Open Journal of Economics and Commerce

SRYAHWA ISSN: 2638-549X | Volume 4, Issue 1, 2023

PUBLICATIONS https://doi.org/10.22259/2638-549X.0401001

RESEARCH ARTICLE

The Impact of Cryptocurrencies on Developing Market Economies

Henri Kouam1, Kelly Mua Kingsley2
1
Economic Consultant, North American Treaty Organization (NATO), Cameron.
2
Director of Operations, State of Cameroon.

Received: 18 March 2023 Accepted: 01 April 2023 Published: 09 June 2023

Corresponding Author: Henri Kouam, Economic Consultant, North American Treaty Organization (NATO), Cameron.

Abstract
Cryptocurrencies are electronic forms of money that are seen as credible investments; these currencies
ranging from Bitcoin, Litecoin, and Etherium are increasingly viewed as a separate asset class with unique
characteristics, driven by the distributed ledger technology (DLT) commonly referred to as Blockchain has
increased trust in Bitcoin as a store of value and medium of exchange. This paper looks at the evolution
of bitcoin and the challenges that have come to characterize the Nobel currency. From sound governance,
tax compliance, data privacy and portability, cybersecurity, and fair competition; the currency in its current
form exposes economies to grave economic and financial stability risks. Policymakers should regulate the
functioning of bitcoin as they would a speculative asset class, by constraining risk-taking from banks by
increasing requirements for deposits, whilst designing a mechanism that monitors and improve the functioning
of markets that allow the proliferation of the currency.
Keywords: Cryptocurrencies, Competition, Distributed Ledger Technology, Financial Stability

1. Introduction – have emerged (Graph 1, left-hand panel). While it

seems unlikely that bitcoin or its sisters will displace
New cryptocurrencies are emerging daily, providing
sovereign currencies, they have demonstrated the
alternatives to traditional forms of payments and
viability of the underlying blockchain or distributed
enabling new mediums of exchange such as cash.
ledger technology (DLT) and its credible use and
These currencies span Bitcoin1, Litecoin and Etherium,
application across other sector such as manufacturing,
designed to provide some characteristics of money
health care, investment, cyber security and big data.
as well as asset classes that enable the transfer and/
store of value across societies. In less than a decade, Venture capitalists and financial institutions are
bitcoin has gone from being an obscure curiosity to investing heavily in DLT projects that seek to
a household name. In recent times, bitcoin has risen provide new financial services as well as deliver old
– with ups and downs – from a few cents per coin ones more efficiently. Bloggers, central bankers and
to over $4,000. In the meantime, hundreds of other academics are predicting transformative or disruptive
cryptocurrencies – equalling bitcoin in market value implications for payments, banks and the financial
1. Bitcoin is an example of a non-central bank digital system at large.
currency. It was invented by an unknown programmer who Findings from Andolfatto (2015, 2016), Broadbent
used the pseudonym Satoshi Nakamoto and was released
as open-source software in 2009 along with a white paper
(2016), Raskin and Yermack (2016) and Skingsley
describing the technical aspects of its design (see Box A for (2016) attest to this sea-change in mediums
further details). of exchange as consumers and transformative

Citation: Henri Kouam,. The Impact of Cryptocurrencies on Developing Market Economies. Open Journal of Economics and Commerce.
2023; 4(1): 1-8.

©The Author(s) 2023. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and
reproduction in any medium, provided the original work is properly cited.

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The Impact of Cryptocurrencies on Developing Market Economies

implications for economies, financial systems and Similarly, it is imperative to understand the
consumer investment behavior is already changing implications of these novel sources of investment
reflecting a macroeconomic backdrop characterised on macroeconomic outcomes, monetary policy and
by ultr-accomodative interest rates, low economic consumer behavior. This paper outlines the nature of
growth and a dearth of investment opportunities with crypto-currencies, outlines the inherent differences
over 20% of global debt yielding negative returns. to cash and how best to leverage their investment
The transformative changes likely embedded in the characteristics without compromising financial
increased use and &adoption of cryptocurrencies stability.
across economies suggests a need to better understand
the nature of cryptocurrencies.

