Volatility + Instability = Hope. Part 2

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.

Among the reasons for the popularity of cryptocurrencies in developing countries is the chance they give to raise your standard of living (and maybe even get decently rich) through speculation. Well, or investment in this or that coin expecting it to “make X’s” at some point. In some emerging markets, crypto investments have already overtaken traditional ones.

And while the US and UK regulators are yet to approve crypto ETFs, Brazil this year became one of the few countries where they are available. Hashdex Asset Management has launched three regulated crypto ETFs on the São Paulo Stock Exchange. According to an analysis by TripleA, a Singapore-based provider of crypto payments solutions, Brazil is leading in the number of cryptocurrency users in Latin America (10.4 million people).

The growing popularity of cryptocurrencies in Brazil is well reflected in the local Mercado Bitcoin exchange, which had its total transaction volumes grow seven times by the end of August 2021 compared to 2020. The company has recently received a $ 200 million investment from Japanese technology group SoftBank, and its customer base doubled to 2.8 million.

Notably, according to Latin American analysts, almost all crypto activity in Brazil has to do with investment and trade (speculation). In neighboring Argentina, people prefer stablecoins, which serve as an important means of protection against fluctuations in the national currency rate. Finally, in Mexico, cryptocurrencies are mainly used for remittances.

One of the most interesting takeaways from all this is that people in developing countries are much more receptive to financial innovations than those in developed and wealthy countries. And it’s not just about finance. Institutions, including public record holders such as land registries and licensing agencies, tend to be weaker (and more corrupt) in developing countries. In those conditions, independently established alternative blockchain systems provide an attractive alternative. After which, it’s сomes down to politicy changes.

In other words, having gotten used to cryptocurrencies, people in emerging countries are developing more trust towards different distributed ledger technology (DLT) applications. This means that “Third World” countries are in for their own boom in decentralized finance. It likely won’t be the same DeFi already widespread in the countries of the “First World”, rather something completely new.

There are, of course, huge risks involved – after all, cryptocurrency is by no means a panacea for instability, but in itself a rather dangerous entity. It requires users to have both financial and technical savvy. And developing countries are not always known for high levels of education among the population. Therefore, consumer protection, especially against large and small crypto scams, is a huge problem in those markets.

We can already see very different approaches to the issue. In Latin America, governments are usually inclined to “let go” of the situation, but in Asia and Africa, authorities tend to be quite repressive about cryptocurrency use.

In Zimbabwe, for example, the central bank banned local banks from conducting cryptocurrency transactions back in 2018 and is now trying to regulate local crypto companies. In Nigeria, their central bank has prevented commercial banks from dealing with companies involved in cryptocurrency transactions. However, people successfully bypass these restrictions by using third-party accounts.

Moreover, constraints often have the opposite effect: ordinary citizens of developing countries get further convinced that it is possible to circumvent excessive financial bureaucracy and regulations by using cryptocurrencies and crypto-based online services.