Afghanistan recently plunged into chaos and conflict, compelling its wealthy occupants to turn to cryptocurrency as a way of storing wealth and moving money overseas.
Wealthier Afghans have always relied on paper money or gold to store their wealth. Sometimes turning to hawala (a chain of Islamic brokers) to send money abroad.
But things are changing. Cryptocurrency is now creeping in, despite the country’s economic and political instability.
While the country may take time to adopt cryptocurrency, its development is a welcome move to ponder about the sensitive finance topic of trust and “credit”. And it doesn’t matter whether you love or hate Bitcoin.
Crypto comes with economic costs
Hyun-Song Shin, an economics professor at Princeton and chief economist of the Bank for International Settlements, says Bitcoin’s value (and trust) is pegged on people creating a shared computing ledger of transactions.
However, you’re more likely to create “frictions” or incur high economic costs when creating this ledger with computing power. Using cryptocurrency as a system of distribution of money is more expensive compared to other alternatives.
For example, the US Federal Reserve issues money effectively and credibly. It’s a trusted institution. So, the costs of using it are relatively low.
But sometimes, as the professor notes, the costs of using cryptocurrencies seem less tedious than the risks of dealing with a failing government (like Afghanistan’s) — or worse, trying to source for scarce paper money (such as dollar bills).
Before Afghanistan can adopt cryptocurrency, they need an accountable central bank, trustworthy central authority, and good political governance.
Shin further adds that if you have a failing or unstable country, you’re better off using cryptocurrency. But then “you [will] pay a [heavy] cost”.
Emerging markets slowly adopting crypto
In a recent survey linking crypto usage with economic activity (in 154 countries), many under-developed countries topped the list, including Vietnam, India, Kenya, Nigeria, Venezuela, and Pakistan. The US was in the top 10 of developed countries.
Sadly, Afghanistan is not one of the top crypto users. The results reflect how much the wealthy trust the government or access dollar bills. Another explanation for lower crypto usage in Afghanistan is low internet usage.
Despite these challenges, Afghanistan is currently ranked 20th on cryptocurrency usage. That means Afghanistan has a growing crypto economy. And may soon blossom if the country’s purchasing power and internet usage increase.
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