The pandemic has further exacerbated the wealth inequality and has left many governments and nations paralyzed. Despite numerous challenges in the past, including tsunamis, civil wars, bad governance and corrupt politicians, South Asia has remained resilient and optimistic. Despite governments operating with the sole purpose of fulfilling short term election goals, private enterprises continued to propel the economies forward, fuelling an unrelenting faith in a better tomorrow. And so, the emergence of COVID-19 was viewed with the same sentiment, and regarded as a minor disruption that would only last for a short period of time. Eighteen months have passed since, and there is no sign of the pandemic slowing down. Though a few battles are won, the war is far from over, driving humanity toward the precipice of a great global reset.
Most South Asian economies rely mainly on FDIs, exports, tourism and inward remittances from an expat blue-collar workforce in order to sustain their economies, and are now seen struggling to manage their balance of payments. The once lucrative forex inflows are now fast drying up. The governments and central banks are now faced with the herculean task of preventing a total economic collapse. Even the largest economy in the world saw unemployment rates rise as high as 14.7% in April 2020—the highest recorded percentage since the Great Depression. As of July 2021, the U.S. unemployment rate was over 5%, rising higher than its average annual rates of 3.5% prior to the pandemic. The U$ 1.9 trillion rescue plan passed by the Biden Government this year, along with increasing oil prices and a stronger Chinese Yuan decreasing the strength of the USD, has given rise to a further negative impact on the struggling South Asian economies who are holding foreign reserves in a fast de-valuing currency.
Although the world has rebounded from financial collapse, decades of bad financial governance and the excess printing of money has effectively deflated the value of fiat globally. The world was in need of an efficient decentralized deflationary financial asset. Satoshi Nakamoto’s whitepaper on Bitcoin (BTC) made this a reality, creating a strong catalyst for a global financial revolution. The year 2020 helped the early adopters of Crypto reap high financial rewards from Bitcoin, as the world first witnessed the true power of a decentralised asset, with nearly 50% of the global millennial millionaires investing a minimum of 25% of their resources into crypto assets. As BTC races ahead to become the number one performing asset of the decade, with an unhindered meteoric rise during one of the worst economic downturns in history, the majority of crypto investors are transcending traditional boundaries, and becoming global citizens who are not restricted to their native countries. Considering countries that accept cryptocurrency as legal tenders, netizens are ready to relinquish their citizenships in countries with inhibitive taxations, in favour of migrating to more crypto-friendly nations.
Leap-frogging to embrace an asset class of the future
The global crypto market is currently booming with liquidities of over U$ 2 trillion. The decentralized financial (DeFi) market has also seen rapid increases, commencing with the DeFi Summer of 2020 which saw a total locked value (TVL) of crypto breaking the $1 billion mark in February, and a whopping $10 billion in September on Ethereum alone. The decentralized lending platform Compound broke $10 billion mark in TVL in early April, whilst CoinGecko forecasts that the DeFi market capitalisation will be over U$ 128 billion by year end.
Countries such as Sri Lanka, Nepal and Maldives can be seen gasping for breath due to the lack of forex inflows caused by the economic adversities of this past year. In addition, Sri Lanka was given a ‘CCC’ rating from Fitch this July which added a further blow to its economy by stifling global credit lines. This, coupled with a sovereign debt of US$ 5 Billion annually for the next few years projects a grim future for the island nation; which begs the question of how the country plans on reducing such a large budget deficit in the hopes of increasing its rating. Similar predicaments are being faced by Nepal, with forex inflow problems and reserves standing at U$ 10 billion, as well as Maldives, an economy which is largely dependent on tourism and tourism related investments. With such a despondent outlook plaguing the traditional fiat markets, the region has nothing to lose by offering favourable tax incentives for Cryptocurrency and DeFi related investment instruments, in an effort to attract forex inflows that could be crucial for the future sustainment of these economies.
As most western nations are imposing stifling regulations against crypto in favour of protecting their centralised monitory economies, this could be the opportunity that South Asia needs to regain financial freedom. A swift move into this growing asset class can finally help these economies enjoy true independence from their western counterparts. The recent report, Adding Fuel to Fire: How IMF demands for austerity will drive up inequality worldwide published by Oxfam further explains how IMF plans to adversely effect developing nations by driving the middle class into poverty, thus expediting the K- shaped recovery. Today (2nd September) El Salvador announced that the country is currently taking steps to develop the its blockchain infrastructure in order to host government documents. Taking a cue from their enthusiasm for the great de-dollarization experiment, other South American countries too are following suit.
The global crypto population has witnessed an exponential growth to 221 million within a few years, which is double the growth rate of the internet; hitherto the fastest tech adoption recorded in human history. Forecasts are set to witness 1 billion crypto users in as early as 2024. Attracting even a fraction of this market and its service providers can be a game-changer for South Asia!
Reference links
Bloomberg – Dollar May Be on Brink of Sustained Downtrend
CNBC – Millennial millionaires have a large share of their wealth in crypto
CEIC DATA – Sri Lanka Foreign Exchange Reserves
Trading Economics – Maldives Foreign Exchange Reserves
CEIC DATA – Nepal Foreign Exchange Reserves
Nepal faces constrained import capacity as key sources of foreign exchange earnings dry up
World Economic Forum – Are we experiencing a K shaped recovery from COVID-19
Trading Economics – United States Unemployment Rate
U.S. Bureau of Labor Statistics – The Employment Situation—July 2021
Coingecko – DeFi market capitalisation
Fitch Rating – Fitch Affirms Sri Lanka at ‘CCC’
BTC Peers – Cuba could be next to adopt BTC
QZ Africa – Kenyans lead the world in peer to peer crypto trade
OXFAM – Adding Fuel to Fire: How IMF demands for austerity will drive up inequality worldwide
Coinbase – El Salvador to Launch Government Blockchain Infrastructure on Algorand This Year
Like the article.
Intrigued as to what can Private sector, Govs and Central Banks do to encourage crypto?
Do you see a downside for any of these stakeholders?
The requirement is a mindset change Rajiv, downside is the short term volatility of the markets. We are at the beginning of global adoption and the rate which it is happening is unprecedented. Some forward thinking stakeholders you’ve mentioned have shifted their focus towards crypto as it is too large to go unnoticed.