Bitcoin and Developing Economies

Neither this post nor any other on cryptofal.com should be taken as financial advice. It is not.

by Crista Yamasaki

Each year Bitcoin (BTC) gains a deeper foothold in the global economy as more states look to adopt it as legal tender.  This year, Parliament in the Kingdom of Tonga, a small island nation in the South Pacific, will consider following in the footsteps of El Salvador to make BTC one of its native currencies. 

While neither of these nations have sizable enough gross domestic product (GDP) in comparison with more developed nations, the significance in their foresight to adopt cryptocurrency indicates the diminishing confidence in the existing global financial system.

At first glance, Tonga and El Salvador have little in common but both are among the top ten countries where remittances from its citizens abroad account for a significant percentage of their GDP.  According to the World Bank's Migration and Remittances Data for 2020, 24.1% of El Salvador's GDP was inward remittances while Tonga’s sat at the top with a staggering 37.7%.  

The motivation for developing nations to accept BTC and other cryptocurrencies began as a way to streamline the transfer of money across borders without the digital red tape. Although banks and wire transfer services have worked to make prices more competitive and the process more user friendly, sending money abroad maintains limitations and is subject to rules and regulations on both sides of a transaction.    

Critics have voiced concerns of adopting BTC on network connectivity, transaction speeds, and conversion to fiat as barriers for average users, but in states like El Salvador the need to convert back to fiat to engage in the local economy is rendered obsolete. 

As we see an increase in adoption of BTC and other cryptocurrencies, so too will the rate at which users are more knowledgeable and the protocols made better.  The cryptocurrency space continues to innovate and improve the factors that critics address–the same cannot be said for conventional financial institutions.