Cryptocurrencies — and ‘developing’ countries
Like most crypto supporters tend to do — cryptocurrencies are painted as the currencies for all (and especially for developing/emerging markets). Of course, that's where we’re headed… right? Digital everything …
I was curious, I mean his focus was on El Salvador, the word remittances came up and the idea that this is the alternative everyone has been waiting for.
Is it really though? It would be great to see how El Salvador fairs in the next year or so …
Now I wrote the memo below in response to the guest lecturer (Nonexhaustive because I only had about 1000 words to write).
Should countries like Tanzania adopt cryptocurrency as a legal tender? Maybe not just yet!
Could they ever? If the speculators are right, maybe yes. With the right environment — from digital literacy, mass adoption, innovative and up-to-date regulation, it could just work. But I imagine banks and other official entities (especially Western ones) will have a lot to say about it!
Thomas Piketty did say “Over a long period of time, the main force in favor of greater equality has been the diffusion of knowledge and skills.” Cryptocurrencies could be that force..
El Salvador is the first country to have adopted bitcoin as a legal tender, sparking debates on whether cryptocurrencies should be adopted by developing nations (Person & Renteria, 2021). In the 1990s, countries in Africa and Southeast Asia were able to ‘leap frog’ and ‘leap ahead’ into a new technology generation — they skipped the cost of putting in landlines for telephones and went straight to implementing wireless cell services (Apostolicas, 2021). Some argue the same can be done with crypto-currencies and that this could be a new opportunity for developing nations (Ashford, 2021). This memo will explore the potential and the concerns with crypto-currencies.
In developing nations, where the legacy monetary systems tend to be inadequate, cryptocurrencies can be of benefit. For example, proximity to banks, the availability of banking services, and the capability of citizens to afford banking services — is a prevalent challenge in emerging markets. China and India have over 300 million unbanked citizens, with countries like Nigeria, Mexico, and Bangladesh having nearly ‘half of the world’s unbanked population’ (World Bank, 2017). Cryptocurrencies can therefore support financial inclusion by providing unbanked access to financial services which can lower transaction costs for small cross-border payments (Frankel, 2021).
In countries like El Salvador, 20% of its GDP is from remittances with costly fees. Via Crypto wallets, El Salvadorians will not require a data plan, and transaction and conversion fees will be free (Frankel, 2021). Moreover, commissions will not be charged to merchants, with free access to USD withdrawals in over 200 branches of ATMs (Wintermeyer, 2021). Crypto-currencies in this sense will benefit from the decreased transaction costs and in lowering banking and conversion fees, which are costly otherwise (Cecchetti & Schoenholtz, 2018).
From a geopolitical viewpoint, a quarter of El Salvador’s population lives in the US, over $4 billion in remittance cycles between the two countries annually (Kopser, 2021). The US benefits from the high costs attached to remittances. Cryptocurrencies will provide an open monetary network in which anyone can participate, allowing for near to zero fees and instant transactions. Powerful states like the US will potentially lose out from costs attached to using their monetary systems as developing nations are empowered via crypto. Cryptocurrencies will help emerging markets free themselves from hegemonies like the US. (If they’d rather..)
In addition, as there are more apps and programs facilitating the use of cryptocurrencies, cryptocurrencies will allow citizens access to the rest of the world. A decentralized currency means that trading can be done freely across borders (Finextra Research, 2019). Consider BitPesa, a company helping business owners in Africa make financial transactions across the world leading to more financial coverage and a liberated financial connection to the world. (Bitpesa) Through BitPesa, entrepreneurs can convert crypto coins into fiat currencies and redirect them to business investments and/or purchases and payments (Finextra Research, 2019).
Cryptocurrencies are facilitating a financial revolution that enables, connects, and empowers more people in developing nations. The benefits of economic growth and globalization have been shared unevenly across regions and countries according to the World Bank (World Bank, 2018). Cryptocurrencies can help close this gap and allow those from developing nations to participate in the global economic growth mostly skewed to the global north.
On the other hand, cryptocurrencies’ instability and volatility are a concern for developing nations. Holding or transacting in an unstable currency is detrimental to those with low incomes (Frankel, 2021). Tremendous prices crashes could be a big disadvantage for those who can ill afford to sustain price swings (Ponciano, 2021). El Salvador had adopted the US dollar as a legal tender in 2021 to provide the stability that the national currency could not, the inflation rates did decrease with the solution (Frankel, 2021).
Cryptocurrencies are volatile and coins like Bitcoin make it impractical to serve, as they cannot have deposit insurances and have no one authority to control for inflation or any “dips”. Those affected will be low-income citizens who rely on crypto for their day-to-day.
It is easy to say that this solution will be the saving grace for the unbanked, but digital literacy and access to the internet in developing nations will be necessary. For instance, in El Salvador, half of the population has no access to the internet, the internet penetration in Africa was estimated to be 47% in 2020 (World Bank Data). Concerns on electricity coverages where in rural parts of Africa, only 45% had access to electricity makes technology proliferation and digital uptake more difficult (Penar, 2014).
Whilst adopting cryptocurrencies might seem appealing, developing nations will need to put in initial effort to provide access to electricity, the internet, and improvements in digital literacy to allow cryptos’ benefits to be fully realized. Ultimately, the initial costs to implement crypto as a national legal currency might be cumbersome but it will have long-term effects and benefits.
The last concern is that cryptocurrencies could facilitate crime and are inadequate when it comes to consumer protection. With crime, the decentralized nature of cryptocurrencies means that criminals can hide their financial dealings from authorities. For example, in the illegal drug marketplace Silkroad, cryptocurrency bitcoin was the main currency used (Congregational Research Services, 2020). The lack of regulation could affect a nation’s monetary policy and protection. However, emerging markets can innovate and take risks that they would have not in highly regulatory environments. This could be an opportunity for developing nations to rethink what regulation means and innovate accordingly.
Consider that technological leaps in low and middle-income countries have been rapid. In low and middle-income countries, 4% of people had access to mobile phones in the 2000s, that percentage rose to 94% by 2015 (Pramanik, 2017). In countries like Kenya, over 43% of the GDP flowed through the M-Pesa app, mobile money helping over 2% of Kenyan households out of poverty (Morris, 2021). Mobile money helped with saving rates, allowed users to tap into wider support networks, and weather health/financial crises. Crypto in a few years could have the same or perhaps even more of an impact. Already in emerging markets, there has been soaring price and popularity in the adoption of cryptocurrencies (Person & Wilson, 2021). And of course, as cryptos are adopted by more, the system will cater to the demand and become more efficient over time as technological advancements and economic conditions improve.
This non-exhaustive response has illustrated the ways in which cryptocurrencies can be of benefit in liberating and providing access to global financial markets to developing nations and emerging markets. There are concerns that must be mitigated and taken into account should emerging markets decide to adopt crypto-currencies as legal tenders. It will be interesting to see how cryptocurrencies fair in the next few years in El Salvador and whether it will provide the blueprint for other countries to follow suit.
Ps. I had a lot more to unravel and so many more points to consider. Like how in America and everywhere else really, more people of ‘color’ use cryptocurrencies than White (is there a reason?), and why is this being popularised so much to developing nations anyways or in some cases, why are ‘developed’ nations so against it…?
P.p.s I really dislike the words ‘developing’ and ‘developed’. I’m going to work on removing them from my writing and my head where they swim effortlessly.
Catch you next time!