable volumes and just in general, these peer-to-peer markets for Bitcoin? What is it that's interesting about them? Sure. So what a lot of people don't understand is, is that peer-to-peer markets are a different architecture of exchange than more centralized exchanges like Coinbase or BitStamp. Coinbase, BitStamp, and all the other big, big time exchanges,

they all have banking connections. And so you can connect, as a retail customer, you can connect your bank account and buy Bitcoin. And it's easy and efficient, no hassles, it's completely legal. With peer-to-peer exchanges, you don't, they typically, you don't directly connect your bank to the exchange, and instead a trade,

a peer-to-peer trade will involve you sending a bank transfer to somebody else within a banking network, but you're not actually ever sending a bank transaction to the exchange itself. And with this architecture, it allows you to onboard users from many, many countries which don't allow banks to connect to centralized crypto exchanges. So if you're in Nigeria and you have a bunch of Nigerian currency in your bank account,

you can't connect to Coinbase and buy Bitcoin. The only other way to do it is go to a peer-to-peer exchange. offer to send your NARA in your bank account to some other Nigerians bank account who already happens to have Bitcoin, and that's how you acquire Bitcoin. And so the architecture of this model allows these peer-to-peer exchanges to operate in many countries that it's not necessarily approved by the government, and that's what makes them the most interesting. And that's why the vast majority of users on local Bitcoins and Paxville come from these

So it's kind of like a Craigslist for Bitcoin, and I guess it's like a more honest accounting of Bitcoin's footprint in the places where it matters, which is places where the crypto financial system doesn't really operate properly. Yes, yes, exactly. So I guess the other thing is that the volumes are kind of more reliable, maybe, because these aren't centralized exchanges. that have a significant incentive to like spoof volume or do a bunch of wash trades to get exposure on coin market cap or anything.

These are kind of bilateral trades. So I don't even know how you'd go about faking volume, right? Right. And so, I mean, you could fake volume or you could just make fake records through the API and I would never know. I don't think that's happening. But you are right. It is, in my opinion, more authentic volume.

and it's not even just the, it's not even the incentivization for, you know, centralized exchanges to spoof volume. It's the fact that it's very expensive and cumbersome to do an actual transaction on a peer-to-peer exchange. You're generally paying a higher spread. There's more slippage. It's because it's a peer-to-peer trade,

and it is escrowed by the exchange. The Bitcoin is escrowed. but the other side of the trade where it's like a bank transfer or a gift card transfer or something like that there's a lot of scam potential there where you know the person could say that they sent you a bank transfer and then they could even Photoshop something that makes it look like they sent you a bank transfer and then they could try to get you to release your Bitcoin and they could try to turn the exchange against you so it's extremely hard and difficult to use a period of peer exchange is a terrible user experience just by the architecture.

And that's, it's not the exchange's fault per se, you know, they're dealing with this architecture and they are getting a lot better at making it like a more user-friendly experience. But the nature of the beast on peer to peer markets, it's, it is a very authentic volume because it's such a chore to even do trading on them. So it's like a proof of work a little bit. if you can satisfy the demands, the rigors of trading, it's most likely the case that not only are you a real trader, but you're highly incentivized to acquire Bitcoin. Absolutely. Absolutely. Yeah, we've kind of already said it, but there are, in my opinion,

far less speculators on these exchanges. It's not to say that there's no speculation. I absolutely believe that a significant minority of the volume of speculation in many markets, but I believe that the majority is utility usage, people who have to use it. And the other interesting thing is that the data is available on a country-by-country basis, so you can really start to intuit or ascertain which geographical regions have a certain affinity for Bitcoin, which leads you down a whole new rabbit hole about questions, right? Yes, but I would like to kind of correct that. you can't see it explicitly on a country by country level. You can see it on a currency by currency level.

