In the ever-evolving landscape of global finance, cryptocurrencies have emerged as a transformative influence, presenting opportunities and challenges for developing economies.
Opportunities
Let’s start by looking at some opportunities:
Accessibility
Cryptocurrencies are a valuable solution for developing countries facing issues related to the lack of accessibility to traditional financial systems. In these nations heavily reliant on the remittance market, the absence of access to traditional financial tools, like banks, poses a threat to their economic well-being.
According to the Global Findex Database by the World Bank highlights that while 1.7 billion adults globally remain unbanked, 1 billion of them own a mobile phone. This suggests a potential avenue for crypto adoption in regions where traditional banking infrastructure is lacking but mobile phone penetration is significant.
Unlike traditional financial markets, cryptocurrencies don’t require physical infrastructure; they are readily available through internet access to make payments easily. This accessibility includes the unbanked population in developing countries, where physical infrastructure barriers and high fees have hindered access to traditional banking. Consequently, many individuals are excluded from mainstream financial services, limiting their participation in e-commerce.
Remittances
The World Bank reports that remittances constitute up to 20 per cent and, in some cases, even 40 per cent of the Gross Domestic Product (GDP) in numerous developing nations. These countries, heavily reliant on the remittances market, witnessed a groundbreaking move in June 2021 when El Salvador officially recognised Bitcoin as a legal tender, giving it equal standing with the US Dollar, the primary currency until then. With over 20 per cent of El Salvador’s GDP dependent on remittances, primarily from Salvadorans working in the United States, this marked a significant step toward embracing cryptocurrencies in the remittance market.
The costs and time associated with transferring funds through traditional financial systems are often prohibitive for both senders and receivers, especially in countries dependent on the remittance market. Cryptocurrencies provide a viable alternative, offering quick and low-cost international money transfers by eliminating the need for intermediaries.
Decentralised networks make international fund transfers using cryptocurrencies quicker than traditional methods. Unlike traditional transfers that may take days to process, cryptocurrency transfers are typically completed in minutes, requiring only confirmation by the network before the funds are fully settled and available.
Inflation And Counterfeit
Cryptocurrencies are gaining traction in developing countries where local currencies face hyperinflation, rampant corruption, and a history of financial hardship. In such environments, cryptocurrencies are viewed as an alternative capable of overcoming these challenges.
According to the data, Chainalysis indicates rising crypto adoption in regions facing economic challenges. For example, countries with high inflation rates or currency volatility, like Venezuela, Nigeria, and Kenya have seen increased adoption of cryptocurrencies as an alternative store of value.
Decades of restricted banking policies and deteriorating infrastructure in developing countries, stemming from traditional financial systems, have led to unpredictable inflation and volatile exchange rates, weakening national currencies. Cryptocurrencies provide a robust alternative as they operate independently of government or bank regulations, ensuring unrestricted access and unalterable operations. Additionally, they are not subject to the same market fluctuations as fiat currencies.
Challenges
Despite the growing adoption of cryptocurrencies in developing countries, several challenges persist.
Evolving Regulatory Landscape
One significant hurdle is the lack of clear regulatory frameworks governing cryptocurrencies. While these digital currencies offer innovative solutions, the absence of comprehensive regulations can lead to uncertainty and potential misuse. Governments in developing countries are working to strike a balance between embracing the benefits of cryptocurrencies and addressing fraud, money laundering, and tax evasion concerns.
Volatility
Cryptocurrencies are volatile, presenting a considerable challenge for users in developing countries. The value of cryptocurrencies can fluctuate within short periods. This volatility can be particularly detrimental in regions with limited financial literacy and can be risky.
Lack Of Awareness
Cryptocurrency transactions involve technical complexity that may be a barrier for individuals with limited financial literacy. Many users in developing countries may not fully comprehend the intricacies of managing private keys, wallets, and the security measures required for cryptocurrency transactions. This lack of understanding can lead to mistakes, loss of funds, or hesitation to embrace these digital assets. However, in recent times, crypto exchanges and platforms have made it relatively easy for beginners to access crypto.
The increasing prominence of cryptocurrencies in developing countries signifies a transformative shift in the global financial landscape. While these digital assets offer unique opportunities, they also bring forth challenges that require careful consideration and proactive solutions.
Despite these challenges, adopting cryptocurrencies in developing countries represents a promising avenue for expanding economic freedom, providing financial services to the unbanked, and facilitating low-cost international transactions.
As stakeholders navigate the complexities of this evolving landscape, a holistic approach that combines regulatory clarity, technological innovation, education, and infrastructure development will be essential to harness the full potential of cryptocurrencies in fostering inclusive and sustainable financial ecosystems in the developing world.
(The author is the CEO and Co-founder of Mudrex, a global crypto investment platform)
Disclaimer: The opinions, beliefs, and views expressed by the various authors and forum participants on this website are personal and do not reflect the opinions, beliefs, and views of ABP Network Pvt. Ltd. Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions. Cryptocurrency is not a legal tender and is subject to market risks. Readers are advised to seek expert advice and read offer document(s) along with related important literature on the subject carefully before making any kind of investment whatsoever. Cryptocurrency market predictions are speculative and any investment made shall be at the sole cost and risk of the readers.
