New financial technologies are driving disruptive innovations in Finance. They have reshaped the structures, provisions, and capturing of customer demands in the financial services industry. The changes brought about by new financial technologies can be attributed to tools such as cryptocurrencies. The implications of new technologies are being experienced worldwide across all economies. However, the effects have been significantly felt in developing countries. This assessment focuses on the impact of Cryptocurrency on economic, political, and social institutions in developing countries. Understanding the effects of cryptocurrencies requires comprehension of the tools behind their operation. The role played by blockchain in the success of Cryptocurrency (bitcoin) cannot be ignored. Currently, blockchain stands out as a disruptive technology that will alter the processes of financial services and even the governance of institutions. Cryptocurrency brings many opportunities for countries due to its liquidity and flexibility, especially for developing countries. Still, the government should also take serious action on relative policies to avoid possible criminal and conflict with central banks and government currency power.
Background of the Study
Breaking into the money-related administration industry by the market contestants was not easy. Thanks to Financial technology, the solid pattern toward mobile banking has actualized the dream of keeping money with no physical branches. Cryptocurrency is decentralized computerized cash (digital currency) that uses encryption. It is a medium of exchange through computer networks, which is not dependent on a central authority for it to be upheld (Kaplanov, 2012). Bitcoin runs on a distributed public ledger called blockchain, which records and updates transactions in the currency. Computer power is used in mining to solve complicated mathematical problems involving generating coins. Despite the popularity of Cryptocurrency being dependent on the blockchain, several people are not aware of the technology. However, this is not entirely to say that blockchain is centered on Cryptocurrencies such as bitcoin since it is merely an application.
Implications of Cryptocurrencies on Economic Institutions
As already noted, Cryptocurrency such as Bitcoin uses blockchain technology, which is utilitarian and disruptive and has begun slowly competing with the current financial system (Gladden, 2015). Improved economic activity, prospects for underbanked countries, increased transparency, low/zero transaction costs, the formation of new marketplaces, and increased power for entrepreneurs are just a few of the repercussions that occur to the economic institutions. In truth, the majority of Cryptocurrency’s consequences are economic. While some influence the economic institutions, some affect the countries’ economies because of Cryptocurrency’s high liquidity and flexibility. Economic institutions are establishments responsible for organizing the production, exchange, distribution, and consumption of products. They include the Federal Reserve and Central banks of different countries and the banking industry.
First, there has been a positive boost in economic activity. Cryptocurrencies have already spawned a whole industry. It is governed by organizations monitoring all digital coin exchanges globally, including those in the United States (Akgiray, 2019). Bitcoin, the most well-known of these cryptocurrencies, has already helped countless people and businesses grow and succeed. Trading is a major source of revenue for many of these people and enterprises. The economy is slowly but surely evolving to fulfill these demands, and cryptocurrencies have a lot of potential to do so. This can ultimately lead to economic growth, which in turn has implications for economic institutions. As economic activities increase, the economy grows hence causing hyperinflation, which makes the central bank or the Federal Reserve increase the interest rates. This applies to the countries that have accepted digital currency as part of their government, such as the Central Africa Republic, Bahamas, Nigeria, Jamaica, and India. However, a country like the USA is affected despite it not making the digital currency part of its reserve due to the high number of Americans who use the digital currency.
Second, countries with weak financial institutions have enormous prospects. More than a third of the world’s population is projected to be without access to fundamental banking services that could help them in a personal financial crisis, such as loans, checking accounts, etc. In most situations, these people are already financially challenged, and they are more prone than not to turn to questionable and perhaps harmful loan methods. This is where cryptocurrencies shine, thanks to their high volatility and ease of use. Several apps and programs have emerged in recent years, making it easier to utilize cryptocurrencies and bring them closer to a broader audience. Such countries include most African and Asian countries.