So many currencies trade in many countries, especially the U.S. dollar. The U.S. dollar trades in several dozen countries on local bitcoins. So, you know, for example, in Venezuela, a lot of the U.S. dollar trades are emanating from Venezuela, but we don't know that because, like, a currency is not equivalent to a country. But it is a good general rule of thumb that when you see a certain currency having uptick and volume, it's corresponding to the country. Yes. So you've written two really good articles recently, diving into this data and then making really interesting inferences about what it means. So the first one, which I thought was so clever, methodologically speaking, was this article about Venezuela, which will link here in the show notes.

where you look at blackouts in Venezuela and use that to infer which countries on local bitcoins had volume which interfaced with Venezuela and use that to infer a lot of information about remittance flow. So can you just talk about how you had that insight and then what you found in this article? Sure. Yeah. It was kind of a eureka moment when I thought of looking at the blackouts as, you know, trying to show how Bitcoin is being used. But yeah, so a quick summary is that, you know, there was a massive nationwide blackout. And you couldn't do this analysis unless it were a very wide sweeping blackout. And it was.

So it's what economists would call it a natural experiment, I guess. Yeah. Yeah. And so it took place. last year in March and almost the entire country was offline for several days and then a big chunk of the country was offline for weeks after that a hydroelectric dam it had it malfunctioned and so yeah when the power was out inside of Venezuela of course the transactions in Venezuela would go down

But what I discovered, which was the interesting and fascinating part was that not only did the Venezuelan Boulevard transactions go down, but all Latin American currency transactions also lost volume during that time. And even the US dollar itself lost volume during that time. And specifically, I had this awesome data set from a website called netblocks.org where they measure the net blocks. number of active internet connections emanating from Venezuela and so I actually had a data set that I could see where when I lined up lined it up perfectly timing wise I could see that the moment or the minute that the power went out you could see these big drops drop-offs and transactions across many different currencies so the long

The realization that I made based on that, you know, on a broad level, you could just very easily see that these other Latin American currency transactions are related to Venezuela in some way. But through a lot of my interviews and domain knowledge on this situation, what I found out that the specific reason was likely related to Venezuelan migrants

who had fled to this situation, these other countries. They were earning income in these new country currencies. And then they were using those new country currency incomes to go to local bitcoins, purchase Bitcoin in one transaction, and then immediately turn around and sell that Bitcoin into Venezuelan Boulevard in another transaction sent to a family member's bank account. And so that is what the definition of remittance is. And so that's kind of how that was the big revelation that I made. And yeah, it was really exciting when it came together like that. Let's, I guess let's briefly give the listeners a refresher on how Bitcoin as a bridge currency works.

So I think there's like maybe a couple of misunderstandings. So first of all, people don't understand what the volume is all about, what it means. So they think maybe it's just people are just straight up buying Bitcoin. Second of all, I think people perceive local bitcoins to be like a primarily retail market, but I guess in reality, it's more like wholesale, right, with like brokers intermediating this. Yeah. So like, let's say I'm a Venezuelan migrant part of the diaspora in Colombia. How mechanically does this process work for me to send?

Take my Colombian pesos and turn them like physical pesos cash and turn them into Bolivar in my cousin's bank account, actually, because they don't use cash in Venezuela. So how does that whole process occur? Sure. So, yeah, like I said, the migrants, they flee to whatever country they can get into. They start earning, you know, income in, let's say, for Colombian pesos, for example. In Colombia, you know, just like immigrant communities in the U.S., they tend to cluster by, you know, wherever they're from. So there's probably Venezuelan communities or Venezuelan neighborhoods in Bogota

and other places in Western Columbia and such. And so the most simplistic picture, and this is the way I drew it in the diagrams in the article, is that you would take, you would earn pesos in your job. Let's say they're electronic pesos, just for the sake of, simplicity. You would earn electronic pesos. They would be sitting in your bank account. You would

go to local bitcoins. You would then find an advertisement for somebody who wants electronic Colombian pesos and you already has Bitcoin and they're willing to give you some Bitcoin for it. So you would find that person, you would agree on a price. You would send them your electronic pesos in a bank-to-bank transfer. And then once that part was complete, they would send you the Bitcoin or they would release the Bitcoin to you on the platform. At that moment, you now have Bitcoin in your local Bitcoin's wallet. That's not the end goal.

