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In the crypto community, it is common to consider digital assets as a lifeline for residents of developing countries. At first glance, it looks like a victory of financial freedom. But the second and closer look reveals moments, which in the rush of bitcoin euphoria are usually not noticed;
What's the problem?
The popularity of cryptocurrencies in developing countries is due to the instability of local economies, high inflation rates and low access to banking services. People choose digital assets as a means of savings and use them for everyday or cross-border transactions. The latter is due to relatively easy account opening, low fees and speed of transfers compared to traditional finance.
However, this financial freedom has a downside that cannot be ignored. Many products and infrastructure are becoming more centralized, allowing large market players to not only regulate access to services, but also change the rules of the game.
For developing countries, this risks falling into the trap of digital colonialism, where the need for external solutions and the inability to develop their own infrastructure threatens a new form of dependency.
Digital colonialism is manifested in dependence on global financial institutions, international organizations and centralized platforms where decisions on access, prices and rules of the game are made by large corporations. As a result, states and users are losing sovereignty over their data, financial flows and the digital economy.
Independence within other people's rules
Latin America is one of the regions where cryptocurrencies have become widespread, accounting for 9.1% of the total value of cryptocurrencies received, according to Chainanalysis.
The most prominent example of state-level bitcoin use and reliance on a financial organization representing developed countries, is El Salvador. In 2021, the government gave bitcoin the status of legal tender, which was not appreciated in the MWF. The organization used money as a leverage - the country needs the loan to solve the liquidity problem and repay debts on government bonds;
In the end, El Salvador agreed to revise its bitcoin strategy in exchange for $1.4 billion in loan financing. Including the participation of regional entities in the program, the package exceeds $3.5 billion.
Authorities in the Central African Republic (CAR) had a similar problem. They legalized bitcoin in April 2022, but this was almost immediately reacted by the IMF. Representatives of the organization said about possible problems for the country and the region as a whole. And later, they suggested that all African countries tighten supervision over digital assets. As a result, a year later, the CAR discontinued bitcoin.
It's not just the IMF putting pressure on developing countries. In March 2024, Vietnam's Ministry of Finance raised the possibility of banning or regulating digital assets by May next year as part of a drive to boost anti-money laundering efforts. The plan aims to get the country off the FATF "gray list."
But the threat doesn't just come from international organizations determining, instead of governments, how they should treat new asset classes. In countries where cryptocurrencies are gaining widespread acceptance among the population, there is a growing threat of centralization and dependence on the decisions of large market players.
"De"centralization
According to Chainanalysis, Latin American residents overwhelmingly favor CEX (68.7%). As of 2023, centralized platforms accounted for 92.5% of transactions in Venezuela, 74% in Colombia, and 63% in Argentina. Only in Mexico was the ratio of CEX and DEX usage nearly equal.
Mexico is the second-largest recipient of remittances in the world, with estimates suggesting the country receives $61 billion a year from abroad, mostly from the United States. Bitso CEO Daniel Vogel told Chainalysis analysts that his exchange processed more than $3.3 billion in cryptocurrency transfers sent from the United States to Mexico in 2022 (5.4% of the total market).
This skew towards centralized platforms is due to the mass user's need for simple solutions. Unlike DEX, the interaction with many CEX is clear and conditionally safe. As with stablecoins.
They have become the dominant type of digital assets in all Latin American countries due to their tight peg to the US dollar (USDT, USDC). In Argentina, for example, at least a third of the population turns to digital assets for everyday transactions. This allows locals to avoid the effects of peso devaluation and preserve their savings. The country's share of stablecoin transactions is 61.8%, slightly ahead of Brazil (59.8%) and well above the global average (44.7%).
The apparent dependence on centralized platforms and products makes users from developing countries vulnerable to external circumstances and decisions by major players.
For example, as a result of Binance's troubles in Nigeria, local customers lost the ability to interact with the platform. In March 2022, MetaMask users in Venezuela, Lebanon, and Iran reported difficulty accessing the non-custodial wallet due to the team's decision to "comply with the law."
In December 2023, Tether announced a new policy to freeze wallets whose owners are under OFAC sanctions. Given that geopolitics is a rather unpredictable thing, every country could theoretically face economic restrictions.
Finding Resources
Attention to the environment, dissatisfaction of local residents and expensive electricity tariffs are forcing miners to look for new territories for their data centers, preferably with rich natural resources. The choice mainly falls on developing countries.
For example, in 2023, MARA announced the launch of a bitcoin mining facility in Paraguay. The company chose Itaipa, the second most powerful hydropower plant in the world. Representatives of the miner presented the news as a way to help the country avoid losses and monetize surplus electricity.
Later, MARA made global expansion part of its strategy and did not rule out entering the African market. Chinese miners were also interested in the region - Bloomberg learned about relocation of these market players to Ethiopia due to favorable climate and inexpensive electricity.
As of December 2024, state-owned power supplier Ethiopian Electric Power contracted with 25 mining companies. The country's share of the bitcoin hashright has reached 2.5% (as of the same month).
Looking at the situation from one angle, developing countries have provided large industry players with their natural resources and labor, benefiting financially. On the other hand, they have limited opportunities for independent development (it will be difficult to compete with a major player that has entered the market unhindered) and have made themselves dependent on external circumstances. In addition, most of the profits go outside the local economy.
Conclusion
Cryptocurrencies have given users from developing countries access to alternative financial instruments, and have become a way of protection against hyperinflation and economic turmoil. However, the lack of their own infrastructure and full-fledged decentralization leads to a new form of colonialism;
Digital independence begins where one's own control over data and technology emerges. And this is a challenge not only for developing countries, but for the entire industry.
