Before we go into more detail about the potential of cryptocurrencies and DeFi in countries of the global south, we should briefly mention a use case for the general use of blockchains. For example, in the report mentioned earlier, the UN emphasizes that Africa needs blockchain technology. The reason for this, it says, is the resulting improvements in transparency, reduction in inefficiencies and falling prices in many sectors of the economy. India has emerged as a pioneer among emerging economies. There, it is showing how the adoption of blockchain can lead to significant social improvements in areas such as land titling, transparent supply chains and comprehensive health records. For example, residents inside the northeastern states of Assam and Sikkim are using blockchain technology to secure their land titles. These were originally promised to them by the government after independence in 1947.

In general, an important feature of crypto is easy access and anonymity (possibly especially important for minorities/persecuted groups in certain regions). Basically, all you require is an internet connection, a device, and a crypto wallet. After setting up the latter, I can start trading tokens/currencies via crypto exchanges. Access to DeFi services is often effortless via mobile or online wallets, where cryptocurrencies can be stashed and coins can be purchased via apps from crypto exchanges (in Nigeria, for example, KuCoin). So, in principle, all that is needed to participate in the crypto market is a cell phone and sufficiently good internet. Celo offers a well-known application in this context. The start-up is building a mobile-first blockchain platform as well as a set of financial tools that are accessible to anyone with a basic smartphone and is specifically aimed at developing countries.

This is of course of interest to market participants in developing countries who do not have any identification documents to prove their identity to banks or other institutions. Nevertheless, there is a certain risk involved. On the one hand, questionable and illegal transactions could be processed via the blockchain. On the other hand, there is a risk that a service provider might have to file for bankruptcy (as seen recently with Celsius) and lose customers’ tokens (as long as they are not stored in a separate wallet). Scams occur just as often, and alongside this, many cryptocurrencies are subject to high volatility. Indeed, contrary to many earlier statements, they are not a hedge against inflation. The DeFi ecosystem, which previously experienced extraordinary growth, recently lost only 68 percent of its total volume, which is 156 billion. U.S. dollars.

Still, it’s important to keep in mind that put in relation to rampant inflation in some developing countries, this no longer sounds so dramatic. Inflation in Zimbabwe, for example, has steadily increased since 2017, reaching as high as 557 percent in 2020. In Venezuela, inflation was reported at a staggering 65,000 percent in 2018, prompting the government to restrict the lower and upper limits on bolivar-denominated credit spending to maintain the stability of the currency. Naturally, many low-income households suffered as a result. It stands to reason that in countries like Zimbabwe and Venezuela, cryptocurrencies are quickly becoming attractive relative to unstable local currencies. To protect against the volatility of many cryptocurrencies, stablecoins are also a good option. Stablecoins are backed by a reserve asset, such as a fiat currency or a basket of currencies, cryptocurrencies or otherwise. They are intended to be stable in value, i.e., to prevent price fluctuations. A widely used stablecoin is USDC, which is supposed to represent the US dollar at a ratio of 1:1. One of the reasons for the high importance of stablecoins such as USDC, apart from the value stability, is their use for cross-border payments.

For many developing countries, migrants’ remittances are an important source of foreign earnings. In low-income countries, they are particularly critical, accounting for nearly 4 percent of GDP. In middle-income countries, this figure is about 1.5 percent of GDP. It is essential to note that remittance flows are very constant in this regard, often increasing in times of economic downturn or after a natural disaster when private capital flows in the recipient country decline. However, remittances still come at a high cost. According to UNESCO’s 2019 Global Education Monitoring Report, the average cost is 7 percent, traditional banks charge an average of 10 percent, and in some cases fees can be as high as 20 percent. Out of desperation, people pay these fees to support relatives in Africa, Asia and Latin America and contribute to their financial stability. In 2022, remittances to low- and middle-income countries are expected to increase to $630 billion (+4.2%). In 2021, the top five remittance recipient countries were India ($89 billion), Mexico ($54 billion), China ($53 billion), the Philippines ($37 billion), and Egypt ($32 billion).

DeFi greatly reduces these fees (often only the staking fees need to be paid) and saves migrants and their relatives billions of US dollars this way. Relatives back home can then use the cryptocurrencies or stablecoins to earn passive income in the form of lending or staking. Lending and staking also offer cross-country opportunities. One of the biggest promises of the blockchain revolution is a redistribution of capital across countries. Many people in developed countries have a lot of wealth and have a lot of money sitting in a bank account that is not earning interest or even paying fees to the bank. In many developing countries, it is precisely this wealth that is lacking, and microloans with exorbitantly high interest rates (50-100%) are regularly common there. Now imagine being able to offer a crypto loan directly from Germany to a person in a developing country via DeFi (in the form of lent coins). For me, the interest income would be higher than if the money is just sitting in a bank account and the borrower would have to pay lower interest than with domestic microloans. Currently, it is almost impossible to lend directly to these countries due to high fees, regulatory hurdles, language, bureaucracy. Incidentally, the risk of loan default is much lower than commonly believed: Studies show that 95 percent of all microloans are repaid.

The risks of cryptocurrencies and DeFi have already been mentioned, but the business model of the Web3.0 play-to-earn game Axie Infinity has made this particularly clear. In the Philippines, a real hype broke out, many locals saw it as a real opportunity to supplement their income (sometimes at about 80-160 US dollars per month). Good players earned up to 600 US dollars with Axie Infinity (somewhat comparable to Pokémon). However, many Filipinos learned the downside of the game. Before you can join the game, you have to buy a so-called “Axie monster”. While the hype, these became more and more expensive so that many locals either went into debt to be able to participate in the game. Or they offered themselves as players to wealthy investors from abroad. The investors then bought the starting monsters, while the locals had to invest up to six hours a day to “level up” the monsters. Most of the resulting profits went to the Investor:in. Then, however, the Axie currency stopped rising, and it became increasingly unprofitable to play. As a result, many Filipinos (sometimes highly indebted) dropped out, which led to a strong devaluation of the Axie exchange rate (the peak in November 2021 was 139€, today Axie is worth almost only one tenth).