The Impact of Crypto Currencies on Developing Countries

Introduction

The World Bank describes that “the number of poor worldwide remains unacceptably high, and it is increasingly clear that the benefits of economic growth have been shared unevenly across regions and countries” (World Bank Group, 2018, p. 23). Along with these incidents of economic chaos, civil war and governmental collapse plague developing regions (Prahalad & Hammond, 2002). Besides, poverty is mainly driven by economic factors, which include limited access to financial services (Beck & Demirguc-Kunt, 2006) and high inflation rates (Aisen & Veiga, 2006). Moreover, studies have argued that a low level of trust (Barham, Boadway, Marchand, & Pestieau, 1995) and corrupt government institutions harm the economic development (Olken, 2006).

Introduction to crypto currencies

To provide a comprehensive overview of the opportunities of crypto currencies in developing countries, it is necessary to understand the general advantages and disadvantages crypto currencies provide for users compared to central bank-issued fiat currencies, like the Euro or the US dollar, and to discuss how they emerge from the underlying technology. For this purpose, the example of two crypto currencies is used in this paper. The underlying technology of most crypto currencies is blockchain technology. A blockchain is a decentralized database that is distributed in the network on a variety of computers. It is characterized by the fact that its entries are summarized and stored in blocks.

General advantages and disadvantages of crypto currencies

This section presents the main advantages and disadvantages of crypto currencies compared to central bank-issued fiat currencies and discusses how they emerge from the underlying technology. Furthermore, a comparison with existing solutions is provided to show the practical relevance of crypto currencies.

Developing countries and poverty

The following section provides a definition of „developing countries“. Moreover, it also gives an overview about which countries are classified as developing countries and are therefore in the focus of this study.

Opportunities through crypto currencies in developing countries

Based on the analysis of the economic problems in developing countries, crypto currencies can accelerate the development process potentially in various fields. In general, new technologies and innovations are key solutions for the catch-up process of developing countries as Chudnovsky and Lopez (2006) have pointed out.

Figure 1: Internet user penetration rate of population in 2017 and 2025, by region

Discussion

Based on a literature analysis, the following part of this paper consists of a qualitative analysis based on expert interviews. The interview partners have been selected via the social networks Xing and LinkedIn. The participating experts vary widely with respect to their background knowledge from a Fintech start-up representative, a lecturer, to a consultancy ambassador. The experts also differ significantly with regard to the region they live and work in, from Argentina, Kenya, Switzerland to Singapore. An overview of the involved experts can be found in Appendix B.

Crypto currencies and local fiat currencies

Regardless of the form, money must fulfil three main functions. Firstly, it has to be accepted as a medium of exchange for the trade of goods and services. Secondly, it must be suitable as a medium to store value for saving wealth. Thirdly, it must act as a unit of account, to measure and compare the value of goods (Ammous, 2018). In Figure 2, crypto currencies are compared with with gold, the oldest form of money, and with central bank-issued fiat currencies with regard to different traits of money.

Figure 2: Comparison of different types of money, Source: Own illustration

Crypto currencies in developing counties

As Expert 2 (2018) mentioned in the interview the impact of crypto currencies on the improvement of developing countries is not noteworthy yet, because the technology is still at its infant stage. In addition, Expert 2 stated, that there is currently only limited adoption of crypto currencies and the positive effects of crypto currencies will only occur if there is mass adoption (Expert 2, 2018). Similar to this view, Expert 1 (2018) argues that currently the support for the improvement process in developing countries with the help of crypto currencies is not given, mainly due to the small adoption.

Improvement of financial inclusion in developing countries

The improvement of financial inclusion is the most significant and most developed benefit of crypto currencies for the population in developing countries (Darlington, 2014). As previously shown, crypto currencies can lower the transaction time and costs significantly and can act as a type of bank account that allows people to make savings and conduct daily transactions (Honohan, 2008; Scott, 2016).

Figure 3: Requirements and possibilities of crypto currencies, Source: Own illustration

Limitations and further potential areas of crypto currencies

Cross-border payments are currently the most significant use case for crypto currencies, due to the reduced transaction time and costs. Also, the Libra project, initiated by Facebook, aims to significantly decrease fees of cross-border payments by using blockchain technology (see Groß, Herz, Schiller, 2019). Currently crypto currencies are mostly used for cross-border payments. However, the importance for cross-border payments could in the future be overtaken by peer-to-peer lending through an even broader market since peer-to-peer lending helps to solve liquidity problems, specifically in developing countries. Furthermore, the collateralization issue could be solved partly by community trust as Expert 6 (2018) has mentioned.

Conclusion

Overall, crypto currencies can have a considerable impact on developing countries, by increasing financial inclusion of individuals and companies. In particular, by reducing the transaction fees and time, cross-border payments can be improved (Scott, 2016). This is beneficial for remittance payments, peer-to-peer lending and international trade. The underlying technology also supports the fight against corruption by having a more transparent tracking system for the use of funds (Darlington, 2014).

Remarks

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  • Blockchain knowledge: We wrote a Medium article on how to acquire the necessary blockchain knowledge within a workload of 10 working days.
  • Our two blockchain books: We have edited two books on how blockchain will change our society (Amazon link) in general and the everything related to finance (Amazon link) in particular. Both books are available in print and for Kindle — currently in German and soon in English. The authors have been more than 20 well-known blockchain experts in startups, corporations and the government from Germany, Austria, Switzerland and Liechtenstein — all contributing their expertise to these two books.
Our two books: the first one on blockchain and the society and the second one on blockchain and finance

Authors

Moritz Holtmeier is graduate of the Frankfurt School of Finance & Management. You can contact him via e-mail (moritz.holtmeier@t-online.de) and via LinkedIn (www.linkedin.com/in/moritz-holtmeier).

Appendixes

Appendix A: List of developing countries by region
Appendix B: List of interviewees

Endnotes

[i] Data from Coinmarketcap.com, Accessed at 5th of September 2019: https://coinmarketcap.com

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Philipp Sandner

Philipp Sandner

Professor | Lecturer | Author | Investor | Frankfurt School Blockchain Center