Volatility + Instability = Hope. Part 1

    18 Oct 2021

    Cryptocurrencies are known for their volatility, while developing countries have infamously unstable economies. But when the former is combined with the latter, it surprisingly leads to both stability and economic growth.

    People in the EU or North America, citizens of countries that set the global agenda, for the most part, still look at cryptocurrencies with suspicion. While no longer considered “toys for tech nerds”, they are still referred to more as an area for speculators and unscrupulous businessmen. And although this attitude towards crypto is becoming less common, it is still alive and well in most developed countries. You can see it in how regulators in Europe and the United States love to warn about the dangers of cryptocurrency trading and are always looking for ways to restrict the work of crypto companies.

    But countries with robust economies, developed social security systems, and, most importantly, strong national currencies can afford it. In the developing world, on the other hand, we see a very different picture. There, we observe a wide spread of mobile gadgets, often existing alongside prolonged financial instability and/or difficulty accessing traditional financial products, e.g., bank accounts.

    We have already written (https://cryptoinsight.ae/crypto-adoption-paradox-part-1/) about the research company Chainalysis estimating the cryptocurrency mass adoption level in different regions and coming to the surprising conclusion that developing countries are absolute leaders in this area. Asia, for example, accounts for half of all cryptocurrency holders.

    Data from UsefulTulips.org, which tracks bitcoin transactions on the world’s two largest peer-to-peer cryptocurrency trading platforms, shows that in the past few weeks, Sub-Saharan Africa has overtaken North America to become the geographic region with the highest trading volume. Crypto adoption in Latin America is also moving at a breakneck pace. Officially, bitcoin has already become legal tender in El Salvador and Cuba; unofficially, in Venezuela, as well. (https://cryptoinsight.ae/venezuela-second-attempt-at-cbdc-2/). Moreover, Brazil, Panama, Uruguay are all preparing for significant liberalization of cryptocurrency relations.

    These projects indeed face some skepticism, in particular coming from the IMF. But there are also many who consider this approach to be a positive innovation. What’s more, the official adoption of crypto as a means of payment by El Salvador and Cuba has set a precedent that dramatically changes the position of cryptocurrencies in the global financial system and accelerates discussions on their worldwide legalization.

    Emerging markets have become a fertile place for cryptocurrencies, primarily because their own currencies are not doing their job. As a store of value, medium of exchange, and unit of account, national currencies in many developing countries too often fail their people. Unpredictable inflation and wildly fluctuating exchange rates, clumsy and expensive banking systems, financial constraints and regulatory uncertainty, insecurity of citizens and a corrupt judicial system, excessive and unjustified capital controls – all of this impedes the popularity of national currencies and, conversely, highlights the benefits of crypto.

    A good example of this is Nigeria, the most highly populated country in Africa. Its dynamic young population faces huge unemployment rates, the vagaries of black-market currency exchange, and capital controls on a daily basis. Due to the coronavirus crisis, the national exports fell, and many businesses could not pay foreign suppliers and creditors, which almost led to the country defaulting. The lack of dollars is an ongoing problem for people sending or receiving money transfers or invoicing customers.

    As a result, peer-to-peer crypto exchanges gained significant popularity there, as they allow users to trade directly with each other. In such transactions, crypto coins are held by the platform in escrow accounts until the payment is confirmed, be it through a bank transfer, mobile money or a gift card.

    It then comes as no surprise that, for example, a third of Paxful crypto exchange users are based in Africa, and Nigeria is its largest market (1.5 million users). Its competitor – LocalBitcoins – also has the majority of its clients in emerging markets of Latin America and Africa, as well as the post-Soviet states.

    Moreover, like many of its neighbors on the African continent, Nigeria conducts active international trade using cryptocurrencies. It is their response to the government’s actions: the country’s monetary policy doesn’t allow small entrepreneurs that don’t operate large amounts of money to enter the world market and participate in international trade. The situation is similar in countries such as Venezuela and Brazil. There, the inertia and bureaucracy of outdated financial systems have led to many people finding different cryptocurrencies more convenient in use than a single national currency.

    The trend has its own peculiarities, too. “We thought people would adopt one main cryptocurrency, but we found that instead, they use different ones for different purposes., – told the Financial Times Ryan Taylor, CEO of crypto company Dash Core Group (operates in Venezuela since 2016). –Coins like Dash are more commonly used for small purchases, bitcoins for large purchases, and lightcoins for things like paying satellite bills and the like.”

    Another major reason for the popularity of cryptocurrencies in developing countries is that they are a good alternative to traditional money transfers, which is essential for many of those economies. Lots of their citizens migrate to the wealthy “First World” countries for work, but transferring money across the border through traditional channels such as Western Union is prohibitively expensive. According to the World Bank, the cost of sending $ 200 to sub-Saharan Africa is 9% of the transaction cost on average, the highest of any region in the world. In comparison, according to LocalBitcoins, on peer-to-peer crypto networks, these fees are usually around 2%.

    To be continued

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