9mins read
Published on: Aug 9, 2024
#Crypto 360
#Financial Markets
Bitcoin and cryptocurrencies offer many benefits for users, which can be especially transformative for the lower income communities. Here is how Bitcoin can help developing countries.
• Cryptocurrency users are constantly increasing in developing countries, with Nigeria, Thailand, and the Philippines among the most active countries.
• Some of the countries adopting Bitcoin to minimise the costs of cross-border transactions and boost the economy include El Salvador and the Central Africa.
• Cryptocurrencies have the advantages of being faster, cheaper, and more transparent in terms of transactions, but on the other hand, there are issues such as a lack of literacy and regulation, especially in developing countries.
• Bitcoin has emerged as a more efficient and cheaper method of transferring money across borders, ideal for developing countries where conventional systems are costly and time-consuming.
• In countries with high inflation rates, for instance, Turkey, the use of Bitcoin has been on the rise as individuals use it to protect against currency depreciation.
Many countries, especially developing ones, are experiencing an increase in the number of cryptocurrency users. The shift indicates a high demand for Bitcoin and cryptocurrencies as an alternative way of payment and a store of value.
El Salvador and the Central African Republic are among the countries that have adopted Bitcoin as a legal tender. Governments of these countries have embraced cryptocurrency to reduce the costs of cross-border transfers and increase their chances of economic development. However, these decisions have come under criticism from the International Monetary Fund (IMF), which has noted that the price volatility of cryptocurrency is negative for financial stability.
Bitcoin and cryptocurrencies offer many benefits for users, which can be especially transformative for those in developing countries. As a virtual asset, it is rather easy to use since it only requires the user to access the internet, a device (smartphone, laptop, etc.), and a digital wallet for payments. The system does not ask for consumers’ identity documents or any Know Your Customer (KYC) process, which is a major issue for many residents in these countries.
P2P transactions on the blockchain are usually faster, cheaper, and more transparent than conventional bank transfers; hence, crypto can be an ideal replacement for traditional transactions for developing countries.
Also, Bitcoin can be helpful for storing money in countries with volatile currencies and weak institutional environments. Savings accounts can be wiped out by hyperinflation; countries such as Venezuela, Zimbabwe and Argentina have seen the value of their currencies plummet significantly, reducing the value of people’s savings in a matter of months. In such circumstances, which are quite common in emerging markets, even though Bitcoin is often considered a rather volatile asset, it can be used as a more reliable tool for protection savings.
In addition to being a reliable form of saving, Bitcoin also provides options for generating more funds to aspiring startups—either via decentralised VCs or by easily and quickly receiving funds from across the borders.
However, the issues of integrating Bitcoin are relevant to both developed and developing countries, although they may be more acute in less developed regions. Many people are yet to understand technology and its implications or may not have adequate knowledge of handling it. Plus, those who engage in fraud and other related activities often focus on users in areas of the world with poor laws and lenient fines.
A good example is the OneCoin scam, which specifically targeted users in rural areas of Nigeria. The Nigerian government later advised avoiding investments in OneCoin or other cryptocurrency tokens.
Traditional methods of transferring money across borders are expensive and time-consuming; Bitcoin is a neutral cross-border currency that can solve this. The increasing awareness is gradually making Bitcoin a viable way of money remittance in the developing world.
For example, most adults holding Bitcoin reported they are from households that often make or receive cross-border transfers. Such individuals usually have a positive outlook concerning the prospects of Bitcoin compared to those who do not engage in such transactions. This optimism is well illustrated by countries like Vietnam and India, where the participation in the remittances market is very high.
Although stablecoins dominate the market when it comes to such uses on average, Bitcoin’s potential as a fast, transparent, and cheap solution for remittances is slowly getting traction.
The past few years have been eventful, especially when El Salvador became the world’s first country to adopt Bitcoin as legal tender. This decision was not viewed enthusiastically by many. The World Bank has not been supportive of such a move, claiming that there are concerns about the social and environmental effects and lack of clear guidelines.
Moody’s, one of the big three credit rating agencies that assign credit ratings to entities and governments worldwide, retaliated by downgrading El Salvador’s credit rating. The media was not kind to the idea; the Financial Times condemned it as a ‘dangerous gamble,’ and a columnist for the Wall Street Journal saw it as a scam.
Critics fail to mention that countries like El Salvador are pioneers in using decentralized virtual currencies and payment systems. These nations have invested a lot of time in learning about the world financial system, its strengths and, more so, its flaws that could impact their citizens. They understand that they have very little control over the money policies that can greatly impact their people's lives.
While El Salvador is not completely stopping the use of fiat money (it still accepts the US dollar as legal tender), it is constantly exploring blockchain-powered payments. We can expect amore developing countries to adopt Bitcoin as an official means of payment in the following years.
Remittances have become essential for many developing countries in terms of remittances. Foreign citizens who work in other countries sometimes need to transfer money to their home countries to purchase food, pay for rent, or educate their children.
Remittances in El Salvador stood at 23.94% of the GDP in 2020. In the Philippines, the overseas Filipino worker population is more than 10 million, and remittances constitute nearly $33.5 billion.
However, sending the same amount of money home by money transfer agencies such as Western Union can be way more expensive and can take a longer time, with the sender having to wait for the money to get to the intended recipient the next business day. Everyone should be able to transfer money with better conditions and at a lower cost. It is, therefore, not surprising to see countries that rely on remittances be attracted to Bitcoin due to its low fees and instant transactions at any time of the day.
Global remittances to low-to-middle-income countries reached $656 billion in 2023. If there were a cheaper way of sending remittances, this amount could be considerably raised and, hence, contribute a lot to the development of families in developing countries.
Inflation is a relatively bigger issue for those in the developing world than for those in the developed world.
