In many developing countries, the cost of accessing financial products, such as bank accounts, is too high. Cryptocurrencies are therefore more attractive and have huge penetration in many of these countries. This is because they bypass financial barriers with ease.
Nigeria, Brazil and Vietnam are a case in point.
Many people in Nigeria prefer cryptocurrency payments to local currency to bypass costly banking systems and local exchange rates.
In Brazil, companies and individuals invest their earnings in cryptocurrencies or exchange-traded funds (ETFs). It is now the second most popular way to invest money in the country.
Individuals in Vietnam invest, trade and transact a lot in Bitcoin and other cryptocurrencies, making them the top crypto adopters in all of Southeast Asia.
In developed countries, however, cryptocurrencies are viewed with suspicion. A fad, far too dangerous to invest in, with the end already in sight. This explains why financial regulators in the US and Europe are warning about the dangers of investing in cryptocurrencies.
Cryptocurrencies as an alternative to weak local currencies
Local currencies are weak and cannot offer value benefits, which undermines their attractiveness.
Here are more reasons why developing countries are switching to cryptocurrencies:
- Financial constraints
- Expensive banking systems
- Unpredictable inflation
- Regulatory uncertainties
- Rapidly fluctuating exchange rates
In Nigeria, for example – Africa’s largest crypto market – the economy lacks dollars due to capital controls, the vagaries of the black market and the collapse in oil prices. The pandemic has also put pressure on the dollar.
This explains why P2P crypto exchange Paxful saw an 83% increase in Nigerian users from the beginning of the year to June.
The same is happening in Venezuela and Brazil. The cost and bureaucracy of legacy financial systems in these countries have prompted businesses and individuals to adopt cryptocurrencies, and for good reason.
Warnings about the instability of cryptocurrencies.
Progressive countries and major financial institutions like the IMF are warning emerging markets about den dangers associated with investing in and adopting cryptocurrencies. They stress that the widespread use of cryptocurrencies as legal tender affects the macroeconomic stability of these countries.
According to the US-based multilateral lender, cryptocurrency trading exposes developing countries’ financial systems to illicit activities such as money laundering, fraud, hacking and terrorist financing.
The UK’s Financial Conduct Authority (FCA) committee warned crypto investors are “about to lose their money”.
In June, the Committee of Global Banking Supervisors also expressed concerns about the growth of cryptocurrencies – insisting that banks face looming risks and financial stability.
But how are consumers to be protected from crypto fraud? The poor in these countries suffer the most when this happens. But whether cryptocurrencies succeed in developing countries or not, they have (already) changed the game.