Third, transaction costs are kept as low as possible. The transaction costs connected with cryptocurrencies and blockchain technology are incredibly low since they do not require the presence of a physical brick-and-mortar structure. Wages, utilities, and rent are not required, resulting in huge cost reductions automatically translated into minimal transaction fees (Harwick, 2016). As a result, more people are beginning to put their faith in these new financial tools and incur transaction fees, allowing the global economy to become more linked. High transaction costs diminish returns and reduce the amount of capital available to be invested. Hence, it discourages investments and savings. The use of Cryptocurrency, which has lower transaction costs, encourages people to transact with it. This is likely to have a negative impact on banks and other financial institutions. Such negative impacts include a reduction in profits.
Fourth, increased transparency in transactions. Crypto transactions are recorded and tracked in a distributed ledger because of their automation and digital (Akgiray, 2019). The most appealing feature is that it cannot be influenced by individuals or corporations, reducing the risk of fraud and corruption dramatically. As a result, developing countries have a better opportunity to participate in financial transactions and enhance their economic and social prospects. Furthermore, residents will be able to watch where state monies are spent, giving them a say in the political environment in which they live and work. Most financial institutions are transparent when it suits them. For instance, in the banking industry, when an institution \ has accrued losses, there is a higher chance of ‘cooking’ the results to attract more investors. However, in Cryptocurrency, transparency is a virtue that cannot be altered.
Fifth, beneficial to start your own company. There has never been a more advantageous time to start a business than during the era of the new technologies. Blockchain technology and cryptocurrencies can help businesses accept payments in a wider variety of currencies (Joo et al., 2019). The goal is to help small and medium-sized enterprises worldwide get greater financial coverage and a more open financial relationship with the rest of the world. Things in the world are changing, and they are changing quickly. The rapid rise of digital currencies such as bitcoin is a clear indicator that traditional financial institutions can no longer hold the fort as successfully as they once did. New financial demands are emerging that must be met. To that end, the world is increasingly confronted with the necessity to demolish borders to achieve complete social and financial inclusion – and blockchain technology offers all the tools necessary to do so. Countries that are reliant on banking institutions have to go back on the drawing board to figure out the viable available options.
Sixth is the emergence of a new market. The advent of cryptocurrencies such as Bitcoin and Ethereum has prepared the way for a new sort of market that no one controls, unlike the present money market (which is controlled by the government and banking organizations) (Zachariadis et al., 2019). Digital currencies, often known as cryptocurrencies, are disruptive economic innovations with the potential to change both the current economic structure and the way banks and financial institutions work. The most widely used Cryptocurrency is Bitcoin. It has enabled two parties to make digital transactions without requiring a third party to act as an intermediary. The transactions are digitally stored in blocks that serve as ledgers, and once a block is full, a new one is created to allow additional transactions. The blocks are connected via Hashtags, and the blocks are arranged in a linear, chronological order to form a blockchain. The identity of the participants in the exchange is not divulged, even though the transactions are recorded. An evaluation of the cryptocurrency dynamics in the USA dollar-denominated market and emerging market economies suggest found out that there is a positive correlation in the digital assets cryptocurrencies’ ecosystem in Nigeria (Anisiuba et al., 2021).
Cryptocurrencies majorly have an impact on the economic state of developing countries. With the evolution of Cryptocurrency, the scenario of central and federal banks enabling monetary transactions has changed. The power is slowly shifting to the public, and soon the change in transaction handling will affect the change in economic structure. Although Cryptocurrencies bring about goodies, there is economic insecurity that it will bring to developing countries that don’t have a stable currency and have been using central banks and other financial institutions to maintain an all-transactions record undertaken by the public technique to bring security and enable scrutiny. Thanks to digital currencies, people are now able to challenge economic power. Lately, there has been a creation of an autonomous body to facilitate transactions with zero transaction costs. It is pertinent that the zero transaction costs have made Cryptocurrencies superior to the traditional money system.