So what you do is you then turn around and you enter into a second trade where you bring Bitcoin and you find an advertisement in Venezuela, where somebody in Venezuela is offering to send boulevars to whatever bank account you. you specify as long as you give them Bitcoin. And so you enter into that trade and you complete the process and you give the bank account of that cousin, for example. So that is the most simplistic way that it happens, but you are right in practice.

Mostly it does go through intermediaries where, for example, if you're in a Venezuelan neighborhood in Colombia, you know, there's usually some person in that neighborhood who knows how to operate local bitcoins or they have bank accounts in different in both Columbia and Venezuela. So even if you don't get electronic pesos, you could bring that person cash pesos and paper and they would do the work for you. And in practice, that's how it does work most of the time because like I said, using

a peer-to-peer exchange, it is quite a task and it's a skill. And so that's how it usually ends up working. Does that make sense? Yeah, it certainly does. And the reason that Bitcoin is the bridge currency is simply that there is no efficient Fiat banking connection between Venezuela. That's an excellent point. Yeah.

So in a free market world, this wouldn't be necessary because in a free market world, the Venezuelan banking system would connect to the foreign exchange, inter, foreign exchange market, around the world globally and you would be able to trade boulevars for pesos in a free market manner. However, in Venezuela, the government does not allow the local banking infrastructure to connect to the foreign exchange interbank market. And so does not allow to connect as kind of a harsh way. They allow there to be a connection, but only certain people get the preferential exchange rates And it essentially ends up meaning that there's no meaningful connection between Venezuelan banks in the global banking system.

So for that reason, because the local banks are not allowed to fairly exchange currency with other currencies, that's why Bitcoin is being used so much. because the Venezuelan banking system oftentimes does not realize that these internal bank transfers, they seem like local bank transfers. You know, I talked about, you know, the second part of that transaction where the person is selling, they're selling their Bitcoin for Bolivars to be transferred into their cousin's bank account. From the perspective of the Venezuelan banking system, it just looks like a random bank transfer taking place. They don't see a Bitcoin part of it.

And there are ways that they can detect it. They can see like certain bank accounts are sending them out, sending out crazy amounts of transactions and like, you know, so there is a game of cat and mouse in that respect, but also because the corruption is so high, I think oftentimes you just have to make sure that you have a bank account at the right place and you pay off the right people or you have a certain status and nobody's going to mess with

So that's kind of how it works in practice. And so your realization based on overlaying these two data sets was actually Venezuela is like a gravity well in Latin America, which is responsible for a lot of the volume on local bitcoins even outside of Venezuela because there's these multi-step trades occurring. So volume that's local to Argentina or Colombia is actually part of. of this like remittance flow into Venezuela, right? Yep, absolutely. So it's, and it, you're right, Venezuela, at least historically, it really was,

um, it was the chief reason I, I feel, at least in the previous years, it was the chief reason for a lot of volume growth in Latin America. Um, yes. The, the other point I want to make is that, yes, there is a remittance flow going into Venezuela, but that remittance flow would, not be possible if it were not met by a number of people inside of Venezuela wanting to purchase Bitcoin. Like I said, when the person sells their Bitcoin for boulevars, there has to be somebody in Venezuela who wants to acquire Bitcoin. And so that group of people is also very interesting. And I tried to look into that as well. And what I found was that it seems to be a lot. It seems like there's a lot of Chinese. I think 5% of Venezuela is ethnic Chinese. And we don't know all the

facts on this. But my best guess is that we do know that the Chinese community in Venezuela, it's quite similar to the Chinese community in the U.S. They have a lot of small businesses, restaurants, general stores. They have a lot of cash businesses. And so we feel like, our best guess was that these cash flow heavy businesses, they have a lot of boulevars that they want to get rid of. And so what do they purchase? They purchase Bitcoin. And then again, they're not resting in Bitcoin. They purchase Bitcoin just so that they can sell that Bitcoin usually to acquire U.S. dollars or potentially even Chinese yuan and other currencies. So yeah. Yeah, that makes sense.

I mean, you need there to be effectively like a market maker that takes the other side of the trade. Exactly. And it's not just Chinese. I think they do account for like a very interesting amount. But it's also a lot of Venezuelans inside of Venezuela as well. They also have an appetite for Bitcoin. I'm sure it's also for the same reasons, but probably some other crazy reasons that I don't know either. So, yeah.