Figure 1. Bitcoin appears to be a volatile investment, but not a credible store of value
Sources1: Central Bank of Kenya; CoinDance; CoinDesk; www.blockchain.info.

1. Ninety-day moving averages. 2 Ratio of standard deviation to mean. 3 Monthly averages. For bitcoin, estimated transaction
value in USD; for M-pesa™, transaction value in KES converted into USD.
2. Can Bitcoin Serve as a Medium of store of value and the democratic consensus which
underpins the crypto currency is limited to its users.
Exchange? Secondly, cryptocurrencies are not accessible to
It is not clear that bitcoin can ever replace cash as individuals who do not participate in the purchase of
it operates via democratic consensus, supported by sale of bitcoin, litecoin, etherium etc.
the distributed ledger technology and has a limited In this spirit, Bjerg (2017) includes the universality of
number of users. This paper defines a cryptocurrencies accessible currencies as central to the legitimacy of
as an electronic form of central bank money that can central-bank issued currencies. It is important to note
be exchanged in a decentralised manner known as that central banks across the world are issuing digital
peer-to-peer, meaning that transactions occur directly currencies to leverage the technological advances
between the payer and the payee without the need latent in the distributed ledger technology; it is,
for a central intermediary1. Unlike cash issued by the therefore, imperative to make a distinction between
central bank, Bitcoin is supported by the distributed cryptocurrencies and central bank digital currencies
ledger technology that serves as a medium of exchange (CBDCs).
between its users.
This taxonomy reflects what appears to be emerging
Furthermore, it does not have the characteristics in practice and distinguishes between two potential
inherent in “cash” issued by a central authority as types of CBCC, both of which are electronic: central
it is not recognised by governments as a legitimate bank-issued and peer-to-peer. One is accessible to the
general public (retail CBCC) and the other is available
1. The purest form of peer-to-peer transaction is a cash
exchange. On a computer network, the peer-to-peer concept
only to financial institutions (wholesale CBCC).
means that transactions can be processed without the need
for a central server.

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The Impact of Cryptocurrencies on Developing Market Economies

The other form is, at least in theory, deposits held by

the general public. Tobin (1987) refers to this form as
deposited currency accounts (DCAs).2So far, central
In principle, there are four different kinds of electronic 2. In a 1987 speech, Nobel laureate James Tobin argued that,
central bank money: two kinds of CBCCs (the shaded in order to avoid relying too heavily on deposit insurance
area) and two kinds of central bank deposits. The most to protect the payment system, central banks should “make
familiar forms of central bank deposits are those held available to the public a medium with the convenience of
deposits and the safety of currency, essentially currency
by commercial banks – often referred to as settlement
on deposit, transferable in any amount by check or other
accounts or reserves. order” (Tobin (1987, p 6); see also Tobin (1985)). That is,
people should be able to store value without being subject

Figure 2. Two taxonomies of new forms of currency

This distinguishes CBCCs from other existing forms maintain consistency across the multiple copies of the
of electronic central bank money, such as reserves, ledger. The simplest way to do this is for the system
which are exchanged in a centralised fashion administrator to maintain a master copy of the ledger
across accounts at the central bank. Moreover, the which is periodically updated and shared with all
taxonomy distinguishes between two possible forms network participants (Bech and Garrat 2017).
of CBCC: a widely available, consumer-facing By contrast, the new systems based on DLT,
payment instrument targeted at retail transactions; most notably Bitcoin and Ethereum, are designed
and a restricted-access, digital settlement token for to function without a trusted authority. Bitcoin
wholesale payment applications. As illustrated in the maintains a distributed database in a decentralised
chart above, cryptocurrencies are not backed by a way by using a consensus-based validation procedure
central issuer, as such, they are not the liability of any and cryptographic signatures. In such systems,
one party and operate based on a distributed ledger transactions are conducted in a peer-to-peer fashion
technology (see chart below). and broadcast to the entire set of participants who
Distributed ledger technology (DLT) refers to the work to validate them in batches known as “blocks”.
protocols and supporting infrastructure that allow Since the ledger of activity is organised into separate
computers in different locations to propose and validate but connected blocks, this type of DLT is often
transactions and update records in a synchronised referred to as “blockchain technology”.
way across a network. The idea of a distributed ledger The blockchain version of DLT has successfully
– a common record of activity that is shared across powered Bitcoin for several years. However, the
computers in different locations – is not new. Such system is not without drawbacks: it is costly to
ledgers are used by organisations (e.g. supermarket operate (preventing double-spending without the use
chains) that have branches or offices across a given of a trusted authority requires transaction validators
country or across countries. However, in a traditional (miners) to employ large amounts of computing
distributed database, a system administrator typically power to complete “proof-of-work” computations);
performs the key functions that are necessary to

