The role of cryptocurrencies in developing economies: Opportunities and challenges

The economic situation of developing economies is often complex and challenging, as they may struggle amid high inflation, unstable economic systems and political uncertainties. In many countries, traditional financial systems do not reach a large part of the population, which limits financial participation and increases poverty. This article examines the role of cryptocurrencies in developing economies, focusing on the opportunities and challenges they present.

              
Current situation of developing economies
Today, the situation in many developing economies is challenging and complex, as these countries often struggle with unstable economic systems, high inflation and political uncertainties. In many places, traditional financial systems are incomplete or even inaccessible to a large part of the population, which limits citizens' opportunities to participate in economic activities and improve their own living conditions. This structural inequality increases poverty and prevents sustainable economic development. The significant role of foreign investments and loans often makes these economies highly dependent on global economic development, which exposes them especially to external economic shocks and worsens their financial vulnerability.
In developing economies, traditional financial systems are often inadequate or unstable. Inflation, unstable political situation and currency crises are common problems. In addition, a large part of the population may be without access to traditional banking services, which limits opportunities for things like savings, loans or financial participation.
The financial situation of developing economies is often complex and prone to external disturbances. In many countries, the economy suffers from structural problems, such as low economic growth, corruption and limited access to capital. This makes it difficult to achieve sustainable economic development and weakens international competitiveness. In addition, inflation, currency fluctuations and political instability can eat away at citizens' wealth, which in turn affects their ability to save, invest and create personal financial security.
In many areas of developing economies, a large proportion of the population lives in the informal economy, which means that their activities fall outside traditional banking systems and controls. The lack of banking services also limits the opportunities for micro and SME companies to get financing for growth and development, which leads to the fact that these companies often remain small or operate in a gray area without official status. Financial exclusion is a particularly big problem in rural areas and low-income households, where access to traditional financial services is almost impossible.
In addition, the dependence of many developing economies on foreign investments and loans makes their economies exceptionally vulnerable to changes in global economic cycles. Global economic shocks, such as financial crises or a drop in the prices of raw materials, can affect the economy of developing countries significantly more than average, which may lead to a currency crisis and deeper financial problems. Under these conditions, many countries have begun to explore alternative financial systems, such as cryptocurrencies, which allow them to reduce their dependence on traditional financial institutions and foreign currencies.
Amidst all this, cryptocurrencies and blockchain technology are seen as potential tools that can help developing economies address these challenges. They can provide an alternative avenue for money transfers, investment and financial inclusion without the constraints of traditional financial institutions.
Possibilities of cryptocurrencies in developing economies
Economic inclusion
One of the biggest promises of cryptocurrencies in developing economies is their ability to promote financial inclusion. Many people in developing countries live without a bank account or access to traditional financial services, but they may have access to smartphones and the internet. Cryptocurrencies allow people outside of banking services to participate in the digital economy.
For example, micropayments and money transfers can become much easier with the help of cryptocurrencies. The costs and bureaucracy of traditional banks and money transfer services can be a barrier for low-income people, but cryptocurrencies can offer them a quick and cost-effective alternative.
Getting around inflation and currency crises
In developing economies, inflation is often a significant problem, as the value of currencies can quickly depreciate due to economic and political uncertainties. High inflation weakens citizens' purchasing power, raises the cost of living and makes saving difficult. In many cases, this can lead to economic instability and deepen poverty, making inflation control a critical challenge in economic policy in developing countries. Cryptocurrencies such as Bitcoin offer people an excellent way to protect their wealth from inflation.
Enabling trade and investment
Cryptocurrencies can promote international trade by providing a global, decentralized and transparent payment system. This can attract foreign investors and make it easier to do business in developing countries, where traditional foreign exchange trading may be difficult and expensive. In addition, blockchain technology can be used to create new business models through smart contracts and digital asset management.
Challenges of cryptocurrencies in developing economies
Regulation and legislation
Many developing economies have yet to develop clear rules for cryptocurrencies. This regulatory vacuum can create uncertainty and slow the adoption of cryptocurrencies. On the other hand, too strict regulations can stifle innovation and prevent the benefits brought by cryptocurrencies.
