The Blue Rate

Original post on Substack: The Blue Rate

I spent the last week in Argentina after a week backpacking in Chilean Patagonia. I grew up on the other side of the world and had never really kept up with Latin American news, let alone thought I would be visiting so often. But ever since meeting Dani1, who is from Colombia, I’ve been brought to South America twice. My first exposure to the Argentinian economy was through some of my crypto friends working on special projects in Buenos Aires, exploring real-world crypto use cases. Some were collaborating with merchants and local businesses to integrate crypto into payment workflows. The premise made sense—a country with an unreliable currency using stablecoins for transactions and gave me a good precursor to what I experienced last week. It was enlightening to learn about the sentiment on the ground and how generations of hyperinflation and economic instability shaped Argentinians’ relationship with money. I don’t speak Spanish, so admittedly, most of what I learned was from the few locals who spoke English, our walking tour guide, and the blogs I started diving into after peeling back the first layers of this complex issue.

Before visiting Argentina, I just knew about their large cattle industry, amazing restaurant scene, and their cycles of economic instability. When planning the trip, I was eager to buy leather goods, try world-class steak, and had restaurants I’d read about online booked before I even left New York. However, when it came to the economic history, I had a lot to learn.

The first assumption I had to abandon was that exchanging foreign currency on the street is always more expensive. Thanks to a friend’s advice, I learned that Argentina, unlike most countries, has a high local demand for US dollars, and the street rates can be much better than an official currency exchange or pre-exchanging the cash I needed in the US before travelling. I would usually exchange cash ahead of my trip, but for Argentina, I was warned not to do that. The currency rates could fluctuate significantly before I arrived that I’d be taking on real exchange rate risk by converting too early.

Second, I expected the US dollar to Argentine Peso exchange rate to be extremely favourable to the dollar, and for it to be a cash-centric economy. Soon, I found out these were very wrong assumptions, which I’ll explain soon.

Lastly, and most fascinatingly, is that unlike most countries that have a single agreed-upon exchange rate, in Argentina, the official rate can differ greatly from the rate that real people use. They call this the blue rate.

To understand why this is significant and different from most of the world, let’s first define some terms. In most developed countries, currency exchange rates usually don’t differ much from the “spot” rate—the rate you’d see when you search “USD to CAD” or any other currency pair on Google. This spot rate is the interbank rate , the rate at which large financial institutions and hedge funds trade currencies with each other, and is usually the best rate, typically only available to large transactions.

Then there are local currency exchange rates. These are the rates you’d see posted outside a currency exchange shop, where you can exchange small amounts of money for another currency. Usually, there are no direct fees, and these rates are competitive, especially in touristy areas, but they tend to be slightly worse than the spot rate by 1-3%.

Then there are the bank rates that are used for international wire transfers and international business. In exchange for the security that interfacing with a large institution brings, banks also have the ability to exchange large sums of cash. They usually charge explicit fees on top of the exchange rate and that can amount to 1-5% above the spot rate. There are also some neobanks and fintech companies like Wise and PayPal that are also well suited for digital transfers that usually have better rates than a bank and can be as low as 0.5% above the spot rate.

And then there’s Western Union and other money transfer services, which are what people are usually referring to when they talk about remittances. They’re good for sending money to underbanked recipients but generally have poor rates that can be up to 10%2 worse than the spot rate.

And finally, there are credit card exchange rates that are usually close to the interbank rate. Each payment network (Visa, Mastercard, Amex, etc.) sets their own rate but they publish them on their websites and tend to stay competitive between each other. If you have a card with no forex and are visiting a card-friendly country, paying with credit card usually gets you pretty close to the interbank rate and can eliminate the need for exchanging cash in advance.

Okay, now back to the blue rate. All these rates I just mentioned are still rates that align quite closely with the spot rate, or the interbank rate. However, the blue rate is a truly separate rate, that while directionally similar to the spot rate, can vary dramatically. How currencies in most developed economies like the US, EU and Japan establish exchange rates are through the forex market where laws of supply and demand generally set the rates. In some cases, the government and central banks may intervene to prevent extreme volatility but for the most part the currencies are “free-floating” which means they are set by the market. In some countries like Hong Kong and Saudi Arabia, there are fixed exchange rates where the central bank pegs the currency to another currency (usually USD) and maintains this peg by using foreign currency reserves to buy and sell their currency as needed.

However, Argentina uses another system called the dual exchange rate system. This is not a system officially endorsed by the government or central bank but instead is a result of strict currency controls and market distortions.

The official rate in Argentina is controlled by the government and they, in the last couple years, have aggressively controlled the currency to remain artificially stable. How they actually do this could be a whole other topic but the tl;dr is that the Central Bank of Argentina buys and sells foreign currencies to control the peso’s value and enforces strict controls on how much USD individuals and businesses can buy at the official rate. As a result, the official rate is artificially low. As people and businesses can’t access enough USD at the official rate, they turn to the black market, where USD trades at its true market value. This has created a huge gap between the official rate and blue rate3 where at some times there can be more than a 100% difference between the two.