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The Impact of Cryptocurrencies on Developing Market Economies

banks have generally chosen not to provide DCAs. and Hyperledger Fabric. Corda replaces blockchain
there is only probabilistic finality of settlement; with a “notary” architecture. The notary design
and all transactions are public. These features are utilises a trusted authority and allows consensus to be
not suitable for many financial market applications. reached on an individual transaction basis, rather than
Current wholesale DLT payment applications in blocks, with limited information-sharing.
have therefore abandoned the standard blockchain Furthermore, cryptocurrencies could enhance
technology in favour of protocols that modify sanctions busting, which has outsized implications
the consensus process in order to allow enhanced for the global world order. It can be seen a credible
confidentiality and scalability. Examples of protocols tool for money laundering across the globe. This
currently being tested by central banks include Corda holds grave implications for tax shifting, more so
to the risk of bank failure.

Figure 3. Distributed ledger system

1
Source: Santander InnoVentures (2015).

1. See also Chapman et al (2017), CPMI (2015) and Benos et al (2017). The amount of energy currently being used by Bitcoin
miners is equal to the energy consumption of Lebanon and Cuba (see http://digiconomist.net/bitcoin-energy-consumption).
For a detailed description of proof-of-work, see https://en.bitcoin.it/wiki/Proof_of_work.
Admittedly, this prompted caution from the G20 of bitcoin and litecoin are not based on any asset or
and Kouam (2019), who illustrate the implications reserves at a central bank, which prevents the creators
to financial stability and disintermediation in from incurring any loss and significantly exposes
the financial system. It is important to note that the users of said currencies. The absence of legal
cryptocurrencies do hold characteristics that are certainty over the convertibility of cryptocurrencies
inconsistent with financial stability in the absence for cash or any other asset are symptomatic of a lack
of intentional and targeted regulation. Bitcoin is an of governance that could prove futile over the long-
example of a non-central bank digital currency. It run for developing economies that are already prone
was invented by an unknown programmer who used to capital outflows, courtesy of political uncertainty.
the pseudonym Satoshi Nakamoto and was released Money Laundering – Terrorist Activities and Illicit
as open-source software in 2009 along with a white Activities: Cryptocurrencies operate via democratic
paper describing the technical aspects of its design consensus but distributed ledger technologies that
(see Box A for further details). prevent regulators from performing a vital function.
This is particularly salient for law enforcement and
3. What are the Risks Associated to counterterrorism activity that is salient for both
Cryptocurrencies? advanced and developing market economies. Safety,
Legal Certainty and Sound Governance: One of Integrity and Efficiency of payment systems: Payment
the drawbacks of cryptocurrencies is the uncertainty systems are a way for consumers and institutions
surrounding claims amongst participants. The likes to execute transaction across borders and within
economies.
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The Impact of Cryptocurrencies on Developing Market Economies

