The past year has seen what the International Monetary Fund has labelled as “cryptoization” in their recent October report; the rapidly growing crypto footprint across emerging market economies, where the use of cryptocurrency for everyday transactions has dramatically increased. IMF researchers have discovered that the top five countries using or owning crypto assets in 2021 were emerging market economies (Vietnam, India, Pakistan, Ukraine, and Kenya) whilst the lowest adopters were more advanced economies.
The significant difference in bitcoin mining activity and crypto adoption between developing and developed economies has also been noticed. Such data was further supported when El Salvador became the first country to adopt bitcoin as a legal tender in September 2021. Vietnam also has the highest number of crypto users, with its level of crypto adoption being the highest (1.0) out of the global index score. The noticeable growth of 1200% within the crypto market in Africa collectively, with countries receiving around $105.6 billion worth of crypto between July 2020 and June 2021, further support this.
It is also no coincidence that China has planned to introduce their first digital currency, the Digital Yuan, with speculations that Thailand will also unveil their own next year, followed by its neighbours Indonesia and Malaysia. Such plans for establishing respective digital currencies reflects the general consensus across emerging market economies that cryptocurrency is a viable future.
This phenomenon can be accounted for by the possibility of cryptocurrency replacing the unsound macroeconomic policies and financial instability of developing countries. Emerging market economies are fertile ground for crypto adoption because of how they offer flexibility and efficiency, as an attractive alternative to weak central bank credibility, and barriers to accessing traditional financial products such as bank accounts and payment mechanisms that these economies are more accustomed to. For example, in countries such as Venezuela and Brazil, the cost and bureaucracy of legacy financial systems mean many people are more comfortable experimenting with and switching between different cryptocurrencies. A similar pattern is evident with the trade of commerce in China and Nigeria, where cryptocurrency is used to import goods due to restricting foreign exchange policies that stand as a barrier between international trade and the everyday entrepreneur. This undoubtedly accounts for the growing number of cases where crypto is being used for small scale transactions- e.g families are using bitcoin to send tuition overseas, and employers bill overseas clients and are paid in bitcoin – which again demonstrates the efficiency and opportunity offered by mass crypto adoption.
However, such an expansion of the crypto ecosystem could potentially carry risks for the macro-financial stability and fiscal policy of developing economies if crypto assets are adopted as asset and currency substitution. Its implications on regulatory frameworks, financial integrity, and consumer protection suggest that the banking sector can come under pressure if the crypto ecosystem becomes an alternative to domestic bank deposits or loans. The growing popularity of cryptocurrency in emerging market economies also potentially poses a threat to their government and central bank’s implementation of effective monetary policy.
Ultimately, only time can tell whether “cryptoization” will bring greater entrepreneurial opportunity and stability in emerging market economies, or actually entail further financial uncertainty and restrictions. Nevertheless, this recent development’s impact on accelerating the debate and controversy surrounding digital currencies cannot be doubted.
By June Seo Chung
Sector Head: Gregor MacDonald