Why is Developing Countries favoring Cryptocurrency over Fiat Currency?
After the bitcoin boom in 2021, people worldwide are divided on where they stand with cryptocurrency. While most proclaim that decentralized finance is the future, many have pointed out that the shift won’t be as easy.
Last month, the most exciting thing happened. El Salvador became the first-ever country to adopt Bitcoin legally and officially. The bitcoin adoption in El Salvador sparked a huge backlash. The media was not impressed, and the World Bank declined any help citing “transparency shortcomings”, Financial Times predicted that it is a dangerous gamble. A Wall Street columnist even called it a scam.
El Salvador isn’t the only country making headway in bitcoin adoption. Many developing countries are following El Salvador’s path and embracing decentralized finance. These countries have tried to understand how their population’s global financial system works. Hopefully, their policies will have positive outcomes for the citizens.
Bitcoin Adoption News in Developing Countries
If you’ve been following the news, you’ve probably come across many instances of regular people shifting to cryptocurrency. For example, a dentist in Sao Paulo, Brazil, exchanged his monthly savings for a basket of the second most popular ETF cryptocurrency in the local market.
Similar stories have been heard in other developing countries. In Lagos, Nigeria, a software developer has been billing her overseas clients in bitcoin, and this has been sidestepping the nation’s costly banking system and the currency’s poor exchange rates.
In Vietnam, companies and individuals have started to trade and invest so much in bitcoin and other cryptocurrencies that the nation has ranked one in the world’s crypto adoption rate.
These trends are fascinating because cryptocurrency is still viewed in suspicion in advanced countries like the United States. It is seen as a volatile fad with negative consequences and ends badly for the nations.
In fact, to control the crypto boom, regulators in the United States and many parts of Europe have issued strict notices warning the citizens about the dangers of decentralized finance and cryptocurrency.
Experts have noticed that countries with a legacy of financial instability and barriers in accessing conventional financial systems (mainly, developing countries) have been keener about adopting crypto. In these nations, cryptocurrency, especially bitcoin and bitcoin cash (BCH), is rapidly becoming a daily exchange medium between merchants and consumers.
BitMEX CEO Alex Hoeptner’s Prediction
Alex Hoeptner, CEO of BitMEX, has been vocal about the bitcoin adoption rate chart trend. He published an article on the BitMEX blog, predicting the future of crypto exchanges and adoption in countries like El Salvador. He has cited three reasons:
Quoting a World Bank Report, Hoeptner said that developing countries (characterized by middle or low-income) receive almost 75 percent of the total global remittances. For developing countries, their main export is human capital.
Therefore, citizens working overseas need money to support their families back home. The current service providers charge as high as 10 percent for sending money home. In fact, remittances amounted to a ridiculous 23 percent of El Salvador’s GDP in 2020.
Since the conventional financial systems are ripping these average-income people by charging 10 percent in remittances, they have started to rely on cryptocurrencies and bitcoin heavily. With cryptocurrency exchanges, the transactions are immediate, but the fees are nearly negligible. This piques the interest of nations that rely on remittances.
Inflation has been listed as the second cause that accelerates the bitcoin adoption to 5.4 percent to the already existing 5.1 percent in developing countries in 2021. The International Monetary Fund had forecasted this, and the estimate was more than double.
In 2020, the COVID-19 pandemic raised genuine concerns about the dangers of runaway inflation. Inflation, in general, is said to be a more serious concern for countries with developing economies.
People in developed countries are in a position of financial strength to weather shocks, but that isn’t the case with vulnerable citizens of developing countries. Besides, in these countries, the price of consumer services and goods can be severely impacted.
In cases when the governments fail to take the initiative, people usually seek alternatives to fiat currency during the inflation period. This is exactly what triggered the crypto boom in El Salvador. A similar situation arose in Turkey in 2021 when inflation jumped to almost 15 percent and crypto use surged. The country responded swiftly by banning the exchange of crypto for consumer goods and services. However, inflation is currently at 19.25 percent.
Bitcoin has been recognized as a popular inflation hedge, and it can fix this problem using its capped stock of 21 million. People in developed countries have started to notice this.
Politics is the third and most crucial factor that addresses the crypto boom in developing countries. In these nations, people in charge of making bitcoin legal tender are typically rulers or politicians. Most of these politicians are extremely savvy and skilled with an intention to make themselves appear as progressive and populist leaders.
On a macro level, bitcoin is the embodiment of the technology. It is the symbol of advancement, progress, money, and value. It is a cultural touchstone and restores the lost hope of people concerning the global financial systems.
Savvy politicians will be likely to adopt cryptocurrency, and they will think about how the decentralized financial model will suit their interests and benefit people. El Salvador did this, and they took a giant leap of faith.
However, it must be noted that if bitcoin is recognized as legal tender, any shortcomings in the implementation phase can harm wider crypto adoption policies. There are several dilemmas ahead, and this cannot be taken lightly.
The bottom line is that developing countries have a notorious history of existing in unequal global financial systems and financial instability. Therefore, they are planning to adopt bitcoin purely guided by self-interest. In the future, it won’t be surprising to see more and more countries like Nigeria and El Salvador hopping on the crypto bandwagon.