Crypto currencies have widely been considered as an instrument
to support the growth process in developing countries. This paper
examines the impact of crypto currencies on individuals and businesses within developing countries. The intention is to show decision-makers the possibilities to use crypto currencies to decrease
developmental barriers.
Introduction
The World Bank describes that "the number of poor worldwide remains unacceptably high, and it is increasingly clear that the benefits of economic
growth have been shared unevenly across regions and countries” (World
Bank Group, 2018, p. 23).
Along with these incidents of economic chaos, civil
war and governmental collapse plague developing regions (Prahalad & Hammond, 2002). Besides, poverty is mainly driven by economic factors, which
include limited access to financial services (Beck & Demirguc-Kunt, 2006)
and high inflation rates (Aisen & Veiga, 2006). Moreover, studies have argued
that a low level of trust (Barham, Boadway, Marchand, & Pestieau, 1995) and
corrupt government institutions harm the economic development (Olken,
2006).
Crypto currencies could provide a significant benefit by overcoming the lack
of social trust and by increasing the access to financial services (Nakamoto,
2
2008) as they can be considered as a medium to support the growth process
in developing countries by increasing financial inclusion, providing a better
traceability of funds and to help people to escape poverty (Ammous, 2015).
Introduction to crypto currencies
To provide a comprehensive overview of the opportunities of crypto
currencies in developing countries, it is necessary to understand the general
advantages and disadvantages crypto currencies provide for users compared
to central bank-issued fiat currencies, like the Euro or the US dollar, and to
discuss how they emerge from the underlying technology. For this purpose,
the example of two crypto currencies is used in this paper.
The underlying
technology of most crypto currencies is blockchain technology. A blockchain
is a decentralized database that is distributed in the network on a variety of
computers. It is characterized by the fact that its entries are summarized and
stored in blocks.
The first crypto currency discussed in this paper as an example is Bitcoin
which is technically, “an algorithm that records an ongoing chain of transactions between members of a decentralized peer-to-peer network and broadcasts these records to all members of the network" (Ammous, 2015, p. 19).
Bitcoin is the world’s biggest crypto currency with a market capitalization of
more than $189 billion1. It was invented by Satoshi Nakamoto in 2008 when
he has published his white paper “Bitcoin: A Peer-to-Peer Electronic Cash
System” (Nakamoto, 2008).
Secondly, Ethereum is used as an example which is a blockchain-based, public, open-source, computing platform and operating system for smart contracts. This platform supports a modified version of Nakamoto's consensus
mechanism and was proposed in 2014 by Vitalik Buterin (Buterin Vitalik,
2014; Rizzo et al., 2016). The underlying crypto currency is called “Ether”. It
is the second biggest crypto currency in the market with a capitalization of
over $18 billion2.
General advantages and disadvantages of crypto currencies
This section presents the main advantages and disadvantages of crypto
currencies compared tocentral bank-issued fiat currencies and discusses how
they emerge from the underlying technology. Furthermore, a comparison
with existing solutions is provided to show the practical relevance of crypto
currencies.
The first advantage is that crypto currencies combine important properties to
foster trust, such as accountability and transparency, which allows trust free
interactions between counterparties. The underlying blockchain technology
uses consensus mechanisms, hash functions and public and private key
encryption to control transactions, which leads to the fact that the user does
not have to trust the counterparty. However, the user must trust the network
and the underlying blockchain.
Thus, it is essential to secure the blockchain
against fraud and attacks.
For central bank-issued currencies, trust is established by third parties like
intermediaries, and in almost every digital transaction in a fiat currency, an
agent is employed to oversee the exchange. Transactions conducted by intermediaries do not only take time, but they also result in a risk premium for the
user due to higher transaction costs (Pilkington, 2016).
Another benefit of the decentralization of crypto currencies is that
governments cannot manage them. Hence, crypto currencies are not
restricted to a specific geographic area and can be traded around the world.
Therefore, Bitcoin can be used to provide low-cost money transfers, particularly for those seeking to transfer small amounts of money internationally,
such as remittance payments (Scott, 2016). This money can often be
transferred cheaper than with central bank-issued currencies, because using
crypto currencies allows worldwide financial transfer without the need of an
intermediary institution. In addition, the speed of money transfer is increased
by eliminating intermediaries.
Nevertheless, these border independent payments also have some negative
aspects, which need to be considered. One characteristic is that it makes it
easy to transfer money from illegal activities or to finance terror activities
without the possibility of government intervention (Fernholz, 2015). In
contrast, to traditional money transfers, the user in the Bitcoin system is
pseudonymous. Contrary to a bank account user, they do not have to get
through a "Know Your Customer" (KYC) process, where the user must
identify himself, to have access to the Bitcoin market.
Moreover, the decentralization and “the lack of flexibility in the Bitcoin
supply schedule results in high price volatility” (Iwamura, Kitamura,
Matsumoto, & Saito, 2014, p. 1). This high price volatility does not only holds
for Bitcoin but for most of the crypto currencies, which makes it hard to store
money and to make contracts in crypto currencies (Lo, 2014).