Well, I guess there's one phenomenon, which is that mining was possible for a while with secondhand A6 because electricity was subsidized, you know, for a while. And so you had people mining with black market electricity or just straight up exploiting the fact that there was an electricity subsidy, which monetized these old A6, which otherwise wouldn't be profitable to run. So that must have been a source of some inflow of Bitcoin. Yes, yes, but that wouldn't counterbalance the remittance flow like the... Right. It would actually... It would be on the same side as the remittance flow. But you're right.

I do think the early mining community in Venezuela, that was the Bitcoin spark in Venezuela. That led to so much more. That would have helped familiarize people with the technology at least. Yeah, absolutely. And create those first bits of liquidity, yes. So it's interesting because you're combining, you know, data which you're collecting from these exchanges with like real-world anecdotes. So what was that process like? I mean, it's almost like investigative journalism.

How did you actually come to acquire this case study knowledge? Yeah. So I started by, so if you do go to local Bitcoins in Paxville on a lot of these advertisements for a trade, you know, you click on a little. link of some person offering to buy Bitcoin at a certain price. There's usually a paragraph of information that the creator of the advertisement posts in relation to the terms of the trade, you know, these are my business hours. Don't try to scam me this way. You know, all sorts of other things like I will request to see your identity or I don't need to see your identity, all sorts of terms of trade.

But also in those paragraphs, and about a third of them, you will see phone numbers that say, if you have any questions about the trade, give me a call and we'll talk about it, we'll sort it out. It's also a way for those traders to kind of try to bring the trade off of the exchange, and that'll save them an extra for 1%, because they don't pay that 1% fee. But so yeah, I saw those numbers and I started calling them or texting them. And so yeah, that is definitely a tricky business as well because like I said, when you're, when you're on this website and this is your phone number that you post, you're all business and you're dealing with you're dealing with potential adversaries all the time. People, you know, trying to get at you.

And so when this random person comes along and says, what are you doing with your Bitcoin? You're like, hey, come over here and talk to me. It's definitely kind of strange. And it definitely doesn't work a lot of the time. But generally, I just, I post links of my previous articles and I try to be persistent. If they don't respond to me on the first day, but I can see that they read the message, I'll hit them up the next day, that type of thing. Yeah. That's beautiful.

That's real shulow the journalism, man. I mean, like, I don't like the New York Times isn't doing that, you know? They're not like persistently calling brokers on local bitcoins to like figure out what's going on. That's that's kind of, that's beautiful and it's like sort of a nostalgic way. And I guess like we're lucky that a few of these guys were willing to at least like share their stories. For sure. Yeah, we are lucky. And but that also kind of opens it up to.

a little bit of, there's probably a term for this, but like information bias in such a way that they're only telling you the information that they want you to know. And so maybe they're only sharing a fraction of what they know with you and then you then go write a story and it might not be fully representative of what's happening. So you have to be on guard for those things.

And a lot of these people, they're not, you know, a lot of these people, it's not a matter of, you know, They're protecting, they're trying to hide illegal activity per se. It's that they're trying to protect their business because this is their moneymaker. So they don't want to give up all the secrets to that by kind of exposing all of these use cases that they know about and that they are capitalizing on. So you have this other great article about Argentina specifically. So Argentina is kind of different in that it's not like fully kind of walled off from the rest of the world the way Venezuela is.

and this article is basically you're trying to analyze, you know, why that is, why the local bit volumes on Argentina are a bit lower, even if they're undergoing these processes of devaluations and even if they have this like really troubled currency history, I think they actually defaulted on their sovereign debt just recently, like in the last couple of weeks here. So what is your your analysis? Yeah, partial default. So how would you explain the slightly lower volumes in Argentina? What does the market for currency look like there?

Sure. Yeah. So the main difference that I tried to explain between Argentina and Venezuela is that Argentina is more accepting of dollars, both the government and the people. And so Argentina is actually already what I call pseudo-dollar. polarized, and that means that people in Argentina regularly do hold dollars under the mattress, and also the banking system there also does tolerate dollars in official accounts. There's well, to a degree.