It was eye-opening to learn about the sentiment on the ground. I learned from the tour guide that in recent months, the local interest rate for Argentine Peso was as high as 32%. Anyone who has taken basic econ knows that high interest rates mean a higher cost of capital and credit, which in turn leads to lower spending and business investments. However, in normal economics, a high interest rate usually also leads to people being incentivized to save more, strengthen the currency, and reduce inflation. In Argentina’s case, there are psychological and historical dynamics at play. Due to generations of hyperinflation and unsuccessful economic interventions, there is huge public distrust in the peso, so high interest rates do not offer enough of a safety net for many to hold their wealth in peso. As a result, many Argentinians prefer to save in USD rather than in pesos, knowing the peso will likely lose value over time. With more people trying to move their money into USD, the demand for dollars increases, leading to a shortage for USD, which in turn drives inflation and depreciates the peso. The government tried to implement strict controls by limiting the amount people could exchange into USD officially, but that only fueled the black market, leading to a higher discrepancy between the blue market rate and official rate. You might be starting to see the issue here. The Argentine Peso is stuck in a negative feedback loop where this inflation, control, and buying USD on the blue market cycle fuels distrust, which causes more destabilization. This has also created a situation where the peso doesn't hold as much value against the dollar, making it less favorable for tourists exchanging USD for pesos. As a result, Argentina, once considered an affordable getaway, is no longer the cheap tourist destination it used to be.

In Argentina’s case, they traded inflation for a recession. In stable economies, higher interest rates usually attract capital and reduce inflation. But deep distrust and human behavior have undermined the effectiveness of monetary policy and pushed it to its limits.

I saw this desire for USD in practice later in the trip when I got a custom leather shearling jacket made by a local tailor. I was surprised to learn that they preferred USD in cash or Zelle above pesos. The fact that they even had Zelle as an option was shocking to me.

One of the most surprising things I encountered in Argentina was how high the credit card transaction fees were for merchants. I was at a weekend flea market, and almost every booth accepted cards, which was great. However, I quickly learned that if I paid with a credit card, I’d face an additional 10-15% up charge. At first, I was pretty thrown off by these fees and thought that the sellers were trying to scam me, but then I found out there was a reason behind it.

Let me tell you about another rate. If all this wasn’t confusing enough, there is another rate called the MEP rate or the Mercado Electrónico de Pagos rate. This rate is specifically designed for electronic payments and usually falls somewhere between the official exchange rate and the blue rate. Given the significant gap between the official rate and the blue rate, banks and financial institutions adopted the MEP rate as a middle ground. While it's not as free-floating as the blue rate, it's more reflective of market forces than the official rate.

You may be thinking, why go through all the trouble of maintaining an official rate just to have another official-ish rate? Well, the official rate, due to strict currency controls, has become increasingly impractical for trade and everyday transactions. The MEP rate helps attract foreign currency inflows, mostly benefiting financial institutions and foreign trade. However, because the MEP rate is dictated by financial markets rather than informal local markets, it can sometimes be even higher than the blue rate but they generally align closely4. While the MEP rate was originally created to allow financial institutions and businesses to transact electronically, payment networks like Visa and Mastercard eventually adopted it for consumer credit cards. This meant that tourists, like myself, are able to use international credit cards at a more favourable rate and skip the currency exchange altogether.

So, here I was, a tourist who’d only brought a couple hundred bucks in cash, and it actually made way more sense for me to use my credit card all week rather than withdraw pesos from my bank through a service like Western Union. The latter would have taken a significant cut, making the exchange rate much worse than the MEP rate. When I was in Argentina, the official exchange rate was 1 USD = 1031 ARS, the blue rate was around 1300 ARS, and the MEP rate was 1,392.95 ARS. The smartest move (note to self for next time) would have been to bring all the cash I needed for the week in USD and exchange it at the local currency exchanges or a cueva5.

Now, here’s the thing—credit card payments did come with a 10-15% fee at most places, which caught me off guard. But even with that, it still worked out better than using Western Union, where the exchange rate would’ve been worse after all the fees on top of the official exchange rate.

I didn’t expect to walk away from my South American trip with such a deep dive into forex and Argentina’s dual currency system, but being there really forced me to grasp it all. These forex dynamics aren’t just theoretical for the locals—they live through the instability and deal with these different rates on a daily basis. Working in fintech, my time in Argentina made me appreciate the stability of the financial system I often take for granted.

1 This South American trip was fully prompted by Dani, who, on a random Sunday last July, asked me if I wanted to join her in Patagonia. It was a trip she had already half-planned with college friends, but plans fell through, leaving two spots available. I committed immediately, and fast forward six months, I completed a hiking trip more challenging than I could have ever imagined, and ended up working remotely in Chile and Argentina for January.

2 These up charge rates align with what locals and friends who gave me advice told me. I used ChatGPT to help me get the general rate ranges of various foreign exchange methods to cross compare but want to be better with citing sources next time. Hold me accountable!

3 This was the point in our walking tour when our guide explained that the black market and the blue rate were actually the same thing—and how Argentinians love their euphemisms.

4 My back of napkin math to think about it is: If more visitors and tourists bring USD cash in, it increases the inflow of foreign currency so by law of supply and demand, the blue rate may weaken. However, visitors and foreigners will only elect to bring cash instead of transacting with electronic payments if the blue rate is stronger than the MEP, otherwise they’d just use the MEP. So when the blue rate weakens too much, fewer people will find it worthwhile to exchange cash, and instead, use the MEP rate to exchange cash which increases a supply of USD into the financial system bringing the MEP rate (which is the rate set by the financial system) back down to be close to the blue rate.

5 A "cueva" refers to an informal exchange network in Argentina, where people privately exchange currencies, typically at a better rate than what you'd get at the official exchange rate. It's kind of like a local, underground currency exchange spot, often involving personal or community connections.