Hugh writes about cyberspace, digital currencies, economics, foreign affairs, and technology.
The popularity of cryptocurrencies around the globe has forced governments to reconsider their initial stances on cryptocurrency acceptance within their specific borders.
In June 2021, El Salvador became the first country in the world to approve Bitcoin as a legal tender. Other Latin American governments includinge Paraguay, Panama, Brazil, and Mexico, have expressed similar interests in supporting cryptocurrencies as legal tender.
Cryptocurrencies act as a uniquely safe economic instrument in a region plagued by government corruption, interference, and low productivity. In this respect, the adoption of cryptocurrencies as legal tender serves to guarantee some semblance of economic stability for countries in Latin America, allowing for a true launch of economic development initiatives into the digital age.
Government instability in developing countries within Latin America has previously resulted in economic development primarily driven by instruments like foreign direct investment (FDI) and programs like the Belt and Road Initiative (BRI). These tools place a significant burden on local governments, literally and figuratively indebting them to foreign forces.
However, even these traditional sources of economic development saw a downfall in recent history, with FDI inflow projections for 2021 being among the lowest ever since 2005. Alternative programs like the BRI have even encountered trouble in light of the coronavirus pandemic and other factors, with development in critical infrastructure technologies to drive economic growth like 5G, data centers, and satellites stalling throughout
various Latin American counties.
Traditional sources of economic development place a significant emphasis on foreign investment within the region. Therefore, the natural move to cryptocurrencies as a form of legal tender will enable further private and public investment in Latin America, spearheading economic development efforts for years to come.
Latin America’s growing youth population (10-24 years) has resulted in a significant shift of regional demographics, with the number of youth as a percentage of the total population steadily growing in the past twenty years.
Additionally, Latin America’s mobile-first approach to Internet access remains relatively successful, with 72% of the population having direct Internet access and smartphones accounting for 69% of all mobile connections in Latin America. The legalized recognition of cryptocurrency will increase economic growth within the region, with decentralized finance (DeFi) playing an important role in this respect.
DeFi is a blockchain-based form of finance used to disintermediate financial transactions, building a more open and global financial system for all. Having the ability to utilize cryptocurrencies in developing countries within Latin America will help empower individuals and increase rates of financial inclusion within the region. This is especially important given the disparity between different countries within Latin America, with some countries to include Chile, Brazil, and Mexico already having specific payment infrastructures in place while others do not.
DeFi also has significant implications for productivity in Latin America, where GDP has remained relatively stagnant over the past twenty years. Productivity growth depends on technological progress and human capital, both of which DeFi can bring to the region.
The cryptocurrency ecosystem has created significant demand for skilled individuals ranging from blockchain software developers to artists-created non-fungible tokens (NFTs). This demand for highly skilled workers can help improve productivity within Latin America and launch regional economic growth for
many years to come.
Several countries in Latin America have already begun to explore central bank digital currency (CBDC) initiatives in recent history. The acceptance of cryptocurrencies will help increase interest in CBDC development throughout the region, forcing governments to adapt more quickly to the pace of fintech innovation.
The 2018 launch of the Petro marked one of Latin America’s first forays into the digital currency realm. However, the Petro has been primarily sold for U.S. dollars or exchanged for goods or services, as reported by cryptocurrency analytics firm Inca Digital, making it a relatively limited transaction mechanism. More mainstream efforts to establish CBDCs in Latin America include Chile’s efforts to discuss CBDC implementation in 2019 and the release of a Central Bank of Brazil document in 2021 highlighting potential CBDC guidelines.
The legalization of cryptocurrencies in El Salvador will surely spur renewed interest in CBDC development for Venezuela, Chile, and Brazil, along with the rest of Latin America.
The legalization of cryptocurrencies in El Salvador enables the first true practical test of the digital cash concept, a self-governing system of commerce that preserves user privacy and anonymity. This has the potential to urge other countries in Latin America and the globe to not only accept cryptocurrencies as legal tender but also to spur CBDC growth.
Private cryptocurrencies and their extensive usage in a formally legalized manner, as demonstrated through El Salvador’s efforts, will create further incentives for accelerating CBDC adoption and development in the region, further kickstarting economic development in Latin America.
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