Developing nations are emulating El Salvador’s Bitcoin experiment

The case for seeking alternative monetary solutions for developing countries is a compelling one, but experts question if Bitcoin is the answer?
13 September 2021

More developing nations are following El Salvador’s move to Bitcoin. (Photo by MARVIN RECINOS / AFP)

  • Emerging markets are fertile ground for cryptocurrencies and the latest to jump on the bandwagon are Cuba, Panama, and Ukraine
  • Remittance is one reason why the country is turning to bitcoin, as it provides an open monetary network in which anyone can participate without needing permission from a central authority
  • While crypto acolytes are excited about El Salvador’s bitcoin currency experiment, regulators have greeted it more frostily

In advanced economies, cryptocurrencies are viewed by many with suspicion —  at worst, a speculative and highly volatile fad that can only end badly. Regulators in Europe and the US have issued stark warnings about the dangers of trading crypto. In contrast, amongst developing nations, there are signs that the crypto ecosystem is quietly digging deeper roots. 

This is especially noticeable in countries that have a history of financial instability, or where the barriers to accessing traditional financial products such as bank accounts are high. In those nations, cryptocurrency use is fast becoming a preferred alternative. Following El Salvador’s recent footsteps of legislating Bitcoin, along with other cryptocurrencies. Panama and Ukraine recently revealed their ambitions but are headed in diverging directions compared to El Salvador.

For developing nations, crypto an alternative to weak currency

Although crypto acolytes are excited about El Salvador’s ‘bitcoin as legal currency’ experiment, the world’s first, regulators have greeted it frostily for the most part. But for developing nations, their perspectives can be very different. As a store of value, as a means of exchange, and as a unit of account, national currencies in some developing countries too often fall short. 

That said, emerging markets are indeed a fertile ground for cryptocurrencies. Experts suggest unpredictable inflation and fast-moving exchange rates, clunky and expensive banking systems, financial restrictions, and regulatory uncertainty all work to undermine the appeal of the classic financial system in many of these countries. Crypto also offers an alternative to traditional remittances — a crucial lifeline for many developing economies. Transferring money back and forth across borders through traditional channels such as Western Union can be prohibitively expensive. 

Cuba’s and Panama’s pathway

Latin American countries have increasingly eyed cryptocurrencies to evade remittance costs and cross-border restrictions. After El Salvador’s announcement, Cuba said it will recognize – and regulate – cryptocurrencies for payments on the island, in a move that could help to circumvent American sanctions. 

More developing nations are following El Salvador’s move to Bitcoin

A person shows a screen while using the Salvadoran government’s electronic wallet Chivo, after Bitcoins were put into circulation throughout the country as legal currency. (Photo by Stanley Estrada / AFP)

Resolution 215, which was published in the state-run Official Gazette, says the central bank will set new rules for how to deal with digital currencies. Commercial providers of related services will now need a license from the central bank to continue operations.

As for the Republic of Panama, the latest Central American country intends to legalize digital currencies and recognize them as legal tender. A Panamanian lawmaker has introduced a bill that seeks to make digital currencies an alternative payment method at a time when the controversial Bitcoin Law takes effect in El Salvador.

Panamanian Congressman Gabriel Silva unveiled the latest bill on Twitter, stating that it seeks “to make Panama a country compatible with the blockchain, crypto assets, and the internet.” Silva believes that the bill, known as the Crypto Law, will create thousands of jobs, make the government transparent and attract investment.

The bill recognizes the rapid upswing of internet penetration in Panama in recent years and how this has played a big role in the growth of the country’s economy. Blockchain technology and digital currencies are the next phases in this growth and Panama can’t risk falling behind, according to the proposed bill.

The Crypto Law also debunked the myth that digital currencies are a criminal haven. “[…]in practice, their [crypto] use for illicit activities is quite low. In 2019, criminal activity using cryptocurrencies only accounted for 2.1% of all cryptocurrency transactional volume, and in 2020 illicit activity using cryptocurrencies dropped to 0.34%, according to statistics from Chain analysis,” the bill stated. In addition, the blockchain allows authorities to easily track any illicit activity since transactions are transparent and immutable.

Ukraine to make Bitcoin legal, but not a legal tender

Ukraine has become the latest country to officially regulate cryptocurrencies and recognize Bitcoin as a legal financial asset. This means the country’s new law doesn’t quite put Bitcoin, or any other cryptocurrency, on the same footing as the country’s national currency, the hryvnia. 

More importantly, the law holds the potential to facilitate the workings of crypto exchanges and lay down protections for those who own crypto and might be susceptible to fraud. Overall, Ukraine plans to open the cryptocurrency market to businesses and investors by 2022, with some experts predicting that it might open up the possibility of adopting Bitcoin as a form of payment in the future.