Cryptocurrencies and stablecoins: An emerging (market) story?

This paper explores how cryptocurrencies (crypto) and blockchain technology could, and in some cases already do, impact emerging markets (EMs). Crypto and blockchain technology are seeing increased adoption across the world and particularly in EMs where inflation has been high, and domestic currencies have been volatile. Increased internet access and a wider range of crypto and blockchain-related options mean it is ripe for further adoption in EMs as these technologies address needs that existing financial systems are unable to meet. This paper focuses on three main areas where crypto is having an impact on EMs:

1. First, we look at the impact of crypto on cross-border payments.
2. Second, we examine crypto as a store of value, while touching on the related macro financial stability risks.
3. Finally, we look at the ways that sovereign states are using crypto and blockchain, from El Salvador to Bhutan.

We avoid making a judgement on the monetary value or speculative nature of crypto such as bitcoin. It is important to note that this remains a nascent technology, meaning that usable data is either limited or questionable in its accuracy, so evidence at this stage is largely anecdotal.

The blockchain and crypto ecosystem still remains a new technology, with limited but rapidly growing uptake, especially in the developing world as they skip a technological step. There are many reasons why adoption of this technology is growing, but largely because it fills a need that traditional fiat currencies and financial systems are struggling to meet, whether for transactions or for a store of value. As adoption continues to grow, the risk of macro instability will also increase due not only to the lack of visibility but also the lack of control by authorities over this new technology. Nevertheless, there are several ways to mitigate the rising risk, most notably through improving regulation, but also by improving external buffers and credible economic policy. Authorities face not only risks surrounding this technology, but also opportunities from the more speculative side, such as bitcoin mining all the way to central bank digital currencies (CBDCs).

There are several key takeaways from an investment perspective, most notably relating to weaknesses in data, which means it will be necessary to view data with increased scepticism while alternative sources of data will be needed to supplement existing sources. Analysis points to increased adoption in Brazil, Argentina, Ethiopia and Nigeria, meaning these countries, among others, will require additional scrutiny when interpreting their macro data. This report also highlights the need for increased vigilance to detect capital flight given the heightened risks.