Implications of Cryptocurrency on Political Institutions
Political institutions are government organizations that create, enforce, and apply laws. They are responsible for mediating conflicts in economic and social systems through government policies. The development of any country requires the input of political institutions in safeguarding the interests of the citizens, unity, and integrity of a nation. As the public continues to be aware of cryptocurrencies, the central authorities should accept them as part of the game and make attempts to find common ground between the political institutions and Cryptocurrency. The G20 has been showing readiness to support the global regulation of cryptocurrencies, which may intertwine the politics and Cryptocurrency (Comben, 2019). However, there are political institutions that still associate Cryptocurrency with high risks. Political institutions primarily play a mediating role. Hence, this section shall concentrate on answering ‘how’ to ensure the safety of the public and the coexistence of cryptocurrencies and political institutions.
When it comes to comprehending the ramifications of cryptocurrencies in political Finance, it’s first necessary to explore some of their most notable traits, as well as what these characteristics mean for how resources move into and out of politics (Kim, 2021). According to the available information, clients should be cautious when using cryptocurrencies, avoid speculators, and focus on political rivalry rather than the ups and downs of the bitcoin market. Because cryptocurrencies are becoming more popular, regulators should consider the best method to regulate them and provide guidance to all parties involved on how to comply with the new regulations. Bitcoin transactions can be completed without passing via a financial institution; AML/CFT requirements should apply to the intermediaries that provide gateways to the regulated financial system. Hence, regulators should consider whether (and how) to make transactions go via intermediaries. However, bitcoin transaction records are immutable. Hence, they cannot be tampered with or offered an additional layer of protection than cash transactions. These papers can aid oversight organizations in following the trail of resources and contributors who have previously supported political campaigns (Volkova, 2019). When designed with an open ledger and allowing the identity of people engaged in transactions to be traced, Cryptocurrency’s improved openness might make oversight agencies’ jobs easier (Akgiray, 2019).
The use of Cryptocurrency is open to the whole population. There is a chance that bitcoin will reduce corruption and make the government’s delivery and transaction of funds more transparent and efficient (Triana et al., 2020). This has a direct impact on policy decisions made by the government. In underdeveloped countries, state officials are prone to corruption; thus, using cryptocurrencies will aid the organizations in charge of identifying people making suspect transactions. As previously stated, Bitcoin was created to remedy the problem of state-backed currencies, in which governments had a monopoly on printing presses. First, there have been currency crises worldwide due to geopolitics. The devaluation of Zimbabwe’s currency and the economic recession of 2007 have accelerated the search for a solution, or rather an alternative, for the state-backed currency.
The implication of Cryptocurrencies on Social Institutions
Cryptocurrencies are run on a blockchain, which has an influence on both social and social institutions (Papadopouos, 2015). The two are closely related and can be used interchangeably. Social institutions include family, religion, ethnicity, political, economic, educational, etcetera. The far-reaching social impacts revolve around personal data protection, transparency, and digital identity.
In big technology companies, the algorithms are kept a secret. Crypto is operating on a blockchain that runs on openness and irrefutable record keeping. This has a great impact in developing countries, where most of the governments run the currencies against these features. Beginning with the issue of transparency, blockchain is mostly open-source software, which gives auditors the ability to review cryptocurrencies such as Bitcoin and Ethereum as everyone is allowed to view the code. Also, the code has no specific authority to monitor or change it; hence anyone can recommend changes or upgrades to the system, and if the majority of the users agree to the new system or the recommended change, then the Cryptocurrency can be updated. The social impact of transparency comes in when all the users are allowed to make changes regardless of their gender, geographical location, ethnicity, or cultural background.
In developing countries such as India, Kenya, Nigeria, and Zimbabwe, in 2017, World Bank reported that over 1.7 billion adults lack bank accounts to save or store their wealth, which makes them dependent on cash. These people earn too little to save in bank accounts because of the transaction costs; hence with cryptocurrencies, a solution is provided for these people can store their wealth in cryptocurrencies. Besides the economy is the major cause of poverty, it still can be argued that people in developing countries face trust and corruption issues in financial institutions, which hurt economic development. In this case, we look at how the corruption in government institutions has hurt economic development and how the issue is connected to social institutions. Citizens in countries with high corruption scales, such as Iraq, Nigeria, South Africa, and Zimbabwe, do not trust their political leaders and systems with their money. Hence, Cryptocurrency may be a unifying factor.