for developing economies that currently see over 2 does not eradicate the propensity for fraud, it bolsters
billion in tax evasion. cyber resilience across the system. Meanwhile, there
The emergence of new cryptocurencies will create are other issues that accrue to centralised information
new forms of clearing that can compromise the systems, the majority of whom will form the basis of
legitimacy, not least efficiency, of such systems. The electronic currencies and central bank issued digital
integrity of payment systems are central to democratic currencies.
underpinnings of cash and the functioning of financial In Kenya, consumers challenged the legitimacy of its
systems. New currencies that are disconnected from National Integrated Information Management System
the financial system can create systemic risk and (NIIMS) as amended by the Statute Law Miscellaneous
impose significant pressure on payment systems in (Amendment Act) 2018. One of the petitioners’
the event of a run or a sudden loss of monetary value. grounds of contention, which will form a central part
Cyber Security and Operational Resilience of this discussion, was that there are no adequate and/
or proper safeguards for protection of the data and/
Admittedly, the distributed ledger technology can be or personal information intended for collection under
termed “highly secure” but by no means does this the NIIMS system, hence there is a violation and/or
mean the technology underpinning cryptocurrencies threat of violation of the right to privacy guaranteed
is unassailable. However, its mode of operation is under Article 31 of the Constitution (Kimani, 2019).
decentralised, reducing the probability of targeted If the distributed ledger technology fails to protect
attacks against a centralised server or location at any consumer data implicitly, such concerns are likely to
given time. Meanwhile, it should be noted that such emerge much more strongly for cryptocurrencies such
operational risks are symptomatic of any digitized as bitcoin, etherium and litecoin. There is ample space
systems that rely on a complex network of electronic for regulator to begin designing legislation designed to
systems. It should, however, be noted that while protect consumer’s interest if cryptocurrencies are to
credit card fraud can be mitigated by a range of novel become operational in developing market economies.
tools such as multi-factor authentication, biometric
log-in processes and geo-location instant messaging Market Integrity and Bitcoin
tools confirming the users’ identity and passwords. Concerns regarding the integrity of cryptocurrency
This has been increasingly employed by banks across markets are a hurdle to mainstream and institutional
the globe in a bid to lessen cyber security risks and adoption of digital assets, in addition to being a key
bolster resilience. concern for regulators. To improve market integrity
The cyber security risks of a cryptocurrency that and provide consumers the confidence they deserve,
relies on democratic consensus and a decentralised policy makers may need to enact legislation to support
mundus operandi are evident, but these are much the orderly and secure functioning of crypto markets.
less prominent that traditional electronic transactions. Such legislation will comprise banking authorities
However, bitcoin has been targeted by hackers on such as COBAC for CEMAC member countries as
September 26th, confirmed by KuCoin Global CEO well as domestic regulatory bodies that are designed to
Johnny Lyu (Kucoin, 2020). The breach affected the support market functioning and lessen the spillovers
Kukoin’s Bitcoin (BTC), Ether (ETH), and ERC20 from cryptocurrnecies into the real economy. The
hot wallets, after private keys were leaked. Reports amount of bitcoin that can be issued at any given
estimate the breach to have affected $150 million time and there are no regulators or market makers to
in user funds. This suggest the fallibility inherent in ensure smooth functioning of peer-to-peer exchanges.
digital systems and the exposure as well as the transfer Data Privacy and Portability: Privacy concerns
of risk to consumers cannot be understated. are little associated with blockchain technology as
Similarly, Sub-Saharan African countries such as unique identification numbers and a fool-proof system
Nigeria and Kenya have equally been prone to bank protects consumer data and users of its peer-to-peer
fraud, including but not limited to identity theft, lending. As outlined above, the distributed ledger
beneficial owners, financial inclusion, discrimination technology is not unassailable as there have bitcoin
and blacklisted consumers etc. Esoimeme (2015) finds has been subject to hacks. One of the features of peer-
that a Bank Verification Number (BVN) could bolster to-peer exchange facilitated by the distributed ledger
cyber resilience if properly implemented. While this technology is the feature of anonymity.

