The rise of digital currencies in the emerging world

As of September 7, 2021, El Salvador will officially recognise Bitcoin as legal currency. This is a remarkable move, and one that will likely stimulate a huge amount of economic growth as Salvadoreans leapfrog from a largely cash-based society straight to a system characterised by the frictionless, finger-snap efficiency of digital currency.

The benefits of this normalisation of cryptocurrency have been spelled out in no uncertain terms by President Bukele, who points to two key areas of interest: financial inclusion and cross-border remittances. As the President notes, 70 percent of El Salvador’s population doesn’t have a bank account – as such, the financial inclusion Bitcoin represents will allow Salvadoreans “access to credit, savings, investment, and secure transactions.”


According to the World Bank, meanwhile, around 20 percent of El Salvador’s GDP is comprised of cross-border remittances – money sent back to the country by workers abroad. By pivoting towards cryptocurrency, the cost of commissions involved in cross-border transactions can be reduced, leading, at least notionally, to greater prosperity.


These exciting changes in the emerging world, with crypto being used in legitimate and pioneering ways to stimulate growth and provide greater financial opportunities to ordinary people, are the backdrop against which much of the global banking community continue to display a reluctance towards crypto adoption. What the example of El Salvador shows, however, is that – like it or not – crypto is here to stay. As such, it’s worth reflecting on banking attitudes in Western countries such as the UK/EU/US and determining where attitudes on the subject are beginning to thaw.


Thawing the ice of banks’ crypto hesitancy
The ice is, in some areas, almost entirely solid. A recent survey from consultancy firm Cornerstone Advisors has shown that among senior bank and credit union executives, there is a high level of disinterest towards offering cryptocurrency investing services – eight in 10 institutions have no interest at all, and only two percent of respondents described themselves as ‘very’ interested.


Resistance isn’t solely due to disinterest, however. NatWest has announced that it will actively refuse to serve any business customers who accept payment in crypto. Morten Friis, head of the bank’s risk committee, has cited cryptocurrency as too “high risk” to deal with.

This is an attitude which has been replicated across the industry: according to the Boston Consulting Group, “financial services leaders remain sceptical of the value that cryptocurrency has as an asset class, and individual cryptocurrencies have lost market capitalization at times.” Similarly, the Financial Conduct Authority began the year by warning that “if consumers invest” in crypto assets, “they should be prepared to lose all their money.”


This conflation is part of the issue. Banks focus on the crypto piece and not on the currency. I somewhat support the notion that crypto is an unstable investment, but I wholeheartedly support the decentralisation and instant nature of the digital currency as a method for El Salvadorean’s and others to cheaply, quickly and efficiently move funds. We need to get to a point where we’re thinking more of this currency aspect and then we will be able to wrap the same KYC/AML framework around it as we do with fiat currency and get over this dated mindset that crypto is all bad. And whilst it is not all good, it does have a very positive and beneficial utility.


The kind of attitude demonstrated by Western institutions might reasonably cause some eyebrow-raising: the same entities would have found it entirely uncontroversial for an investor to buy stocks in cruise business Carnival Corp in 2019 – a company which lost 70 percent of its market cap in 2020. Risk and volatility are not limited to the world of crypto and in my view rejecting digital currencies on that basis isn’t the most persuasive position in the world.


Besides, if we return to another Cornerstone Advisors survey, it’s worth remembering that there are a lot of people to persuade. 60 percent of crypto owners would use their bank to invest in cryptocurrencies if the opportunity were presented to them.


Lighting the touchpaper
Fortunately – albeit slowly – banks are starting to create that kind of opportunity. While UK banks like NatWest and regulators such as the FCA remain slow to catch up, there has been a recent flurry of activity in the US that points towards a burgeoning acceptance of the asset class.


JPMorgan, for example, has recently announced a bitcoin fund in spite of CEO Jamie Dimon embodying the disinterested individuals surveyed by Cornerstone: he recently noted that “I have no interest in it” but that “clients are interested.” It is hard not to think that a lot of the banking world’s resistance to crypto is that they see it as an existential threat rather than there are any real concerns about the KYC/AML framework.


And once this blanket denial is overcome and we can start to apply the same compliance oversight to crypto as we do fiat currencies then the dated preconception that crypto is less safe than fiat will surely pass.

The high levels of interest in crypto banking clearly signpost the futility of banks’ resistance to crypto, and this has been highlighted in similar moves across several other major institutions, including industry darling Goldman Sachs and its recent relaunch of its crypto trading desk.


Of course, as the situation in El Salvador indicates, these moves made by Western banks pale in comparison to the enthusiasm for crypto to be found in the emerging world. Bank of America has found that according to a number of different metrics – adoption rates, trading volumes, levels of mining – the top 10 countries are all found in the emerging world.

As such, Simon Peters an analyst at social trading platform eToro is right to say that “with some of the largest banks in the world now moving to offer their clients bitcoin via a variety of products, we think this is lighting the touch paper for an explosion in interest in cryptoassets.”


The fireworks that follow, however, will be at their brightest, not in the world’s traditional financial centres, but in the emerging markets which have grasped the nettle and begun to demonstrate the many rewards that enthusiastic adoption has to offer.