Imagine a day in the near future, going to a store, reaching the self-checkout kiosk, and using Amazon-issued currency to buy your favourite snack. This may sound far-fetched, but with cryptocurrency and digital currencies taking off, there is a possibility that “megacorporations with worldwide reach, such as Amazon, could start issuing their own stablecoins”. In a world where currency knows no borders, cryptocurrency emerges as the digital trailblazer, rewriting the financial narrative and empowering developing nations with a currency of possibility. The future is uncertain, but we can try to understand cryptocurrency’s current significance to economies around the world.
With its growing impact on developing economies, it’s crucial to delve into the mechanics of cryptocurrency and its implications on a global scale. In recent years, Cryptocurrency has proved itself to be more than just a tool used by investors and financiers in traditional finance jobs. Africa, Latin America, and parts of Asia have seen a rise in the adoption of cryptocurrency in recent years. Cryptocurrency has a significant impact in developing countries such as Argentina. This offers an alternative perspective on the role of this financial technology in economic development throughout the world.
Cryptocurrency is a type of digital currency or alternative to government-issued fiat money. Money is traditionally characterised by its functions as a medium of exchange, unit of account, and store of value. If Bitcoin and other cryptocurrencies can fulfil the functions of money, then it theoretically can act as a replacement for traditional forms of money. This can be both useful and problematic, as it introduces new possibilities and challenges to the financial and economic landscape.
Cryptocurrency uses blockchain technology. In 2008, Satoshi Nakamoto, the pseudonymous creator of Bitcoin, introduced the concept of blockchain technology. Blockchain is essentially “a distributed database or ledger” which provides the framework and system for providing and “maintaining a secure and decentralised record of transactions”, an accounting tool of sorts.
Privacy issues are inherently contentious in the financial industry. Many people want the freedom to transact without the watchful eye of banks and government agencies, and while this may sound suspicious to some, it is not inherently nefarious. An important program used in blockchain technology is consensus mechanisms, which is a peer-to-peer confirmation system. Trust and verification allow for reliable validation of transactions. The concept of consensus mechanisms is used in other emerging technologies to help ensure data safety, keeping those with nefarious intentions locked out of distributed ledgers.
Cryptocurrencies such as Bitcoin are virtual currencies, but the mining of Bitcoin has been a major topic of conversation. When the term mining Bitcoin, or more generally cryptocurrency, is used, it means that relevant information is validated and verified; this is awarded to miners as new crypto. There is no mining involved; in a simplified sense mining means solving puzzles, mathematical data, and verifying the information on the blockchain, and miners are the individuals who solve these puzzles.
The increasing popularity of crypto is partially due to its efficiency. Crypto is not issued by the central bank and doesn’t require the same bureaucratic processes. Since crypto is ‘mined’ using blockchain, governments and their political agendas cannot sway the supply of crypto. Cryptocurrency can be transacted across the globe without needing to adjust for the exchange rate and it can be a low-cost alternative to transfer money using the traditional banking system. This is relevant to developmental economics as remittances are “a $589bn market and a major source of capital for developing countries”. Cryptocurrency in this market can play a role in decreasing poverty by cutting out the middleman; immigrants and their families don’t have to give up fees to banks to send money back home. Currently, African countries, as a whole, have seen $562m worth of cryptocurrency inflows.
When considering development, the relative stability of the governments being considered plays a major role. If the currency or the economic policies are more volatile than cryptocurrency, it becomes a useful tool for individuals who want to invest and conduct transactions. Hyperinflation may lead to people adopting cryptocurrency, as the decentralised currency is not directly tied to their economic stability. For example, Argentina, which has struggled with hyperinflation, may use crypto as it is more stable than its centralised currency. Many Argentines are turning to cryptocurrencies as one way to escape the peso. About one-third of Argentines said they bought or sold cryptocurrencies at least once a month, double the percentage of people in the United States, according to a separate survey by Morning Consult. High inflation can create significant issues in developing countries as it erodes the purchasing power of the local currency. This national context explains Argentina’s high activity with cryptocurrencies, placing it behind Brazil and the 13th worldwide, reaching a total volume of $93 billion annually.
That being said, cryptocurrency can be problematic in many ways. This has been recognised by many governments, some going as far as to ban the use of cryptocurrencies in their countries, such as China and Saudi Arabia. China cites the reason for the ban as a necessity to “curtail financial crime and prevent economic instability”. As Bitcoin allows transactions to be conducted anonymously, governments may feel the need to regulate its usage to prevent the proliferation of money laundering. Governments may also ban or limit crypto’s use as they can’t control the currency, which may weaken the receptiveness to their monetary policy.
Cryptocurrencies may be more stable compared to certain countries facing economic struggles, but compared to other economies with stable currencies, the volatility of crypto is a notable disadvantage. More than fiat money, which is controlled by the government, cryptocurrency is left up to the system of supply and demand, which can make it more volatile. There is also a lack of regulation, as it is a relatively new currency allowing factors such as government regulations, media hype, and user sentiment to influence its price.
While the increasing popularity of crypto, driven by its efficiency and potential to revolutionise financial transactions, has made notable strides, it is essential to acknowledge the challenges that came to the forefront with the recent crash in 2022. The volatility, lack of accountability, and regulations underscore the challenges and risks associated with embracing digital currencies. That being said, physical currency issued by the central banks of many countries has had controversies of its own; however, it’s just easier to blame and hold groups accountable for their problems in the traditional financial system. Some economists have theorised that banks and fiat money will become obsolete in the face of the growing popularity of cryptocurrencies. Though anything can happen in the future, the current volatility of crypto, not considering countries dealing with hyperinflation, makes banks a safer choice for those seeking stability and reliability in the financial landscape.
Edited by Ailish McGiffin
Anvita Dattatreya is in her second year at McGill University, currently pursuing a B.A. Double Majoring in Economics and International Development Studies. As a staff writer in Catalyst she hopes to write articles on topics including socio-economic and political issues in South-East Asia.