When a country’s economy is in turmoil and their currency is absolutely worthless due to hyperinflation, what would you do? People in third world are turning to bitcoin, but why?

Beyond the speculative coverage on cryptocurrency, particularly on bitcoin, it’s now widely acknowledged and accepted as a valid form of payment, proving to have a very social and economic function. Many places in the third world are hit hard by a recessions from negligent banking systems or worthless currencies due to hyperinflations, turn to the virtual currency for an innovative solution.

Down in South America, Venezuela’s sunk by a weak economy that’s in constant crisis. Due to tight government-controlled exchanges that’s created a blackmarket for the American dollar, the country’s seen their currency free fall as far as $1 USD = 103,000 Venezuelan bolívars. Citizens are unable to afford anything with their valueless currency, and pushed them salvage what they have to buy bitcoin. It’s become an increasingly popular way to survive since 2014, from the early adopters in businessmen and engineers to the poor and elderly. The digital asset allows many people to buy food, services and health treatments — all locally or from neighbouring countries — otherwise inaccessible because of their native currency problems (and the restriction on other coins).

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In Africa suffering the same trouble is Zimbabwe. After decades of corruption, war and instability, it all brought endless problems to their economy. To try and solve the economic problems a decade ago, the central bank of Zimbabwe by printing money which gave predictable results. In 2007, the inflation rate in Zimbabwe was running at 24,411% per year. By 2008, the situation was so bad that the government stopped tracking inflation (experts state the annual inflation rate that year hit 231 million percent in July and later reaching 79.6 billion percent in November). The government finally admitted that its currency was worthless, then abandoned it and started to use the US dollar and South African rand instead. This didn’t solve any problems of their at all.

In many African countries, there are far more smartphones are in use than bank accounts. The ability to setup a digital wallet and purchase cryptocurrency can be simply done from a handset, then you’re good to go. This resonated with Zimbabweans who’ve embraced this new form of finance that’s becoming the preferred way for residents of failing economies to transfer money without dealing with banks, protecting their savings from political turmoil, and avoiding the local currency when its value declines due to inflation. Since Bitcoin is a decentralized asset — not particularly bonded with a government or banking system — it’s definitely an attractive one.

 

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There’s no data on how much digital money leaves industrialized nations for the developing world. Part of the allure of electronic cash is the ability to transfer it anonymously. But as events in Zimbabwe have confirmed, bitcoin, the world’s most popular cryptocurrency, is most attractive when confidence in institutions falls.

The bigger picture

One of the major impediments to Africa’s development is the high cost of developing business there for both local and international business owners. If Afro-entrepreneurs can secure funding from banks and investors, up to 150% of the borrowed amount will be asked in repayment.

Worse still, most budding entrepreneurs do not have access to banks or venture capital. They often lack access to financial markets and its instruments such as savings, credit and insurance which would enable them to engage in economic activity and help their countries achieve sustainable financial growth. According to the African Development Bank’s Financial Inclusion in Africa report, only about 23% of adults in Africa have an account at a formal financial institution.

Additionally, international banks tend to be reluctant to establish branches in Africa because the continent is essentially a blank slate meaning they would have to invest too much in infrastructure or to acquire regional banks before they could expect any major returns.

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This is where bitcoin comes in. It is already being used to overcome some of the mobile-banking deficiencies, with two notable examples being BitPesa in Kenya and Bitmari in Zimbabwe. In 2013, former employees of Google, Facebook, Apple, Credit Suisse, KPMG and JPMorgan, founded BitPesa in Nairobi, Kenya. BitPesa is a mobile-oriented bitcoin payment system that enables seamless, cross-border transactions and remittances. It not only helps East Africans living abroad to send money home cheaply, but also significantly reduces the cost of doing business for local and multinational companies.

Bitcoin and the cryptocurrency world still need big improvements before releasing the tech’s entire potential. But in unstable economical situations, we’re seeing digital currency’s versatile functionality to actually save lives.

Author: Francesco Segramora