Beyond Bitcoin: why developing nations should look to stablecoins
The United Nations is dedicated to achieving “sustained, inclusive and sustainable economic growth”, vowing that “no one will be left behind”, and working to “reach the furthest behind first”, as stated in its 2030 Sustainable Development Goals (SDGs).
Considering that cryptocurrencies have a positive impact on financial inclusion, it is odd then that the UN has expressed its reservations about them. The UN’s Conference on Trade and Development (UNCTAD) called for a halt to the growth of cryptocurrencies in developing countries in a recent report, saying that although private digital currencies have rewarded some individuals and institutions, they are an unstable financial asset which can bring social risks and costs.
During the Covid-19 pandemic, the use of cryptocurrencies increased at an unheard-of rate on a global scale, accelerating a trend that was already underway. There are currently about 19,000 cryptocurrencies.
15 of the top 20 economies in terms of the percentage of the population that owned cryptocurrencies in 2021 were developing nations, according to the UN.
Admittedly, these strong words from the international organisation would have surprised a lot of people. However, the UN makes a good argument. Cryptocurrencies should not be mistaken for a source of stability. Particularly in emerging economies, they have the potential to give consumers a false sense of security and catch people on the wrong side of cryptocurrency’s volatility.
Although many fiat currencies may still be preferable to cryptocurrencies, they shouldn’t always be viewed as a reliable source of stability either. For example, the US dollar is the world’s dominant reserve currency, however it is currently suffering due to inflation and the looming recession. Digital assets provide a way for countries to maintain sovereignty of their currency.
A risk-averse approach to sustainable development neglects to examine the potential long-term prospects such nations may leverage from the immensely diversified, nuanced digital asset market. However, the use of digital assets has the potential to build more inclusive and fairer monetary systems.
Therefore, while it can be said that Bitcoin does not provide the level of stability and security to the degree which a developing country requires, this perspective alone ignores significant nuances. By embracing digital assets like stablecoins, emerging economies may benefit from the use of digital assets while simultaneously assuring economic stability.
It is crucial to remember, however, that a stablecoin is only as stable as what it is pegged to. Therefore, for stablecoins to live up to the promise of ‘stability’, there must be a wider, more mainstream movement away from being backed by inflation-prone fiat currencies towards more reliable physical assets – notably a fully redeemable physical asset like gold.
This will let poor nations participate in an asset class that presents a fairer, more inclusive manner of storing and trading wealth and protect against currency inflation and volatility, unlike Bitcoin, other unpegged cryptocurrencies and fiat-backed stablecoins.
Zimbabwe is an example of a country prone to hyperinflation yet benefiting immensely from the adoption of gold-backed currency. In 2008, Zimbabwe had a year-on-year inflation rate of 89.7 sextillion percent, a record high. However, since adopting gold coins as legal tender, the yearly inflation rate has already decreased more than 100 percent since its formal introduction on 25 July 2022.
There is also a compelling use case for overcoming inequalities in financial independence and access in nations like Indonesia. With 87.7 percent of the Indonesian population being Muslims according to Statista, a large percentage of citizens find themselves excluded from traditional interest-bearing or debt-associated financial services due to their religious beliefs.
Further, across Indonesia, an estimated 70 percent of all citizens are unbanked or underbanked, posing serious challenges and questions around difficult to establish financial routes and access. This has led to citizens stranded outside of the financial system, unable to save their funds securely or spend their money easily. The Indonesian government has incorporated Sharia-compliant, gold-backed money at the national level, giving the vast majority of the underbanked and unbanked people in the nation access to physically backed digital gold through its POSPAY Gold app.
The UN report also highlights the reality that regulators all over the world still have a lot of work to do. Improved monitoring and transparency might start a positive stability spiral that would increase institutional support for cryptocurrencies and further stabilise the global market if implemented properly.
Looking towards alleviating developing countries and to “reach the furthest behind first”, international organisations should allow discourse to flourish around the positive attributes of the digital asset market for emerging economies.