How Cryptocurrency will benefit Nigeria, South Africa and other developing countries

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Cryptocurrency has a lot of benefits to the developing countries like Nigeria and South Africa. It has become a valued resource for many emerging economy and frontier markets. As a payment technology, crypto currency holds the potential to be more transformative with developing nations than to developed countries, where financial and banking services are reliable, widely available, affordable and trusted.

It is likely that Cryptocurrency will benefit the US economy as it provides an economic alternative to exorbitant credit card fees and an alternative solution to the problems of credit card fraud, PayPal chargebacks and micropayments.

However, the real benefits of improved financial security and freedom will be felt most acutely by people living in countries with an urgent need for new payment systems, such as Argentina, Zimbabwe or Nigeria.

In the following we describe some of these benefits that elevate cryptocurrency above the level of marketing gimmick in the emerging countries and frontier markets.

In countries with an unstable currency and high inflation, cryptocurrency can be relied on as a predictable store of value when volatility and systematic risk are very high.

In the  past years, traditional currencies have been on an overall downward trend, therefore, given the geometrical increase in strength of cryptocurrencies such as Bitcoin and Ethereum against the USD, the accumulation of these may actually reduce overall portfolio risk.

Closely related to its function as a store of value is the possibility of using bitcoin as a means to counter extended currency controls such as those employed by Venezuela or Argentina. In the wake of its peso devaluation, Argentina has implemented extensive restrictions to stave off capital flight, effectively restricting (See Contagion spreads in emerging markets as crisis grow and Emerging market hot money risks best rally since 2009) how its citizens can move their money in and out of the country.

Authoritarian government frown upon attempts to circumvent these controls; therefore, it is no surprise that countries like Nigeria have commented negatively on Cryptocurrency, stressing its use in money laundering and criminal activities.

On a societal level, Cryptocurrency is anticipated to solve a problem called “unbanked economies”. In some countries huge segments of society do not have access to credit cards or regular current or savings accounts. Those people who do have access to financial services have to pay high fees.

In an article hosted by the blogger called the “Two bit idiot”, guest contributor Peter Smith describes his experiences in Africa:

“I used to live and work in Africa and MENA. Most people I met, particularly in rural areas, didn’t have access to a bank – they lived too far away, didn’t qualify, didn’t have proof of identity etc. And the consequences for “self-banking” are often dire. I once met a farmer in Uganda who’d had his savings wiped out not once, but three times, in only two years. Twice by robbers who ransacked his house and stole his cash, and once by a corrupt policeman who extorted him. For the few who did have bank accounts in Africa, as I did, the fees were shocking. (It actually made me wistful for Bank of America.) The banks are so disorganised that it is perfectly normal to spend over an hour in line to withdraw cash at the ATM… Moreover, the problems are systemic: the irresponsible policies of MENA central bank frequently leads to hyperinflation and runs on the local currency.”

On Coindesk, Ron Hose argues along similar lines, suggesting that the Philippines and other Southeast Asian markets could be prime locations for the expansion of crypto currency. “Less than 5% of people in Southeast Asia have credit cards – the rest end up paying for online transactions next day in line at the bank or COD, a huge pain for both customers and online merchants. Cryptocurrency solves a real problem here – increasing conversion and lowering transaction cost for the merchant, and providing far more access to customers.”

” Being unbanked” also means not having access to credit facilities, and microfinance institutions are being created throughout developing economies to address this problem. P2P lending based on Bitcoin may however provide another attractive solution as Radoslav Abrecht of Bitbond argues in Spotlight 10.

To use Cryptocurrency, a user only requires a smartphone, a wallet and internet. For Bitcoin this means two things. First, the lack of an incumbent institutional framework increases the need and the chances for increased crypto currency adoption. Second, by providing inexpensive financial services Bitcoin may play a role in facilitating economic development in frontier markets.

Cryptocurrencies can help to create transparency in financial transactions. Corruption is an unfortunate fact of life in many developing countries.

While it is to a large degree related to systemic factors, such as a fragmented society or underpaid civil servants, technical solutions may play a role in alleviating this scourge of economic development. Based on a public blockchain, cryptocurrency offers maximum public visibility. As a result, Nirgunarthy, an American living in India, posits: “If every single government subsidy programme was given to the bitcoin protocol, there would be no corruption anymore.”

Probably the most promising application of cryptocurrency is facilitating international remittances from immigrants in the west to their families in the developing world. As noted before, remittances come at a hefty price. Can a centralised solution based on Bitcoin, Ethereum and other cryptocurrencies be cheaper than traditional service providers such as MoneyGram or Western Union?

Given the efficiency of crypto currency we are inclined to say yes, but in fact compliance and regulatory costs might undermine these cost advantages. Another concern relates to the difficulty of providing cheap on-ramps and off-ramps in the developing as well as in the developed world.

Opportunity as well as challenges are plentiful. For a perspective on the situation in Africa please refer to spotlight 11, where Elizabeth Rossiello from Bitpesa provides an introduction on this topic.

We have discussed real demand for innovative financial solutions in developing economies. We have also introduced transformative business ideas such as P2P cryptocurrency lending, bitcoin-based international remittances or the use of blockchain-based solutions for better government.

Demand for such services suggests that the creation of a business in developing markets may offer more potential for entrepreneurs than the creation of yet another solution to well-served customers in the US or other developed countries.

However, opportunity comes with risk. Moreover, for the time being, adoption in these markets is slow. Investing in exchanges, news portals and other basic infrastructure elements of Cryptocurrency is therefore just as important and attractive as investing in sophisticated remittance businesses.

Adoption in emerging markets would increase if Bitcoin volatility was lower, if there were more exchange platforms, more liquidity, more startups, and most important of all, more opportunities to trade bitcoin for cash. Developing countries are cash-based economies. For this reason, people want to buy and sell bitcoin for cash instead of using credit cards, bank accounts or similar means.

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