So what I discovered is that, you know, they have had decades of troubles, and, you know, about every five to 10 years, something happens where the banking system clamps down, and it, and it tends to place a ton of restrictions on those dollar transactions or devalues people's pesos against the dollar, things like that. The most notable example is in 2001. There was an event called De Coralido where essentially a lot of people were storing dollars inside of the Argentine banking system as a savings mechanism. the banking system over a period of I think it was like two weeks they froze the bank

they froze all dollar transactions withdrawals deposits they froze it first and then I think like a week later they summarily said okay the exchange rate used used to be you used to be able to get X amount of pesos for these dollars but now you're only getting Y amount of pesos for these dollars. And it essentially reduced the value of people's savings accounts by like 75% in a single night. And so it destroyed many people's lives, especially those who are, you know, getting close to retirement age. It ruined their lives. And so that event is very big in the memory of a lot of people in Argentina. And they don't trust the banking system. And so what they do now, mainly is when they do have dollars, they store them outside of the banking system

because when you have cash dollars or physical dollars, they can't be confiscated unless they raid your home or whatever. So there are two dollar systems inside of Argentina. One is inside the banking system and one is outside. The one outside is called the glue dollar market. It has a different exchange rate than the official exchange rate. And I'll just... just kind of wrap up my explanation here.

Last fall, the incumbent president, he was more free market leaning. He lost the very important primary election, which basically indicated that he was going to lose the presidency to the more left-leaning party. And when that happened last fall, the currency lost like 25% of its value overnight, and the stock market lost 40% to 50% of value

overnight. And since then, they've started laying on capital controls one after another. And you've been seeing increasing Bitcoin volumes since then. Yeah. And so this was a really interesting article to me because you kind of did like, I don't know if you actually did this for the article, but like you can imagine how you do a multivariate regression to like untangle the factors affecting local Bitcoin volumes. And effectively, what you find is that, There's other factors which explain the variance in local Bitcoin's volumes in Argentina, like Venezuelan variants, but the new predominant factor is the instantiation of capital controls, right?

That's what I think. What I showed was correlation, so that doesn't prove causation. But I had, I think, six people either born in Argentina or currently living in Argentina, to review the article and they understand it, they understand the situation very well, and they agreed with my conclusion that the chief reason for Bitcoin volume in Argentina now is likely capital controls. That's where Bitcoin thrives. And, you know, it's, I find that there's often like an Anglo-Centrism in terms of analysis of Bitcoin. It's like if you've grown up within the American financial system, which works great and it's super friction.

and it's available to everyone for the most part. It's hard to even conceive of a state of affairs where the banking system isn't reliable and where the local currency isn't even reliable. And so people let that infect their view of Bitcoin. But that's like a highly local phenomenon having a reliable banking system. In fact, the reality for most people is an unreliable banking and monetary system. Yep, you're absolutely right. And that is the trap that a lot of people in the Westfall,

to is they don't understand why Bitcoin is really all that necessary. They think that people who, you know, are afraid of government and afraid of bad decision making and inside of government, they think that is way overblown. And maybe in the U.S., you could argue that it might be overblown, but the history shows that many, many governments over the period of the course of history, they do screw up a lot and they adversely affect their citizens a lot. So, yeah. So you talked about dollarization. That's the subject of this mini-series. I find it fascinating because it's a situation in some cases where you have a free market phenomenon occurring. You have normal individuals that might choose to substitute their currency for the dollar,

and that might actually force the hand of the government. That's certainly what we saw in Ecuador. That's probably the most famous case study in the early 2000s. Argentina had this pseudo-dollarization, which then the government kind of cracked down on and reversed it. They sort of de-dollarized for a while. So how does Bitcoin play into this? Is it a rails for dollarization?

Or is it just a precursor to like stable coins? So what would you say is the relationship between Bitcoin, local bitcoins and dollarization. Yeah. So first I would, the way that you characterize Ecuador, I don't know the situation in Ecuador a lot, but you use the phrase, it forced their hand. I think that's really what happened in Venezuela as well. I think Bitcoin played a part in that.

