Guest post by Elena Obukhova, founder & CEO at FAS | Fintech Advisory Services.
FAS is a global and fully decentralized advisory ecosystem that bridges blockchain and fintech experts from Asia, Europe, North America, and Latin America with SMEs willing to evolve in those domains.
Bitcoin a legal tender, what does that mean?
We all heard the recent news that El Salvador is to become the first country to use Bitcoin as a legal tender. What would that mean for the rest of the world?
Honestly, I am not surprised that the first country to do so comes from Latin America. Countries in the region have been suffering from multiple crises and economic instability. People started losing trust in the government and central banks. In 2001, for example, Argentina froze all bank accounts and only allowed small withdrawals from peso-denominated accounts. It was not the first case of the government taking such actions. Earlier, in 1982, Mexico banned US-dollar accounts and converted funds to pesos automatically that caused a 30% immediate loss for the account holders on the currency exchange.
Unfortunately, the list of such events in Latin American history is endless. Lack of trust in the public system provoked a rise of the Cash Economy there. Financially excluded citizens do not want to become inclusive, as they simply do not trust banks. When you know that any moment the crisis hits and the government can freeze all your accounts, you feel safer to keep all cash at home “under your pillow”.
Cash Economy and Bitcoin
What exactly is the Cash Economy, you might ask? It’s a combined term to describe all the transactions and activities both legal and illegal that are using cash: remittances, loans, investments, savings, purchases of goods and services. People become a part of the Cash Economy for multiple reasons. They can have good intentions, trying to protect savings from inflation or sending money to their family. They can also have other intentions like avoiding taxes or even purchasing illegal commodities and goods. Cash Economy is not the same as a black market, it’s rather a consequence of the inefficient financial system.
Let’s go back to Latin America. Unofficial and OTC markets started evolving as taxation and inflation rates were growing enormously. Many people no longer wanted to pay taxes since fewer and fewer had faith in the public services.
Recently, Argentina in its attempts to fight the crisis limited US-dollar exchange amounts, setting a bar at $200 per month with a 30% tax applied. If the US dollar is the only way for you to protect your family savings against skyrocketing inflation, what would you do? And here came the answer: cryptocurrency.
Cash Economy embraces the cryptocurrencies in Latin America, as now anyone without a bank account can be financially included. Cryptocurrencies allow people to store money digitally and thanks to the growing Decentralized Finance (DeFi) industry also earn an interest rate on top. It’s easier for businesses to do cross-border payments regardless of the country’s limitations and restrictions. Remittances are now more accessible than ever. You don’t need to line up in international cash money transferring offices, paying a large commission to send money to your family that is converted into the inflating local currency.
Not the last…
El Salvador is the first, but definitely 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 it’s just one per household. Informa Telecoms & Media earlier claimed that mobile penetration in Latin America reached 100%. That’s enough to access the cryptocurrency market but not enough to set up a bank account.
What about the rest of the world, you would ask? In past years when I was doing data science in the United Nations, I had a chance to work with lots of data from the Asian region, especially within South East Asia. It was so shocking to find out that many people in Myanmar, for example, do not have a national ID! Without this paper, you do not have any rights, not even mentioning a bank account eligibility. For cryptocurrency, all people are equal, whether you have this piece of paper or not. Stats were also showing that people have access to mobile connection, and it’s more accessible than an ATM that can be miles away from you.
At that same moment, I also had an opportunity to explore the Bangladesh P2P market that was evolving. Microcredits, P2P lending and saving, all these things coming from underserved markets. People are trying to make their life easier. Many unique cash-based financial products are appearing within Cash Economy in the developing world. Nigerian Isusu savings and loans scheme is one of such examples. This model is completely built on trust, but in people rather than in financial institutions. It’s a way of collective saving and lending that became a powerful tool not only for individuals but also for small businesses.
One word: trust
If we look closer, we will see so many similarities with those traditional fiat-based products for underserved and DeFi market products. It’s all made by people for people and based on common trust.
Cryptocurrencies are also built on trust and on people’s belief. That’s why whenever there’s a major crisis, we see people are migrating to cryptocurrency. Venezuela is one of such examples, where the government had no other choice but to be crypto-friendly with extreme inflation. Dash cryptocurrency built a very strong community there and made its cryptocurrency being accepted in some shopping malls, parking lots and now even testing a payroll system with Dash.
The recent Lebanon crisis resembles the Venezuelan one. The difference between the official dollar rate and black market rate became 13 times. That’s an enormous difference, and it drives all people into the Cash Economy market, where everything is done through cash or cryptocurrency. Cryptocurrency adoption started increasing drastically and will continue doing so.
El Salvador is a starting point, a case study, for cryptocurrencies to go beyond the Cash Economy and enter the Public Economy. If this proves successful, then we will see a massive adoption coming next, especially in countries where Bitcoin is already the main tender within the Cash Economy. Personally, it’s very exciting to live through such upcoming changes in the world economy where everyone can be financially inclusive regardless of income, race, age, gender, and any other preferences.