Crypto isn’t perfect- but for some, it's the best they have

Over the past few years, cryptocurrencies, especially stablecoins, have enjoyed a surge in popularity as many tout them as not only safe investments, but also a viable alternative to hedge against inflation or evade unjust capital controls.

Last year, Chainalysis reported that crypto was being heavily used in Sub-Saharan Africa, a region with fractured payments systems and capital controls. Crypto is being used for retail payments, peer-to-peer transactions, remittances, and much more. These use cases have been hailed as examples of how crypto can solve real world problems for people, and Africa has been held up as a key area where this is taking shape.

Yet, the Bank for International Settlements has just released a report that criticised cryptocurrencies for amplifying rather than reducing the financial risks in less-developed countries.

These two conclusions are clearly contradictory. So what is going on?

Understanding the BIS point of view

First of all, we should break down the BIS’ reasons for its conclusion.

The report argues that in emerging market economies, the rule of law is less established, and this might potentially mean that contracts are harder to enforce, and that “inconsistent enforcement can create confusion and raise market risk”.

The committee also cited the “combination of the lack of financial literacy and technological knowledge” in these emerging markets as creating a “potent catalyst for risks to financial stability, especially concerning crypto assets”.

On some level, what the BIS is saying about emerging markets is generally true. Many emerging economies do face issues of weak or inconsistent law enforcement. Victims of crypto crime here may not have many options or ways to recover their money, since they cannot turn to the police.

However, what we cannot ignore is that much of this uptake has been organic- people who use cryptocurrencies make a conscious choice to do so, and have doubtless weighed the costs against the benefits before making that choice.

These choices may not be made with perfect information- but they do reflect that cryptocurrencies at least fulfil some needs of daily life in these regions.

As I have previously argued when discussing the process of dollarisation, rapid inflation can and does result in citizens abandoning their own local currency because even basic economic transactions cannot be carried out with it.

Towards a better financial future

Given that people are adopting crypto of their own free will, we should also consider what blockchain and crypto have to offer for them that makes it so attractive to them.

First of all, in a high inflation environment, fiat currency fails at one of its most basic functions as money- to act as a store of value. While crypto may not necessarily always function as the best store of value, it is important to consider what crypto usage allows people access to- stablecoins.

Coins like USDT and USDC form a good alternative to the US Dollar, which can be a valuable alternative to holding actual US Dollars in a place where said US Dollars are scarce.

This doesn’t just mean that people can be sure of their money’s value even without a local fiat currency to rely on, but also that they are not necessarily subject to shocks that affect the local currency.

Of course, this risk is not completely eradicated- it is merely transferred to risks that the external stablecoin issuer is exposed to, such as the Terra-Luna crash or the Silicon Valley Bank bankruptcy that caused USDC to depeg.

But if such crises are rarer or less severe, then the risk is actually reduced.

Crypto isn’t perfect- but for some, it's the best they have

Evidently, crypto has its problems- but these should not invalidate the technology entirely.

Instead, central banks should closely examine cryptocurrencies- and the reasons why these cryptocurrencies are so readily being adopted. These reasons will very often point to pain points that citizens face, which have not been addressed or are not adequately addressed by the central banks and larger financial system which claims to serve these people.

Speculative investment may also exist, but when cryptocurrencies are seen not merely as vehicles for such investment but instead as a better form of money to the local fiat currency, something has gone very, very wrong in monetary or economic policy.

Because crypto may not be perfect- but for some, it really is the best choice they have.