Developing Economies Take On Crypto: What Are the Benefits and Risks?

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Cryptocurrencies have become a popular way of transacting in the global economy, with both positive and negative impacts on developing countries. Let’s take a look at the opportunities and challenges of cryptocurrency adoption in these nations.

Opportunities

Accessibility: Cryptocurrencies provide a great solution for developing countries that are lacking access to traditional banking systems. According to the Global Findex Database by the World Bank, 1.7 billion adults in the world are still unbanked, but 1 billion have mobile phones. This presents a great opportunity for the adoption of crypto in regions with low banking infrastructure but high mobile phone penetration. Cryptocurrencies require no physical infrastructure and are easily accessible, meaning individuals who have been excluded from mainstream financial services can now join the e-commerce market.

Remittances: Remittances can account for up to 20-40% of a nation’s Gross Domestic Product (GDP) in certain developing countries. In June 2021, El Salvador officially recognised Bitcoin as a legal tender, with the US Dollar as its primary currency until then. Over 20% of El Salvador’s GDP is dependent on remittances, primarily from Salvadorans working in the United States. Cryptocurrencies promise a faster and more affordable way to transfer funds internationally, with transactions taking only minutes and no intermediaries involved.

Inflation and Counterfeit: Cryptocurrencies are becoming increasingly popular in developing countries facing economic difficulties, such as high currency volatility or high inflation rates. Chainalysis data shows that the adoption of cryptocurrency as an alternative means of storing value is on the rise in countries such as Venezuela, Nigeria and Kenya. Cryptocurrencies operate independently from banks and governments, and their market fluctuations are not as extreme as fiat currencies.

Challenges

Evolving Regulatory Landscape: Cryptocurrencies lack a clear regulatory framework, which can lead to confusion and misuse. Governments in developing countries have to find a balance between embracing the benefits of crypto and addressing concerns about fraud, money-laundering and tax evasion.

Volatility: Cryptocurrency users in developing countries are vulnerable to its volatile nature. The value of crypto can fluctuate in short periods, which poses a risk to those with low financial literacy.

Lack of Awareness: Transactions can be technical in nature and users may not understand the complexity of managing private keys, wallets and security measures for cryptocurrency transactions. This lack of knowledge can lead to errors, lost funds or reluctance to embrace digital assets. However, platforms and exchanges have been making it easier for beginners to get into crypto.

In conclusion, the increasing importance of cryptocurrencies among developing countries represents a transformational shift in the global landscape. Despite the unique opportunities it presents, stakeholders must develop solutions to address the challenges that come with it. This includes regulatory clarity, technology innovation, education and infrastructure development to ensure the full potential of cryptocurrency is harnessed and create inclusive and sustainable financial ecosystems in developing countries.

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