I don't think maybe it maybe didn't play the main part. But inside Venezuela, the situation has changed rather drastically over the last year as well. And they have dollarized in Venezuela quite a bit now. And I do believe it is because all of these very stringent laws that they were putting into place, they simply were not working because people were going around them because they were able to access the internet. They were able to get offshore bank accounts. They were able to use Bitcoin to move money to those offshore bank accounts, among other methods. And so I do believe that Bitcoin played a hand in forcing the Venezuelan government to back off because what they were doing was not working. And yes,

to answer your question, is Bitcoin rails to dollars? I think today in these emerging markets, it is. That is chiefly what it is. That is taking place in many countries, not just in Latin America. it's happening in Nigeria and Kenya and India and all of these countries they have their local currency system and they're fighting against this invasive species of the US dollar in that US dollar has by far the most network effects in the world and it's the gold standard of money transmission and they're all fighting against this and the internet and Bitcoin is just it's allowing people to get around these laws in these different countries. Will it turn into stable coins?

Was your... Yeah, I mean, I guess to ask a better question, like, even with local bitcoins, it's still hard. There's no, like, in a lot of these countries, there's no local infrastructure to hold dollars in a credible way in the banking system, right? The banking system isn't considered credible. Maybe by law, they can't allow dollar deposits, et cetera.

Would stable coins resolve that in a certain way by letting people hold dollars in a bearer manner as a kind of a bearer asset? Is that a plausible thing to you, like that potentially stable coins might be introduced? Because it seems like they don't have much penetration right now. Yeah. So in my opinion, I think that that is a huge possibility. I think what's holding off stable coins right now is just the liquidity that, that Bitcoin currently does have in these peer-to-peer markets, as well as these people are already, you know, maybe they're not stable coins, but they are able to hold dollars in

offshore accounts, and that is in effect or de facto stable coin as well. So they have the in these countries, they do have options to get dollars. And so what I found in cryptocurrency over the years is that, you know, your product, it can't be just a little bit better. It has to be a paradigm shift improvement in order to start gaining network effects. And are stable coins, do they represent a paradigm shift and the fact that they hold value? I think it's possible. Like I said, I also think that there might be more stable coin adoption than we really realize. And I know in Asia, a lot of anecdotal evidence says that, you know, Tether is on fire as a, you know,

medium of exchange and a store value for a lot of people. It's possible that we're just not measuring it or seeing it because Tether doesn't release that data, you know. So they may not want to release, not only may they not want to release relevant data about usage, they may not have the ability to collect it, right? Exactly. Yep. Yes. So it, yeah, it might already be happening. And I don't know. The other thing is, is we will find out in the next few years if these stable coins are really as, you know, censorship resistant as they are advertised. You know, maybe they will start blocking transactions or freezing wallets based on various things. that will make them a lot less attractive. Yeah. I personally don't see that happening a lot

because I think that allowing these stable coins to be free, at least from the perspective of the U.S. government, it is beneficial to allow these digital dollars to be circulated in these developing markets because it increases the power of the dollar. And it gets, it forces these governments to kind of, follow what the U.S. government wants to do. So yeah.

Yeah, and that's something that's missed, I think, here. Like, we talk about Bitcoin and the existence of, like, difficult to suppress markets for currencies, which Bitcoin helps, you know, mediate. You know, imagine if there's this constant threat of dollarization hanging over some of these central banks with, you know, inflationary regimes. I think that would be a very strong.

disciplinary force, even if it didn't happen, there's certainly the threat of like crypto dollarization is what will be ever present in the future. Yeah, I agree. And it, like you said, it's going to force their hand or it's going to keep them from doing these extreme measures. So one thing that I was curious about is, so you mentioned this before. Like, you talk about how when you talk to some of these brokers, they're trying to arrange off, like, out-of-band transactions, right? So they want to make a peer-to-peer transaction without necessarily going through the local Bitcoin's

kind of, you know, template. So if I'd guess, I'd say like probably people use local bitcoins to like find trusted suppliers or establish these trusted relationships. And then maybe as you say, like, they make subsequent transactions off platform, Is there like, do you have any estimate of like the relative share of off platform transactions? Or is it just we should know that the numbers are a low ball and that the real peer-to-peer volumes are likely much higher?

