Numerous surveys and studies in recent years show that residents of developing countries are the most active in adopting and using cryptocurrencies, leading the world. Trust in digital assets is significantly higher in developing countries than in developed countries.
According to financiers, this trend can have a positive impact on the economies of developing countries as a tool for creating new jobs, fighting inflation, corruption and poverty.
We decided to understand how cryptocurrencies affect economic processes in developing countries and how financial inclusion indicators can change with the help of cryptocurrencies.
The Financial Inclusion Problem
According to various estimates, up to 25% of the world’s population lives without access to the banking systеm. Most of these people live in emerging markets, and the number is growing. The main reasons why a person does not have access to the banking systеm are
- Lack of necessary documents to interact with the bank;
- Lack of developed banking infrastructure. In Kenya, for example, there are fewer than 5 bank branches per 100,000 people.
If people do not have access to financial services, they cannot obtain loans, buy property with mortgages, insure their lives or property, start and run businesses, and receive benefits from the government. People have no access to money — poverty and crime increase, businesses cannot open an account — illicit financial flows increase and corruption flourishes.
A country is usually considered a developing country if it does not meet certain socio-economic criteria (which can be interpreted in different ways) compared to developed countries. Simply put, these are countries with lower incomes and living standards, an underdeveloped industrial base, and lack of access to modern technology. They typically have high levels of poverty, lack of jobs, food, clean drinking water, access to education, health care and housing. In developing countries, traditional financial systems are often inadequate or unstable: inflation and currency crises are common problems. And financial inclusion is a powerful incentive to improve performance in all of these areas.
According to the UN, by 2024, 125 countries (out of a total of 256, or almost half) will be classified as developing. The majority will be in Africa, Asia and Latin America.
According to the World Bank’s World Economic Outlook report, the world economy is expected to grow by 2.4% in 2024 and by 2.7% in 2025. This level of growth is the worst to start the decade in 30 years. The report says that on this trend, by the end of this year, the population of about one in four developing countries will still be poorer than before the COVID-19 pandemic. Lack of access to financial services limits opportunities for people and businesses, which hinders economic growth and development. Developed countries generate about 75% of global GDP, while developing countries lag far behind. And the world is searching for a balance.
Financial inclusion is one of the key factors in driving, balancing and facilitating economic development. Today, inclusiveness is a long-term trend among national governments and key international organizations.
The higher the level of financial inclusion, the higher the level of economic development of a country and the well-being of its citizens. In countries such as the United Kingdom, Austria and the Scandinavian countries, 98-100% of citizens have access to banking services.
Researchers at Lund University (Sweden) found an interesting correlation in their study: a 10% increase in financial inclusion in a country contributes to its GDP growth by an average of 0.3%.
Financial inclusion is a multidimensional concept that refers to a set of measures aimed at ensuring equal opportunities for people to participate in the financial systеm, regardless of their location or socioeconomic status. One of the most important tools for increasing financial inclusion is digitalization. Internet, mobile, fintech and blockchain operators have ample opportunities for development by entering new markets.
Cryptocurrencies in addressing financial inclusion challenges
Cryptocurrencies are one of the keys to solving people’s access to financial services. They allow people to send international remittances, receive loans and passive income on their savings without having to visit bank branches in another city on weekdays and during working hours to collect a package of documents confirming their eligibility for the service. A person only needs a smartphone with Internet access and a cryptocurrency wallet to receive services from anywhere in the world at any time.
A striking example of the use of cryptocurrency in the economy of a developing country was the adoption of bitcoin in El Salvador as an official currency, equal to the U.S. dollar, in 2021. The new law stated that the innovation was primarily due to bitcoin’s important role in financial inclusion — at the time, approximately 70% of El Salvador’s citizens did not have access to traditional banking services.
According to Crypto.com, the number of digital asset owners is expected to grow by more than 25% by 2023 alone, growing faster in developing countries than in developed ones. While developed countries are busy implementing regulations for the industry, developing countries are mostly accepting and supporting the growth of the crypto industry.
