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Most of us have heard the recent news that El Salvador would become the first country to use Bitcoin as legal tender. What will this mean for the rest of the world?
Honestly, I’m not surprised that the first country to do this is from Latin America. The countries of this region suffer from multiple crises and economic instability. People started to lose faith in government and central banks. In 2001, for example, Argentina froze all bank accounts and allowed only small withdrawals from peso-denominated accounts. This was not the first time the government took such action. Earlier, in 1982, Mexico banned US dollar accounts and automatically converted funds to pesos, resulting in an immediate 30% loss for foreign exchange account holders.
Unfortunately, the list of such events in Latin American history is endless. The lack of confidence in the public system has caused a rise in the cash economy. Financially excluded citizens do not want to become inclusive because they simply do not trust banks. When you know that at any moment a crisis strikes and the government can freeze all of your accounts, you feel more secure to keep all the money in the house “under your pillow.”
What exactly is money economy? It is a catch-all term to describe all transactions and activities, both legal and illegal, that use cash.remittances, loans, investments, savings and purchases of goods and services. People become part of the cash economy for a number of reasons. They may have good intentions while trying to protect their savings against inflation or sending money home. They may also have other intentions, such as avoiding taxes or even buying illegal goods and goods. Money economy is not the same as a black market it is a consequence of the inefficient financial system.
Back to Latin America. Unofficial and over-the-counter markets began to evolve as tax and inflation rates rose dramatically. Many people did not want to pay taxes anymore, as they trusted public services less and less.
Recently, in its attempts to combat the crisis by limiting the amounts of exchange to US dollars, Argentina set the bar at $ 200 per month with an applied tax of 30%. If the US dollar is the only way you can protect your family savings against skyrocketing inflation, what would you do? And here is the answercryptocurrency.
Monetary economics encompasses the use of cryptocurrencies in Latin America, as anyone without a bank account can now be included financially. Cryptocurrencies Allow People to Store Money Digitallyand thanks to the growing decentralized finance industry (DeFi) also earn an additional interest rate. It is easier for businesses to make cross-border payments regardless of country limitations and restrictions. Remittances are now more accessible than ever. You don’t need to queue at international cash transfer offices, paying a hefty commission to send money back to your family which is then converted into the local currency that swells.
El Salvador is the first but certainly not the last in this game. Bitcoin is the way to increase financial inclusion, especially when almost everyone has access to at least one phone, even if there is only one per household. Informa Telecoms & Media claimed earlier that mobile penetration in Latin America has reached 100%. This is enough to access the cryptocurrency market but not enough to open a bank account.
What about the rest of the world, you will ask? Over the past few years when I was doing data science at the United Nations, I had the chance to work with a lot of data from the Asian region, especially South East Asia. It was so shocking to find out that many people in Myanmar, for example, do not have national identity cards. Without this paper you have no rightsor bank account eligibility. For cryptocurrency, all people are equal whether or not you have this piece of paper. Statistics also showed that people have access to a mobile connection, and that it is more accessible than an ATM which can be miles away.
At the same time, I also had the opportunity to explore the changing Bangladesh peer-to-peer market. Micro credits, P2P loans and savingsall of these things from underserved markets. People are trying to make their life easier. Many unique cash-based financial products are emerging in the cash economy of developing countries. Nigeria’s ISUSU, a savings and loan program, is one example. This model is entirely based on trust but trust people rather than financial institutions. It is a means of collective savings and credit which has become a powerful tool not only for individuals but also for small businesses.
If we take a closer look, we will see so many similarities with these traditional fiat based products for underserved market products and DeFi. Everything is done by people for people and based on mutual trust.
Cryptocurrencies are also built on people’s trust and belief. This is why whenever there is a major crisis, we see people migrating to cryptocurrency. Venezuela is one example, where the government has had no choice but to be crypto-friendly, given extreme inflation. Dash cryptocurrency has built a very strong community there and got their cryptocurrency accepted in some malls and parking lots, and now they’re even testing a payroll system with Dash.
The recent Lebanese crisis resembles that of Venezuela. The difference between the official dollar rate and the black market rate has grown to 13 times. That’s a huge difference, and it pushes everyone into the money economy market, where everything is done in cash or cryptocurrency. The adoption of cryptocurrency has started to increase dramatically and will continue to do so.
El Salvador is a starting pointa case study for cryptocurrencies to overtake the cash economy and enter the public economy. If this proves successful, then we will see massive adoption then, especially in countries where Bitcoin is already the main supply within the cash economy. Personally, it is very exciting to experience such changes to come in the global economy where everyone can be financially inclusive, regardless of their income, race, age, gender and any other preferences.
Elena Obukhova is the founder and CEO of Fintech Advisory Services. With strong expertise in business strategy and financial modeling, Elena applies this knowledge to help SMEs take advantage of emerging technologies, assist startups in their business creation and facilitate their fundraising journey.
Disclaimer: Opinions expressed on The Daily Hodl do not constitute investment advice. Investors should do their due diligence before making high risk investments in Bitcoin, cryptocurrency, or digital assets. Please note that your transfers and transactions are at your own risk and that any loss you may suffer is your responsibility. The Daily Hodl does not recommend buying or selling cryptocurrencies or digital assets, nor is The Daily Hodl an investment advisor. Please note that The Daily Hodl participates in Affiliate Marketing.
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