Cryptocurrency has been hailed as revolutionary and disruptive, a “truth machine” and “the future of money and global finance”. Has cryptocurrency helped drive the development agenda in the Global South, or are the claims too good to be true?
What is cryptocurrency?
Cryptocurrencies, such as Bitcoin, emerged in the aftermath of the 2008 economic crisis. They are loosely defined as a system of digital decentalised finance that is detached from government oversight and regulation. Cryptocurrencies are based around blockchain technology. This is a peer-to-peer network which maintains a secure, unchangeable central ledger. The technology is meant to protect users from fraud, hacking, and double-spending. They are also notoriously difficult to define and understand.
Rather than replacing traditional banking, cryptocurrencies such as Bitcoin have been used in the Global North mostly for speculation. In contrast, cryptocurrencies are most commonly used in the Global South for sending remittances, or to provide a buffer against currency fluctuations. They have been spruiked in Southern contexts as a way to reach the “unbanked” and provide new economic opportunities for marginalised groups. And they are said to offer superior security and privacy compared to national banking systems. Crypto enthusiasts claim that this is especially relevant in the Global South, where trust in governments can be low. (Though certain Global North governments increasingly suffer from this too).
And use of cryptocurrencies in the Global South is growing. In 2021, 15 of the top 21 economies leading in digital currency ownership were in the South. Some countries, such as the Central African Republic and El Salvador, have gone as far as to make cryptocurrency legal tender.
Cryptocurrency as ICT4D
Given these heady promises, it’s reasonable to consider cryptocurrency as a potential information and communication technology for development (ICT4D). ICT4D refers to entities that process or communicate digital data with the goal of alleviating poverty or inequality in a developing country.
But there is a difference between “ICT in developing countries” and “ICT for development”. Development projects tend to focus on the former. We see this when technologies from the Global North are simply provided in Global South contexts. Too often, the Global South is seen as a “laboratory” for new technologies created in the North. Developers launch the new tech with great promise but without a good idea of its impacts. But to drive social change, they must deliver some social benefit to the people who use them.
The question is: have cryptocurrencies delivered on the benefits promised to people in the Global South? Let’s turn to the evidence.
Delivering the development agenda, or the neoliberal agenda?
Bitcoin, billed as a revolution for the finance sector, was the first and largest player in the cryptocurrency space. Enthusiasts promoted its potential to improve financial inclusion by providing a path for those excluded from traditional banking systems, for example because they lack documentation or a credit history, to access financial services or lines of credit.
But is Bitcoin really a revolution for development? Cryptocurrency shares many characteristics of a classic capitalist, neoliberal system of finance. Despite the lack of central bank control, Bitcoin’s value is determined by demand (buyers) and supply (sellers) on the market. Just like a national currency.
Much of the talk about cryptocurrencies in the Global South focuses on these countries ‘catching up’ with the Global North. This language is reminiscent of Rostow’s stages of growth that see capitalist societies as the ideal end stage to which all nations should aspire. So it’s possible to see cryptocurrencies in their current form as another example of a neoliberal system being forced upon countries in the Global South.
And reducing inequality is not exactly a hallmark of neoliberal systems. We already know in a Global North context that gains from cryptocurrency accrue only to a select few. As Henshaw puts it: “the predominant success of early adopters means that the greatest known concentration of wealth is in the hands of individuals from the technology and finance sectors” (p. 10). These turn out to be mostly white and East Asian men.
The case of El Savador
Let’s look at what has happened in a country that has embraced Bitcoin, El Salvador. President Nayib Bukele made Bitcoin legal tender just over a year ago. He said that it would attract foreign investment and generate jobs. Since then, few citizens have adopted Bitcoin as their currency of choice. Equally few business owners said they were accepting Bitcoin as payment – and those that were tended to be large businesses.
At the same time, the Bukele government’s purchase of Bitcoins for ‘Bitcoin bonds’ has exposed the government to significant currency losses due to the Bitcoin’s volatility. This, in turn, has negatively affected the country’s credit rating, resulting in higher borrowing costs for local borrowers. Just recently (and possibly in response), UNCTAD released a series of policy briefs urging governments to introduce controls against cryptocurrency use in developing countries. This is because the increasing popularity of cryptocurrencies can enable tax evasion and limit the tax base. It also threatens macroeconomic stability in the case that, for example, Bitcoin loses significant value, forcing a bailout with public money.
So much for economic empowerment.
The future of cryptocurrencies for development
This is not to say that there are no use cases for cryptocurrencies, or that financial inclusion, trust and security are not important issues to address. There are several use cases for cryptocurrency in the humanitarian and development sectors.
For example, UNICEF has created its own crypto fund which aims to grow avenues for donor funding as well as improving transparency of its spending. In addition, African central banks are experimenting with Central Bank Digital Currencies (CBDC). CBDCs rely on blockchain technology for traceability and security, with less volatility because they are issued and regulated by central banks. CBDCs might offer a middle ground between classic cryptocurrencies and existing payment systems.
But despite some promising prospects, it’s important to challenge techno-evangelism with some practical considerations. (For example, the overwhelming environmental costs of Bitcoin mining – but that’s another story). Bitcoin has shown that the technology works. But whether it can live up to the promise of improving financial inclusion and addressing poverty is another question entirely.
This blog was written by Kristin. The featured image for this post was generated using DALL·E, an OpenAI platform that uses artificial intelligence (AI) to create original images.