Written by Gabrielle Inzirillo, Ventures Associate at Plug and Play Fintech.
45% of the world’s population is under 30 and living in an emerging market. It’s a startling fact, and with the population on track to reach 11 billion by 2100, that number is only going to grow.
Though the term emerging markets is a catch-all masking enormous variations in economic development there is no doubt that large numbers of young adults are going to face increasingly uncertain times of political and economic unrest.
In the Dollar we trust
In the past 25 years over 21 countries have suffered incidents of severe inflation. In these cases, as the national currency became increasingly devalued, either due to government over-printing or large injections of counterfeit bills, citizens have privileged foreign currency in order to maintain the import of goods.
The U.S dollar, as the world’s leading reserve currency has been that money of choice. Approximately 65% of all U.S. dollars are currently being used outside the United States, 80% of trade finance was conducted in dollars and close to 85% of forex trade volume involved the dollar.
But dollars are hard to come by in legal ways. Aggravated by limited foreign reserves and fixed exchange rates pegging the national currency at artificially high rates to other currencies, black market currency trading has flourished. Since the beginning of 2016, Egypt’s central bank has closed 48 out of 115 licensed exchange bureaus for trading at black market rates.
In November 2016, security forces in Ethiopia reportedly went house to house it the country’s capital of Addis Ababa seeking illegal exchange operations. Finally, in Nigeria, dealers trading at an exchange rate weaker than the government sanctioned rate risk running afoul of Nigerian intelligence services.
Not all are suffering from the discordance between the official versus black-market rates. In fact, up till 2015 some benefitted greatly from the spread. ‘El raspao’, the scrape is the Venezuelan term for leaving the country, retrieving US dollars at the official government-imposed forex rate through a credit card cash advance and then returning to Venezuela to exchange the cash back into bolivars at the far higher black market rates.
A highly lucrative arbitrage play that was reserved for the wealthiest, as only 56% of the Venezuelan population holds a bank account and even fewer have access to a credit card. Over 90% of the population does however own a smartphone.
But in Bitcoin we hope
Bypassing government control and regulation, accessible via a smartphone and not dependent on a bank account, bitcoin offers one the most viable alternatives to the prized US dollar in countries suffering from inflationary monetary policy.
Though the government is capable of limiting the supply of foreign currency through its own channels, the only way it could restrict access to bitcoin would be via nationwide internet censorship. Early this year, four Venezuelans were placed in custody for running a bitcoin mining operation involving over 300 machines.
Interestingly, mining bitcoins wasn’t cited as the reason for the arrests, instead authorities claimed the energy-intensive operation was hijacking national resources. The Latin-American nation is rocked by frequent and often severe blackouts and as electricity is heavily subsidized by the state and provided virtually free to residents, the charges of electricity theft are not entirely without merit.
Other bitcoin miner arrests in Europe and the US have been far more black-and-white, such as the Fed employee that installed bitcoin mining software on Fed servers, or the money-laundering bitcoin operation in Spain. Some nations have felt the currency itself directly undermines their own economic policy, and have taken steps to outright ban it. In Bangladesh trading in bitcoin can lead to 12 years imprisonment. Ecuadorean officials fear that bitcoin will kill the country’s fledgling electronic cash system before it ever sees the light of day. Iceland hasn’t banned bitcoin as of yet, but converting the krona to BTC would run afoul of the nation’s ongoing capital flight prevention policies.
But bitcoin’s one enduring trait, the one that has allowed it to stand the test of these past 8 years is quite simply that it is without equivalent at bypassing government control. With anonymous transactions publicly controlled and validated, it has gained a reputation for being the de facto currency for extralegal, if not illegal activities. It can be argued that these nefarious beginnings are what allowed it to gain traction in its earliest days, however the reality is that today, Bitcoin existing independently of a regulating body is what makes it so attractive as an alternative currency.
Regulating bodies are known to make mistakes and populations suffering from those mistakes must seek alternative monies regulated by alternative bodies. Why not, therefore, a currency regulated by the people? And if that same currency has gained a staggering 400% in the past 18 months and increased its market capitalization by over 30 billion USD, all the better.
Not now for all, but some people need it now.
With a current trading price of 1BTC hovering around 2000 USD, the cryptocurrency may still be considered the tech guru’s alternative to the gold rush, but it is of far more value to those 570 million people seeing their savings chip away day by day.
The debate on whether bitcoin is or isn’t legal tender is of little value to the developing world’s digital natives if it holds up better than the crimpled bits of government-backed paper found in their pockets.
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