Lack of regulation can also open the door to abuses such as money laundering and tax evasion. Without clear legislation, cryptocurrencies can be used for criminal purposes, which in turn undermines their reputation and reduces trust.
Volatility
The value of cryptocurrencies can fluctuate greatly in a short period of time, making their use challenging in everyday life. In developing economies, where financial stability is already on a fragile foundation, strong exchange rate changes in cryptocurrencies can naturally be a risk. For example, the value of Bitcoin can fluctuate significantly over days or even hours, which poses its own challenges for financial planning and trading.
Technological infrastructure
The use of cryptocurrencies requires a stable internet connection and digital infrastructure. In many developing countries, internet connections can be unreliable or incomplete, which poses obstacles to the large-scale adoption of cryptocurrencies. In addition, lack of education and illiteracy can limit the possibilities of using cryptocurrencies.
Information security and fraud
Data security is also one of the most significant concerns. Hacking and scams related to cryptocurrencies can be particularly harmful in developing economies where financial stability is fragile. Cryptocurrency users are responsible for securing their own funds, and if the private key is lost or stolen, the lost funds are permanently lost. This makes cryptocurrencies a risky option for many.
Future prospects of cryptocurrencies in developing economies
The role of cryptocurrencies in the global economy is constantly growing, but their future importance is particularly emphasized in developing economies. In these countries, cryptocurrencies and blockchain technology offer an opportunity to circumvent the limitations of traditional financial systems and respond to many economic challenges, such as financial exclusion and inflation. However, realizing this potential requires solving certain key challenges. The development of technological infrastructure, the creation of a regulatory system, and financial education are all factors that influence how cryptocurrencies can successfully integrate into the economy of developing countries.
Technological infrastructure plays a key role in the expansion of cryptocurrencies and use in developing economies. In many of these countries, access to the internet and mobile technology is still limited. That's why investments in digital infrastructure are extremely important. Developing economies need better and cheaper internet connections, a wider mobile network and digital platforms that enable the safe and efficient use of cryptocurrencies. Without these investments, cryptocurrencies will easily remain just a marginal phenomenon. Instead of serving a wider population, their use may be limited to those who already have access to digital services.
The successful adoption of cryptocurrencies and blockchain technology in developing economies also depends on the development of legislation and regulation. One of the biggest challenges is the ability of states to find a balance between supporting innovation and protecting consumers. When the regulatory framework is clear and predictable, it increases the confidence of companies and investors to participate in the crypto market. This could especially encourage small businesses operating in developing economies, which could benefit from opportunities brought by cryptocurrencies, such as low-cost international payments and quick access to financial services.
One of the biggest opportunities for cryptocurrencies in developing economies is their potential to increase financial inclusion. Much of the world's "unbanked" population—people without access to traditional banking services—live in developing countries. Cryptocurrencies can offer an alternative way to participate in the digital economy, especially since you don't need a bank account to use them, just access to the internet and a smartphone is enough.
Cryptocurrencies and blockchain technology have a huge potential to support the economic development of developing economies. They can help create more open and efficient financial systems, increase financial inclusion and provide alternatives to regions suffering from currency crises. For example, in Venezuela and Zimbabwe, cryptocurrencies have already provided a safe haven when the value of the local currency collapses.
In the future, the role of cryptocurrencies in developing economies may become more and more significant. In addition, smart contracts enabled by blockchain technology can change the way business is conducted and bring efficiency to, for example, supply chains and contract processes.
Summary
Cryptocurrencies have significant potential in developing economies, especially in increasing financial inclusion, protecting against inflation and enabling international trade. They can provide alternatives to those without access to traditional financial services and help protect against fluctuations in local currency values. However, obstacles to the large-scale adoption of cryptocurrencies include, for example, lack of regulation, the weakness of the technological infrastructure and their high volatility.
In the future, the role of cryptocurrencies may increase if developing economies are able to create a clear regulatory framework, invest in digital infrastructure and provide citizens with sufficient education on the safe use of cryptocurrencies. Although the growth of the adaptation of cryptocurrencies in developing economies requires strategic investments, their potential in promoting the financial inclusion of developing countries and the financial opportunities of citizens is massive.

Mikko Soon
Head of Northcrypto Private