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The Impact of Cryptocurrencies on Developing Market Economies

Unlike traditional modes of exchange such as cash or economic fallout can be seen from two stand points;
other electronic payments, cryptocurrencies promise 1). The cost of hedging against macroeconomic risks
anonymity, enabling their users to exercise their right such as inflation or risk-adjusted returns on developing
to purchase without any legislative impediments economies can exacerbate liquidity and banking
from governments; the anonymity is symptomatic crisis. For example, if consumers seek to insulate their
of cash but the risks inherent with digital forms of portfolios and investments from inflation, they can
payment are consumers’ data that are stored online. increasingly rotate their assets into cryptocurrencies,
The information risks associated to cash are muted, which can further reduce the value of the exchange
but regulators must ensure that consumer data is rate and precipitate a currency crisis. This imposes a
protected in a rigorous manner. costs on the fiscal balances of developing economies,
Consumer and Investor Protection: there are no as their governments have to spend more to attenuate
clear definition for investor and consumer protection the costs of banking or currency crisis. Meanwhile, the
as the distributed ledger technology does not provide cost of borrowing for banks and governments equally
any way to trade the founders of cryptocurrencies. rise following periods of macroeconomic stress, more
Furthermore, cryptocurrencies operated via so as one in three countries are at risk of debt distress.
democratic consensus, which absolves anyone 2). The second costs that accrue from non-compliance
party of counterparty risks. For example, an event- or tax evasion are lower government revenues.
triggered sell-off could have adverse implications This particularly endemic of developing market
for financial stability, but unlike the financial crisis economies, which are prone to tax evasion s domestic
where blame was attributed to banks; the value of the regulation is not sufficiently harmonised with global
currency is contingent on demand and scarcity. It is, standards to prevent tax shifting across jurisdictions.
therefore, challenging to design legislation protecting This constrains spending on vital infrastructure such
investors over the longrun, but it is indispensable as roads, schools and energy that are necessary for
that regulators explicitly prohibit banks and financial economic development. More worrying is the fact
institutions from using consumer deposits to invest in that developing economies are commodity exporters,
cryptocurrencies. whose revenues are exposed to the global business
Tax Compliance: Tax evasion nd avoidance is cycle as well as economic activity prone to different
endemic in developing market economies, due to an tax countries. Tax avoidance and hedging impose
inability to coordinate global surveillance and the grave costs on policy makers’ ability to spend,
ability of multinationals to shift profits to tax havens. thereby slowing economic development. The issue of
From the stand point of cryptocurrencies, they will tax compliance can, therefore, not be overstated.
provide a credible vehicle for global companies to Monetary and Financial - Hedging and Monetary
evade taxes as retained earning can be otherwise Policy Transmission: Cryptocurrencies are a credible
termed investments that are subject to different tax vehicle of investment for some, as they are a store of
regimes across different jurisdictions. According to value in some regards and can be converted to cash
the IMF, developing economies loose over 2trillion on based on the given amount of sellers at any one time.
average, which constrains government spending and However, they impose grave cots to the financial
exacerbates the impact of weaker external balances. system, not least financial stability, as individuals
It is, therefore, imperative for policy makers to ensure can use cryptocurrencies to hedge against inflation or
that such cryptocurrencies are not used as a means other macroeconomic outcomes such as low growth
to evade taxation that have grave socio-economic or weaker returns on investments.
costs to nations, not least developing economies with The disintermediation caused by cryptocurencies
structural economic imbalances facilitated by free can enable investors to store their assets in
trade policies that have not sufficiently accounted for cryptocurrencies and cause the currency to depreciate.
tax loopholes. A weaker currency not only causes prices to rise, it
Whilst such unfortunate economic effects are endemic equally depresses economic growth (REF, REF and
in cryptocurrencies, it is important to consider the tax REF).
implications of cryptocurrencies prior to legislating As such, the economy is prone to hedging and
their operation in developing market economies. The inflation overshoots if individuals park their assets

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The Impact of Cryptocurrencies on Developing Market Economies