There's no way for me to estimate that in any sort of mathematical way. But anecdotally, if I had to make a bet, I would say that it, the off-exchange volume probably dwarfs the on-exchange volume. And it's because they do have an incentive to move the activity off-exchange to avoid the fee, to gain privacy. And like I said, I talked to these exchangers. And I think we talked to, for the Venezuela article, we talked to five different traders in five different countries in Latin America. And every one of them said that, and these people are people with thousands of trades on local bitcoins already. And they also said that local bitcoins is a minority of their total

Bitcoin transactions. So yeah, I think that it is much bigger than we realized. And I think it's important, you can follow local Bitcoin's volumes directionally. If they're increasing, then you can say adoption is probably gaining in that country as a rule of thumb. But I don't think the volumes are representative of the true impact because like you said it's we both agree a lot of it is off exchange so yeah and for context you know looking at the last week's figure for Latin America as a whole local Bitcoin says it's about local bitcoins and Paxville combined is about 11 million dollars but what you're saying is we're likely undercounting that and the true the true scope of this market is impossible to fully capture just based on the data.

Yes, but I would say we're not likely underestimating. I would say we're certainly underestimating. It's guaranteed higher than that. And I feel like, like I said, if I had to make it bet, it would be several multiples of that, maybe an order of magnitude higher than that possibly. So when you think about the future trajectory of these, markets, you know, it's clear that local bitcoins has made a direct impact, potentially at the geopolitical level already, you know, maybe by facilitating the unofficial dollarization.

By forcing the hand of the government, I think I would say that that's a possibility. It has already had a geopolitical impact, possibly. Which already is pretty remarkable. When you think about how crypto will develop in these nations, I mean, do you expect these local bitcoins or just peer-to-peer markets to grow and survive, or do you think that there's really significant risk factors there? What do you expect to be like the trajectory of these informal remittance channels? So you could call peer-to-peer exchanges as in the websites themselves. You could classify that as maybe informal. But then there's another peer-to-peer that's

taking place off exchange that is also informal. So for my opinion on the websites themselves, or the volume precipitating from those websites, it's very hard to tell. I think the interest in these emerging markets to come to these platforms is at an all-time high and it will continue to increase. However, I think that there is a lot of compliance

issues that these websites are having to deal with by their own local governments. So local bitcoins is having to deal with all of these crazy European regulations and Paxful in the United States is having to do the same. And so these new compliance layers, you know, they got away with a lot of kind of relatively free non-KY-C-A-ML type trades for several years. And now, the government is the governments all across the world are cracking down on it because it is true that a lot of there have been many criminal cases that have come about because of things that happened on on local bitcoins or packs full and but the question is is is the compliance requirements are they going to be

so heavy that it just is completely chases the developing country users off the platform. I think that's possible. If KYC AML on an average customer costs $12 on local Bitcoins, then it doesn't make sense for local Bitcoins to allow this $10 user on the exchange and they're screwed. So I see that happening and I think that the compliance is only going to get worse. And local Bitcoins in particular, they have to honor what's called the travel rule in the next year or so, which means that anybody who sends Bitcoin out of their exchange, they have to inform that exchange of all of that person's K-Y-C information. So if somebody transfers their Bitcoin from local Bitcoins to Krakken, for example, or let's say B-stamp,

another European exchange. Local Bitcoin has to transfer that identity information to BitStamp. And BitStamp has to do vice versa. And there's an enormous amount of cost in doing that. But having to follow all those rules, that's expensive. Well, Matt, this has been really insightful and really elucidating. Where can people follow you and follow your work? Yeah.

So the nexus of all my work is useful tulips.org. When you go there, you can see articles that I've written, the articles that we talked about. And you can also see all these really cool volume charts from local Bitcoins in Paxville. So useful tulips.org is the easiest place to find where I put my work. Okay. Well, thanks so much for appearing on the show. I really appreciate it. Yeah, thank you, Nick.