Financial institutions in developing nations have encouraged the use of online service platforms, which has enabled service providers to gather, aggregate, and assess consumer data in quantities that exceed what is fair in terms of privacy infringement (Meltzer, 2016). There are data privacy rules in most third-world countries, but they are rarely enforced because of a lack of funding. Data brokers have established a marketplace for exchanging information on intended clients that may be used to relate them to previous acts, including but not limited to financial services, to understand them better. The information, which may include the reuse of credentials, can link transactions to the parties involved in the transactions. In the context of long-standing arguments about privacy as a public good, it is helpful to analyze how such practices may exacerbate social inequality by imposing constraints on the ability of affluent and influential people to conduct private transactions. In this regard, financial transactions are no different, as they provide information on the amount and beneficiaries of people’s purchases and remittances, their behaviors, geographical histories, social networks, and so on. Modern retail banking has developed a paradigm for customer behavior that, in the end, promises to adopt a mechanism that will link all of their client’s financial actions to a single identity.
On the other hand, consumers have legitimate grounds to reject such surveillance when they are observed without their knowledge and punished for their legitimate activity; nevertheless, there is no appropriate organization where they may lodge such complaints. According to the Federal Trade Commission, the rising ability of third parties to analyze and interpret data about consumers’ financial transactions hurts the relationship between customers and financial institutions. For the most part, customers consider cryptocurrencies to be a natural alternative to traditional methods of trading value since it allows them to avoid the surveillance of the state machinery, large businesses, and malicious hackers who do not have their best interests at heart.
Besides financial concerns, Bitcoin has societal ramifications in developing countries. Although the deployment of digital currencies in the social sector is still in its early stages, at least five notable use cases and applications have already been identified and documented. First and foremost, a more reliable means of exchange for half of the world’s population is required. “For many of us who live in modern cities in first-world countries, it is taken for granted that we can open our smartphones and see that our paycheck has been directly deposited, that we can use Apple Pay to purchase groceries at the grocery store and that we can find an ATM on any corner with plenty of cash if we ever find ourselves in a financial emergency.” Having access to a functioning medium of exchange continues to be a significant barrier for the more than 3 billion individuals on the earth who do not have bank accounts (Gleason, 2020).
Second, global poverty, clean water, and hunger are all issues that need to be addressed. Generally speaking, distributed ledger technology (DLT) offers tremendous potential to support social impact projects worldwide. Reductions in transaction and administrative costs guarantee that donors have the most significant possible influence on the recipients’ lives while reducing corruption and wasted resources. They recently conducted a pilot initiative in which they provided Syrian refugees in Jordan with digital currency vouchers that could be used to purchase products and services in the local community. With the initiative, more than 10,000 people received a total of $1.4 million, and the risks associated with carrying cash were successfully eliminated, while administrative costs were significantly reduced. Fourth, remittance payments are more affordable and reliable. The transfer of money from more affluent countries to underprivileged places around the world, in the form of remittances sent to family members by relatives living and working in other countries, currently amounts to about 444 billion dollars. Traditionally, it has been a costly and unreliable process to regularly transfer these large and significant amounts of money to achieve the desired results (Shuraeva, 2020).
Blockchain technology, which has the potential to disrupt long-standing financial systems, puts Cryptocurrency in a unique position as a trailblazer in potentially transformative technology. However, the road ahead of Cryptocurrency remains unknown. Its success or failure will largely depend on whether or not it can achieve a critical mass of participants to minimize wild volatility, and achieving this critical mass is not guaranteed. When it comes to political institutions, the volatility and limited purchasing value of cryptocurrencies mean that parties and candidates should be cautious when using them, avoid speculators, and keep their attention on the political competition rather than the up and downs of the cryptocurrency market. Cryptocurrency has had a significant impact on institutions in developing countries worldwide, affecting them economically, politically, and socially.
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