Cryptocurrency and Emerging Markets

            Being left out of industrialization for so long has been an obstacle for emerging markets in Africa and Latin American and the Caribbean (LAC). However, Japan and Germany had their infrastructures destroyed in World War II, allowing them to adopt newer technology in the reconstruction. Japan today the world’s second largest steel exporter due to this modern technology.

Similarly, industrialization-deprived emerging markets, starting in some instances from almost nothing in terms of homegrown technology, have adopted modern technology that puts them ahead of more developed countries in some cases. For example, the lack of wired telephone lines has led to greater adoption and usage of cell phones, often advanced cell phones, which are used to facilitate business transactions.

So, the question now is: will the development of the cryptocurrency industry help emerging markets or not? The answer at this point is mixed. Thus far, four African countries – Kenya, Nigeria, South Africa, and Tanzania – all ranked in the top 20 for global crypto adoption early on. The Bahamas and Antigua & Barbuda governments have already recognized the vital means of cryptocurrency to boost their country's economy, while the legal regulations in other countries are still in process.

This growth was largely powered by retail users rather than institutional investors, signaling a willingness of some in these countries – most likely younger people and entrepreneurs – to try an industry that has been troubled, particularly with recent scandals such as the FTX cryptocurrency exchange collapse. Some experts point out that the collapse of FTX was the result of malfeasance at the exchange and not the collapse of cryptocurrencies such as Bitcoin, which has lost significant value.

The value of traditional investments such as company shares are largely influenced by the performance of the business, but cryptocurrencies have no underlying asset. Consequently, movements in their price are based purely on speculation among investors about whether it will rise or fall in future.

Cryptocurrency is in essence electronically traded cash. There are actual coins, but the blockchain technology allows cryptocurrency to be traded across borders and without cumbersome regulations or even the need to identify those who participate in exchanges of this electronic money, which can attract those with criminal intent. A blockchain is defined as a type of distributed ledger technology that consists of growing lists of records, called blocks, which are securely linked together. Each block is connected to the previous block in a supposedly unalterable fashion and contains a time stamp. and transaction data. The time stamp proves that the transaction data existed when the block was created. Since each block contains information about the previous block, they effectively form a chain, with each additional block linking to the ones before it. Therefore, blockchain transactions are irreversible in that, once they are recorded, the data in any given block cannot be altered retroactively without altering all connected blocks.

The presumed security of the blockchain technology makes cryptocurrency attractive to those interested in using it, including criminals. But it also opens possibilities for the many who don’t have access to or don’t get involved with traditional banking. Globally, 230 million people are unbanked: 66.5% in Africa and the Middle East, 44.6% in Latin America and the Caribbean and even 35% in North America and Europe.

The country of El Salvador has bought into cryptocurrencies in a big way, making Bitcoin legal tender in September 2021. An estimated 70% of Salvadorans now use Bitcoin, as well as the U.S. dollar. The government says its digital wallet, Chivo, has more than 4 million users. Yet, the country has lost $65 million, or two-thirds, of the $105 million the government has invested in cryptocurrency.

Neither the fall in the price of Bitcoin following the collapse of the cryptocurrency exchange FTX nor the arrest of its founder Sam Bankman-Fried have caused El Salvador’s Bitcoin-backing president, Nayib Bukele, to reconsider his cryptocurrency investment with the country’s finances. So far, Mr. Bukele appears defiant. On November 17^th, he tweeted that his government would buy one bitcoin a day, after not having bought any in almost six months. He has also brushed off any criticism of his decision to buy it using public money.

“Stop drinking the elites’ Kool-Aid and take a look at the facts,” Bukele wrote in a September statement.

The Salvadoran government is still claiming victory. Bitcoin reportedly has attracted foreign investment and tourism and increased financial access to a largely unbanked population, according to Finance Minister Alejandro Zelaya.

 After what it called “one of the wildest in crypto history,” Chainalysis, a web site devoted to analyzing the cryptocurrency industry, writes that those who use this electronic money have decisions to make for the short and long run.

