The pros and cons of cryptocurrencies for developing countries
Isabella Roiz of The Washington Post contacted me by email to discuss the consequences of El Salvador’s decision to adoption bitcoin as its official currency, despite its volatility. Here’s her article, “Central America hoped bitcoin would attract tourists. It hasn’t worked.” (pdf).
The problem with a country adopting a cryptocurrency as its official currency is is how to integrate an extremely unstable asset into economic activity. Bitcoin is less volatile than other cryptocurrencies, given its widespread use, but the fact that the asset is as such in the price discovery phase makes its use, for the time being, only suitable as a store of value, due to the level of uncertainty it generates in the price of each transaction.
This limitation is even more evident in developing economies, due, firstly, to the fact that the capacity to use assets as a store of value tends to be limited due to the low saving capacity of the population. Secondly, there is the problem of access to the internet and the tools necessary to carry out transactions in an exclusively electronic currency. And thirdly, there is the problem of how to face temporary drops in value, with little savings in the form of a reserve.
The problem is particularly relevant for economies that have so far tried to take advantage of…
