As the devastating situation in Ukraine continues to unfold, cryptocurrencies have emerged as a more significant theme than expected in the conflict as crypto donations pour in to support the Ukrainian people. According to CNBC, the crypto donations that have come in the past week are valued at $54 million.
It is no exaggeration to say that cryptocurrencies have been the easiest and perhaps only alternative means for donations to reach Ukraine. Shortly after Russia’s invasion began last month, Ukraine’s President Zelensky instituted martial law – suspending civil law and extending military rule to civilians – thereby making it almost impossible to send and receive fiat currencies.
It is symbolic of the broader potential of cryptocurrencies to help the financially disenfranchised. As developing countries struggle to deal with the economic impact of Covid, cryptocurrencies are playing an increasingly important role in easing financial burdens by helping those in rich nations wanting to make regular transfers of money, known as remittances, to relatives in low-income countries. Globally, annual remittance funds amount to hundreds of billions of dollars and provide a lifeline for millions of people.
With growing efforts around the world to regulate cryptocurrencies amid concerns over price volatility, financial crime and the possible threat to monetary policy, their adoption as a remittance vehicle highlights their economic utility and potential as a decentralised, borderless currency, especially for people with no bank accounts in regions like Africa, Asia and Latin America. As of 2017, there were 1.7 billion unbanked adults globally, nearly half of them living in developing world economies.
Recent survey research in the US by the online news service PYMNTS.com reveals that 60 per cent of those in America who make payments online to family and friends abroad increased their frequency during the pandemic, 23 per cent of them – some 8 million adults – using at least one kind of cryptocurrency. The research also found that just over a tenth of respondents said cryptocurrencies were their most used payment method for such cross-border transactions.
Indeed, Latin America has reportedly seen four-fold increases in the value of monthly crypto-based remittances received from abroad over the past couple of years and there are indications of a recent rise in transactions in Africa. Nigeria is seemingly so concerned about the use of digital coins for overseas payments that it is incentivising Nigerians to opt for official money transfer operators.
Migrant workers or immigrants in advanced countries have long relied on money transfer services to send a proportion of their earnings back to families in the Global South, a flow of funds estimated to be over $500 billion annually. The regular flow of money buttresses recipients’ meagre finances or serve as a principal source of income, preventing them from falling into poverty. With Covid, these funds have assumed ever greater importance, as lower-income countries will take longer to recover from the pandemic, worsening inequality around the world.
For the most part, money transfer services have been the main means of sending cash, but they are being increasingly rivalled by cryptocurrencies, as delivering the latter is speedier and incurs fewer costs. This is due in large part to the decentralised nature of blockchain – the digital ledger that records cryptocurrency transactions – which cuts out costly intermediaries involved in conventional money transmission.
The other reason is that, although digital coins can be quite volatile, especially Bitcoin, they are probably less prone to losing their value than the very weak currencies of certain remittance-receiving countries, such as Lebanon or Venezuela which suffer chronic hyperinflation. There’s an even stronger argument for their use in fragile, deeply unstable states like Afghanistan or Zimbabwe, where many live in extreme poverty.
In all these jurisdictions, receiving money in and buying cryptocurrencies preserves the value of remittances, earnings and savings, which would otherwise be squeezed by hyperinflation or currency devaluation. Moreover, cryptocurrencies become the only viable option for transmitting money to such countries if international sanctions or security crises cause international money transfer organisations to suspend their operations.
Perhaps unsurprisingly, cryptocurrency adoption in emerging markets is rising rapidly, with specialist remittance companies set up to facilitate transfers of digital coins. One country, El Salvador, even made Bitcoin legal tender in September last year. And, within a month, there were reportedly more Salvadorans with crypto wallets than bank accounts – about $2 million in remittances sent daily by migrants via the government’s cryptocurrency app.
Yet a number of factors militate against broader take-up of cryptocurrencies as a means of making remittance payments, principally their volatility as well as creeping regulation and curbs on their use in sending and receiving countries.
The wider adoption of stablecoins, pegged to fiat currencies, could help address volatility issues. The growth of central bank digital currencies (CBDCs), an electronic form of a country’s national currency, may do so as well. CBDCs also offer states more control over monetary policy, which some believe cryptocurrencies can undermine. That might lessen the need to regulate them. Though their exploitation by money launderers and financers of terrorism does mean authorities have to remain vigilant, even as criminal exploitation of digital coins falls.
Clearly, cryptocurrencies have great potential as a way of making remittance payments, in doing so advancing financial inclusion around the world. There are challenges that need to be overcome, notably certain authorities’ scepticism towards, and opposition to, their widespread utilisation. But with advanced countries likely to recover from the pandemic at a faster pace that developing ones, leaders of both would do well to recognise the contribution cryptocurrencies can make to help some of the world’s neediest.
William Je is the Founder and CEO of Hamilton Investment Management Ltd, and a Global Advisory Board Member of The Institute for Emerging Technologies and Social Impact (ITSI)