Emerging markets are fostering adoption of crypto, propelled by a combination of factors including lack of confidence in local monetary policy, the unbanked masses experiencing their initial joys of modern finance and the rise of mobile banking. . As such, the transition to a digital currency is not only easier but often more reliable than relying on a traditional fiat currency. In many cases, this is why developing countries are adopting cryptocurrencies at a much faster rate than more developed countries.
The increase in the use of digital currencies by developing countries is being countered by a growing interest by governments – both in emerging markets and in developed countries – to establish a central bank digital currency. This growing global trend in crypto adoption is gathering momentum with the rise of this asset class, driven by a combination of factors: currency controls, communications, media censorship and blatant financial repression. Very few citizens trust their national financial system. Citizens around the world are starting to look for ways to bypass these systems.
Governments naturally try to cope with this decentralized and borderless option by implementing their own digital options, called central bank digital currencies (CBDCs). In many cases, this calculated response to citizen preferences results in competing cryptocurrencies. These dual systems, legitimate and illegitimate, will continue to foster the ongoing skirmishes at the entry points of this new international financial system.
Take Ethiopia, for example. Ravaged by civil war and internal strife between rival tribes and ethnic groups, the current government, led by controversial Prime Minister Abiy Ahmed, dreams of a “greater Ethiopia” – transforming this melodious country into a more unified and modern nation . We often think of blockchain / crypto as an inherently decentralizing force. The Ethiopian government is using its relationship with the Cardano blockchain platform to do the exact opposite: centralize government control over the country. Granted, Ethiopia has not (yet) adopted a cryptocurrency itself – but it has partnered with IOHK, the company behind Cardano and the ADA cryptocurrency, to create a pilot program that would register and track. the performance of Ethiopian students across the country. . The Ethiopian government is betting that integrating everyone on the same network is the first step towards building a more cohesive national identity. Given that Ethiopia is currently around 75% unbanked, one can imagine a government-backed digital currency, or perhaps even Cardano’s currency, the ADA, eventually putting together a more cohesive monetary and fiscal framework. and unique and cohesive for the country as well.
Crypto and blockchain can be truly disruptive and revolutionary in emerging countries such as Ethiopia – where geography, history, power, and conflict all hold the potential of over 100 million people.
Turkey provides another example of the struggle between dual systems. Crypto experienced a trade boom in Turkey recently – that is, until the Turkish government announced a ban on Bitcoin and other ledge-based cryptocurrencies to purchase goods and services. Turks embracing cryptocurrency says a lot about how cryptocurrency is most attractive in emerging markets – and how weak the Turkish government is.
For years, under the mercurial leadership of President Recep Tayyip ErdoÄan, Turkey degraded its currency, triggering an emerging market currency crisis in 2018. There is one method to ErdoÄan’s madness: he shapes Turkey according to his dream for the country. To do this, he needs economic growth and has continually robbed Peter to pay Paul – all in US-denominated debt. No wonder Turkish citizens want their money taken out of the lira – and therefore from the clutches of the Turkish government. Here is a government that mismanages a currency for explicitly geopolitical ends, at the expense of the individual. Turkey’s geopolitics have placed it on a collision course with cryptocurrency trading. If history is any indication, this is a fight the Turkish government cannot win.
And then there is China. China’s plans to accelerate the “dual circulation” strategy – national growth and international influence – building on the success of digital yuan experiments. China’s history of tight capital controls and state-run capitalism makes cryptocurrency an alluring store of value for China’s burgeoning middle class. The Chinese digital RMB is how the Chinese Communist Party hopes to fight the lure of alternative and unregulated cryptocurrencies, while simultaneously strengthening China’s international financial influence.
To this end, the People’s Bank of China (PBC) is leading the way in the design of productive public-private partnerships between commercial banks and technology companies, effectively arming competing cryptocurrencies in these lucrative markets. Chinese have adopted controversial cryptocurrencies like Tether and contributed to the growth of market capitalizations. Recently, China reaffirmed its position on non-state-funded cryptos by explaining prohibition financial institutions and payment companies to provide services related to cryptography. The aim is for the government-led increase in the yuan’s speed at the national level to send positive signals abroad and attract the attention of investors looking for promising growth prospects. In addition, fintech patents filed by the Chinese indirectly guide visions for the global digitization of fiat currencies, such as the US dollar.
With the United States lagging behind the central bank’s leadership in digital currency, governments around the world could emulate Chinese state-backed surveillance capitalism. Central banks are forging new relationships with key private sector players and their citizens. The PBC has always been admired for its limited exposure global financial shocks, which will likely make it easier to support its brand of national economic management. In a post-COVID-19 world, citizens and politicians are seeking competent economic leadership. China can implicitly guide the economic policies of other countries if its efforts to regulate and dominate the cryptocurrency market are successful.
As cryptocurrencies continue to gain popularity, especially in emerging markets, the rise of a dual system needs to be on every investor’s radar. Investors should monitor the legitimate adoption of certain cryptocurrencies by governments and the outright ban on crypto in order to protect their current assets or switch to the cryptocurrencies most likely to prevail in the developing skirmish. .
Nikolas Joyce is CIO of Strategic funds.