According to the International Monetary Fund (IMF) estimation, inflation rates in developed countries in 2021 were at 2.4 %, while for developing countries, they stood at 5.4%. In this case, people in developed countries might be in a better position to handle the effects of the economic shock since they have enough resources, but people in developing countries will have a harder time, especially when the price increases of consumer goods and services.
In Turkey, where this year’s inflation rate stood above 15%, there is evidence of increased crypto adaptation. In the same way, the Turkish government acted swiftly to ban the purchase of goods and services with cryptocurrencies. However, the inflation rates persisted, with the current rate in the country standing at around 75%.
Emerging technologies like blockchain provide solutions to economic development and services that are important to people without access to banks. In developing areas, Bitcoin is a convenient and safer way of transacting than the traditional banking system since users do not require an account to send or receive funds.
In addition, Bitcoin's borderless system empowers international transactions, boosting trade and transfers across various countries. Thus, there is a prospect for the financial sector's evolution in these regions and the increased participation of individuals and business entities in the world economy through Bitcoin.
The increasing adoption of Bitcoin, particularly in these markets, demonstrates how Bitcoin is becoming a global currency with the potential to advance financial inclusion worldwide. Considering the remittances and international transactions, Bitcoin has one major advantage: it minimises transaction costs.
Immigrants are increasingly using Bitcoin to minimise transfer expenses and increase transaction speeds. Bitcoin's benefit in cutting down transfer costs can be attributed to eliminating the middleman and the charges accompanying such intermediaries. Below are few reasons that make Bitcoin a better option for remittances:
Generally, using Bitcoin is cheaper than using other traditional remitting channels. This can translate to a lot of money being saved, especially on the low-paid workers' remit.
Image: Remittance fees, by Finbold
Bitcoin can quickly transfer funds, and the recipient will receive the funds in a short period of time—from a few seconds to a few hours. This speed is helpful for any potential emergency transfers.
Bitcoin has no barriers or geographical limitations to conventional systems; hence, transferring money internationally becomes easier and cheaper. By using Bitcoin, the customer does not have to make numerous currency exchanges or pay conversion fees.
It is helpful to analyse different cases to understand how Bitcoin impacts the lives of migrants and its position in remittances and cross-border payments.
The use and acceptance of Bitcoin is making it a preferred asset among migrants and other related groups. For instance, Venezuelans, Filipinos, and many other migrant workers from developing countries use Bitcoin to transfer money to their families since the Venezuelan economy is in the negative side.
The decentralized system and the low transaction charges of Bitcoin are advantageous to Venezuelans who need to send money to their loved ones.
To understand Bitcoin's acceptance across global economies, we must look at the various economies that have adopted this virtual currency. Thus, by analysing the number of users, the transaction volume, and the ratio of merchants who accept Bitcoin in each country, it can be concluded how deeply Bitcoin has entered these markets.
Also, the role of legal frameworks in accepting Bitcoin cannot be ignored. Legal frameworks and rules can either support or hinder Bitcoin usage, which is why the role of government is critical when determining the cryptocurrency’s worldwide acceptance.
Different countries’ governments have developed various policies to combat money laundering, fraud, and consumer protection. These regulations have had both positive and negative impacts on Bitcoin usage. Also, proper and favourable rules and regulations will contribute to the development of an environment that allows both businesses and individuals to use Bitcoin.
At the same time, too severe measures or a total ban can hinder Bitcoin’s spread and the development of the cryptocurrency industry. Governments should consider developing policies to ensure citizens' security while adopting Bitcoin and cryptocurrencies.
It is quite natural to fear change, as it can sometimes be rather uncomfortable; however, it is not something that has to control us. Thus, it would be unfair and self-contradictory to disregard what Bitcoin and cryptocurrencies can offer and the issues they can address. The emergence of innovations like cryptocurrencies can significantly impact the world economy, especially in developing nations. With massive market capitalisation and transformative technology as a base, blockchain and cryptocurrencies have the potential to reshape the financial world.
Most countries are already experimenting with fiat digital currencies, and the traditional banking system is using blockchain and its variants to speed up clearing and settlement, digitalise real-world assets, and introduce other innovations. Although there are some issues with integrating cryptocurrencies into the financial inclusion agenda, the adoption rates of digital assets are very high in developing countries, which means that people want to use cryptocurrencies for both investment and payment purposes.
Although there are some issues with integrating cryptocurrencies into the financial inclusion agenda, the rates of adoption of digital assets are very high in developing countries, which means that people want to use cryptocurrencies for both investment and payment purposes.
Cryptocurrency has the advantages of quick, low-cost, and secure transactions compared to conventional banking procedures. It also offers stability in storing value where the value of currency is unstable due to inflation. For example, El Salvador decided to accept Bitcoin to reduce the expenses of international transfers and promote economic growth by introducing another payment type.
It has low transaction fees, and the transfer of money is relatively quicker than conventional models of international payments, especially to developing countries.
Some of the barriers are a lack of knowledge about technology, issues with regulation, and fraud in areas with weak legal systems.
It has a scarcity factor, making it an inflation hedge where investors can store their wealth in countries with high inflation rates when the local currency is losing value.
Certain laws favour Bitcoin adoption while others do not; these are the facilitators and inhibitors of the digital currency. The right and favourable policies can improve usage, while the wrong or ambiguous policies may slow down adoption.
Cryptocurrencies are now being used to extend financial services to the unbanked, especially in the developing world, thus enabling people to be active participants in the world economy.
This article is for informational purposes only and not intended as investment or financial advice. It contains opinions and speculations that are subject to change without notice.
The author and publisher disclaim any liability for decisions made based on the content of this article. Readers are advised to conduct their own research and consult a financial advisor before making investment decisions.
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