Recently, Venezuela offered an unprecedented deal to India; a staggering discount of 30% on crude price for purchasing Venezuelan crude using its state-backed cryptocurrency Petromoneda or Petro. In fact, Venezuela is the first country to launch government-backed cryptocurrency. It is backed by Venezuela’s huge oil and mineral reserves. There are different reasons for developing and promoting Petro; but it is true that in the last couple of years, cryptocurrencies are winning a lot of attention; and that’s definitely not without any reason. In 2013, Coinbase, a cryptocurrency payment processor, reported selling a bitcoin in exchange of $22; today the same bitcoin is roughly worth of $9180.
What is cryptocurrency?
Simply speaking it is a type cryptography-backed digital currency; example is bitcoin. It is different from electronic currency; and primarily developed and maintained on the basis of block chain technology. Some of the salient features of any cryptocurrency are;
- Tamper-proof – does not require any centralized authority like Federal Reserve or RBI. Sanctity of such currencies is maintained on the basis of decentralized block chain-based peer-to-peer distributed ledgers. These ledgers are absolutely impossible to change without alerting others in the system; so, completely tamper-proof.
- Supply-restricted – supply of cryptocurrency is limited by the system unlike any fiat currency or central bank-backed currency. So, it is safe from sudden devaluation as no single authority can increase money supply unilaterally by printing of currency notes.
- Exclusively secure ownership – these currencies are cryptography backed so ownership is not just exclusive but also very secure from centralized surveillances.
However, one might raise a question that how far such currencies are adaptable to realities of emerging markets. Let us have a look.
Characteristics of emerging markets
All emerging markets throughout the world have certain common characteristics despite many other differences. They are;
- Lower per capita income
- Large unorganized sector
- Underdeveloped financial sector
- Underdeveloped technology
- Fragmented markets
These factors cause significant hindrance in the process of development in these economies. Poverty and low per capital income keeps people away from the reach of banking services; and lack of access to banking facilities again stop these people from growing economically beyond subsistence level. Similarly, fragmented nature of these markets and existence of large unorganized sector causes considerable exploitation of employees and workers. One major reason behind poor outreach of banking sector in emerging markets is underdeveloped technology. Physical banking infrastructure being expensive to distribute does not justify wider outreach in emerging markets.
How does cryptocurrency adapt to the situations?
Due to inherent characteristics of block chain technology, cryptocurrencies can be perfect fit for emerging markets as they are highly adaptable to shortcomings of emerging markets.
First of all, cryptocurrency transactions are maintained and validated across peer-to-peer distributed ledgers. It does not require heavy technology intensive centralized server system and digitally secured network. Security comes from inherent nature of the peer-to-peer distributed network and not from any cutting edge software or hardware. So, cryptocurrency can be implemented even without the latest technology from developed world.
Second, distribution of banking services on the basis of block chain network is least expensive compared to modern digital banking infrastructure and traditional physical banking system. Cheap availability of internet and affordable smartphone are sufficient condition to implement block chain based cryptocurrency.
Third, block chain based transactions can also store ownership titles and contracts. This is especially useful in unorganized sectors of emerging markets where implementing legally binding contracts is somewhat difficult and expensive. Block chain based ownership titles and contracts can make underpayment, non-payment and other financial frauds impossible securing interests of poor.
Fourth, block chain based system is lot more efficient is credit risk analysis compared all other traditional and digital risk management techniques. So, providing loans to people with low income become more manageable for financial services providers.
Finally, in emerging markets central banks are often highly dependent on governments and end up printing money to fund fiscal deficits. This again causes inflation and unnecessary trouble to already poverty-stricken people. Cryptocurrency makes it impossible to increase supply of money by printing currency notes. Supply is finite and tamper-proof.
So, cryptocurrency is a perfectly adaptable to realities of emerging markets and, in fact, highly necessary for ensuring economic equity in these regions. However, despite these strong benefits, cryptocurrency and block chain technology is not completely free from loopholes at this moment. It is not yet clear how strictly finite supply of money can accommodate wider user base. Supply shortage can also encourage speculative activity causing artificial scarcity. Besides, most of the cryptocurrency processing agencies are privately held. That can cause trust deficit among public. The technology is still in its nascent stage. In coming days we would see more refinement and government participations to remove these obstacles. There is no doubt cryptocurrency is going to be disruptive in too many senses and solve lot of structural bottlenecks in emerging markets.