Benefits of Cryptocurrencies for Developing Countries
Cryptocurrencies and international remittances
Global migration processes have a significant impact on the world economy, increasing cross-border remittances by about 10% every year. Initially, most remittances (transfers from migrants to their relatives and friends back home) were made using electronic payment services (such as PayPal, Revolut, Perfect Money) or international money transfer systems (such as Western uniоn and MoneyGram). Fees for these types of transactions range from 1-7% depending on the geography and method of transfer. In Africa, fees can sometimes exceed 9%, which may seem like an unreasonable cost to people from developing countries.
Mobile crypto payments in Africa and other countries significantly reduce costs and simplify international payments. The use of cryptocurrencies in rural areas or other locations without quick access to banks allows for instant transfers anywhere in the world in case of emergency.
- Transaction fees are minimal. The reduction of banking costs with cryptocurrencies is achieved due to the fact that the principle of operation of decentralized financial systems does not require the presence of intermediaries and the cost of their maintenance.
- There are no limits to the amount of cross-border transfers. For example, in Nigeria there is a bank limit for international transfers: no more than $500 per transaction. Or in Ukraine, during martial law related to rf aggression, there are regular limits on transfers abroad.
Cryptocurrencies and business development
In developing countries, access to SME credit through banks is difficult. Local banks tend to lend to large corporations without risking the funds. In addition, local businesses have difficulty accessing international markets due to the lack of facilities for quick and favorable conversion into international currencies such as the US dollar and the euro. As a result, entrepreneurs face certain difficulties in buying and selling their goods or services abroad.
Today, businesses in developing regions are actively using cryptocurrencies to raise and convert capital: cryptocurrency microfinance allows them to raise funds, and the availability of cryptocurrency exchanges allows them to convert them into fiat.
In this way, the positive impact of cryptocurrency on socio-economic growth is manifested — jobs are created, poverty rates are reduced, taxes are paid, which ultimately stimulates further development of the country.
Cryptocurrencies in the fight against inflation
For both governments and citizens of developing countries, cryptocurrencies are a safe haven against inflation. Countries such as Venezuela, Argentina and Turkey, for example, are experiencing inflation rates of tens or hundreds of percent per year, and in a situation where local currencies are depreciating, the use of digital assets (primarily bitcoin and stablecoins) can hedge the associated risks.
Digital assets in the fight against corruption
Corruption is one of the most pressing issues in emerging markets. According to various estimates, the amount of bribes paid to corrupt individuals around the world can reach up to 2% of global GDP. This drains billions of dollars from the economies of nations, which can’t help but affect the economies of developing countries.
Blockchain technology makes it possible to build transparent financial systems because information about transactions remains unchanged and cannot be deleted or altered. Thus, the chain of funds flowing in and out of the financial systеm becomes fully controllable.
Cryptocurrencies and poverty alleviation
In addition to being a way for the unbanked to save and grow money, cryptocurrencies are an effective tool for humanitarian aid and charity. Nonprofit organizations support various social programs in the areas of health, education, and assistance to the poor or disabled. Donations in cryptocurrencies allow to ensure high mobility of aid, as well as to monitor the targeted use of funds by fund administrators. Also, thanks to humanitarian and charitable foundations, the positive impact of cryptocurrencies on the growth of financial literacy of the population is realized: often the aid comes directly to the personal wallet of the person in need, which requires training in cryptocurrencies in poor regions.
Challenges of Cryptocurrency Adoption in Developing Countries
Despite the fact that developing countries lead the world in cryptocurrency adoption, more mass adoption is hindered by factors such as
- Limited internet access. In many developing countries, especially on the African continent, there are large areas that are not covered by the internet.
- Lack of financial literacy among the population. Low levels of general education lead to low levels of financial literacy.
- Lack of user protection. Regulation of cryptocurrencies in developing countries is still in its infancy.
Conclusion
In recent years, blockchain technology has played an increasing role in achieving financial inclusion in developing economies. As a tool for economic growth, cryptocurrencies offer millions of people around the world new ways to make payments, increase wealth, and improve their standard of living.
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