in cryptocurrencies. This obviously has implications ensuring smooth market functioning and creating the
for monetary policy, where by central banks will have right incentive for market participants and platform
to raise policy rates to keep a lid on inflation even owners to effectively transact.
as the economy slows. As a result, such pro-cyclical The rationale for forward-looking regulation and
monetary policy outcomes could amplify the shock legislation is imminent, but this should champion
from uncontrolled investments in cryptocurrencis. fairness for a rudderless currency with significant
Over time, the inverse relationship between the domestic ramifications.
performance of cryptocurrencies and the exchange
rate will induce pressures for monetary policy that will 4. Recommendations
have to contend with episodes of financial instability • Policy makers should ensure that a group of
and lower economic growth. More worrying are the public sector staff are ware and knowledgeable
transmission mechanisms from monetary policy about blockchain technogies. They should ensure
that could assuaged by renewed investments in that the security concerns that could arise as well
cryptocurrencies as the purchasing power of cash as the financing issues and hedging that is implicit
remains impeded by the uncertainty created by the in bitcoin can be spotted. Admittedly, this can
linkage between cryptocurrencies and traditional equally enable the formation of tech units that
exchange rates. Admittedly, limits could be set on seek to better understand the distributed ledger
the amount of deposits that can be credibly invested technology and can implement this across other
in cryptocurrencies and enhanced convertibility can sectors such as manufacturing, retail and health
result in greater financial stability over the longrun. care. A complete and up-to date understanding of
However, such an outcome is only likely if crypto block chain is indispensable to assuaging security
companies own deposits at the central bank to ensure concerns should they arise, whilst ensuring that
convertibility. consumer data and interactions are shielded from
The International Trading System: Capital flows techbandits or other forms of assailants.
form the backbone of the modern day economy, with • Secondly, policy makers should discourage
liquidity and foreign direct investment necessary hedging by ensuring that any electronic currencies
for the functioning of the modern day economy. hold large liquid deposits at a central bank to
Cryptocureencies will discourage investment in ensure convertibility. This will reduce sudden
traditional assets that have a positive impact on the real spikes in the value of the currency as investors
economy via employment the employment channel or citizens seek to flee episodes of risk such as
and networks effects that eventually spillovers into a sudden plunge in the value of the currency
the informal sector in developing market economies. caused by an exogenous or endogenous shock
Should cryptocurrencies become ubiquitous, it is such as COVID-19. This will equally lessen
not unlikely that huge swathes of capital will be financial stability risks as commercial banks
transferred from traditional asset classes like stock, will be sufficiently liquid to and improve the
bonds, real estate and commodities to cryptomoney. transmission mechanism from monetary policy.
This is even more likely as over 20% of global debt Liquid deposits will improve financial stability;
is negative yielding and investors will be looking for not least guarantee it over the long run.
other means to generate higher returns. Not only are
the development implications of cryptocurrencies • An effective tax mechanism should be set to
dire, they can equally serve as an anchor for a new ensure that cryptocurrencies are contributing to
type of investment, which do not particularly related the societies were each trade occurs. For example,
to the modern-day economy. policy makers could design a tax based on each
trade and a certain sum to reflect the creation
Fair Competition: Cross Border Effectiveness of economic activity on the financial side of
The last decade has exposed the frailties and the economy; the proceeds from such taxes can
vulnerabilities of an increasingly interconnected be used, explicitly, to up skill and digitize the
and interlinked global economy, with centralised workforce. An example includes the creation of
clearing and free-flowing capital across borders. It is job transition.
important for cryptocurrencis to regulate sufficiently
in advance, imposing restrictions on the amounts of
5. Conclusion
deposits that can be used to invest in these assets, cryptocurrencies as an electronic form of central

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The Impact of Cryptocurrencies on Developing Market Economies

bank money that can be exchanged in a decentralised 21st century needs of domestic economies; this is
manner known as peer-to-peer, meaning that particularly salient for developing economies that are
transactions occur directly between the payer and the prone to tax evasion and global tax haemorrhaging.
payee without the need for a central intermediary3. This article posits the challenges associated with
Unlike cash issued by the central bank, Bitcoin is cryopto-currncies in the context of developing,
supported by the distributed ledger technology that emerging and advanced economies. While its does not
serves as a medium of exchange between its users. explicitly advocate the ban of cryptocurrencies, their
The currency is driven by technological advances and functioning in economy should be accompanied by a
has come to firm a credible mode of exchange for set of measures that address data, privacy, security,
market participants across advanced, emerging and economic and financial issues.
developing market economies.
This paper finds that Bitcoin does not possess unique
6. References
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