 “In times of volatility and panic, we’d expect crypto users to seek shelter with the stability of fiat currencies. There are two ways to do this: Trading for stablecoins pegged to fiat currencies like the U.S. dollar or liquidating entirely and swapping cryptocurrency for fiat. Overall, crypto proponents would likely rather see the former than the latter — if investors swap for stablecoins, they’re more likely looking to stabilize their holdings temporarily, and they can always easily swap back into standard cryptocurrencies when they’re ready to trade again. But if they swap for fiat, it may indicate an intention to step away from cryptocurrency for a longer period, or even permanently,” Chainalysius writes on its web site.

In the June 2021 issues of the journal African Renewal, Eugene Yiga wrote that despite strong rates of adoption of cryptocurrency in Africa in recent years, there remain obstacles to its greater success.

“Part of the problem surrounding cryptocurrency adoption in Africa, besides the lack of reliable and affordable internet, particularly beyond urban areas, is the varying level of financial literacy,” Yiga wrote. “Most people are not conscious of investment types beyond the basics like real estate or stocks. Even those who hear about certain billionaires probably don’t know much about how they built their wealth, beyond thinking that it has something to do with money.”

There is no reason to believe that over the last year, such concerns have been significantly minimized.

In the Caribbean, there is significant interest in cryptocurrencies, but consumers face difficult roadblocks when engaging in accessing electronic money. Most people still rely on the banking system to manage their money. While many Caribbean countries have sound internet systems, they often rely on outside agents like the United States and the European Union to facilitate internet traffic, meaning Caribbean countries remain dependent on the U.S.-based system. Building a more decentralized digital financial infrastructure, would allow Caribbean countries to become more financially independent. 

            Stefen Deleveux, President and CEO of the Caribbean Blockchain Alliance, says one major opportunity lies in remittances.

“Remittances are such a part of our reality because so many people in the U.S. and the UK have to send money back to family in the Caribbean, and they have to use a banking system that takes so much money in fees,” says Deleveux. “But with cryptocurrency, my money goes from me to the person I’m sending to directly. Having no middlemen takes so much of the cost, complexity, barriers and restrictions out of the equation.” 

There continues to be interest in cryptocurrencies in emerging markets despite the difficulties, scandals and collapse of various cryptocurrencies. Chainalysis reports in its 2022 that overall adoption has slowed in a worldwide bear market but remains above pre-bull market levels.

“Our data shows that global adoption has leveled off in the last year after growing consistently since mid-2019. We look at this trend…where we apply our index methodology globally by summing all 154 countries’ Global Crypto Adoption Index scores quarterly, from Q2 2019 to the present, and re-index that number again to show adoption growth over time across the world,” the Chainalysis report states. “Global adoption of cryptocurrency reached its current all-time high in Q2 2021. Since then, adoption has moved in waves – it fell in Q3, which saw crypto price declines, rebounded in Q4 when we saw prices rebound to new all-time highs, and has fallen in each of the last two quarters as we’ve entered a bear market. Still, it’s important to note that global adoption remains well above its pre-bull market 2019 levels.”

Leading the way in cryptocurrency adoption are emerging markets. The African countries in the top 20 cryptocurrency adopters in the Chainalysis list are lower middle-income Kenya, Morocco and Nigeria, and the upper-middle-income LAC countries are Argentina, Brazil, Columbia and Ecuador.

The LAC is the seventh largest cryptocurrency market in the Chainalysis 2022 adoption report, with citizens in the region receiving $562.0 billion in crypto from July 2021 to June 2022. This represents a 40% growth over last year’s total. LAC is also home to five of the top thirty countries in this year’s crypto index: Brazil (7), Argentina (13), Colombia (15), Ecuador (18), and Mexico (28). Meanwhile, the Middle East & North Africa (MENA) may be one of the smaller crypto markets in the 2022 Global Crypto Adoption Index, but it’s also the fastest growing. MENA-based users received $566 billion in cryptocurrency from July 2021 to June 2022, 48% more than they received the previous year.

Cryptocurrencies are not going away even though these are tough times for electronically traded money, but will emerging markets be able to weather the storms and prevent their citizens from losing substantial amounts of money even as they deal them into the global economy?