🎯 The Nexus of Cryptocurrency and Developing Economies:

🌍 Financial Inclusion, Hedging Capabilities, and Systemic Risk

Executive Summary: Blockchain technology and decentralized finance (DeFi) are reshaping global economic structures. While developed economies focus on regulation and institutional adoption, developing economies face a dilemma: financial inclusion versus capital flight and volatility spillovers. This blog synthesizes evidence from academic journals to assess these dynamics.

1. Financial Inclusion and the Unbanked 🏦

Cryptocurrency adoption in developing nations enables populations to bypass traditional banking systems. In regions with limited access to credit and savings, digital currencies function as alternative stores of value and payment mechanisms.

💡 Cryptocurrency reduces cross-border remittance costs which is critical for economies where remittances exceed foreign direct investment (FDI).

However, low digital literacy and weak cybersecurity awareness increase asset-loss risks, potentially worsening economic vulnerability (Gomber et al., 2018).

2. Cryptocurrency as an Inflation Hedge 🛡️

Many developing economies experience persistent inflation and currency depreciation. Bitcoin has been proposed as a hedge, though empirical evidence remains mixed.

Bouri et al. (2017) demonstrate that Bitcoin functions primarily as a diversifier, with safe-haven properties only under specific market conditions.

3. Market Spillover and Systemic Risk 🔗

Empirical studies indicate increasing co-movement between cryptocurrency markets and equity markets during periods of financial stress.

Charfeddine et al. (2020) find significant spillovers between Bitcoin and BRICS stock markets, suggesting heightened systemic risk exposure.

4. Capital Controls and “Bitcoinization” 🚫

Cryptocurrencies undermine capital controls in economies with weak institutional trust. This phenomenon forces central banks to reconsider monetary sovereignty (Makarov & Schoar, 2020).

Conclusion 📝

⚖️ Cryptocurrency presents a trade-off between innovation and macroeconomic stability. Carefully designed regulatory sandboxes are essential.

📚 References:

1. Bouri, E., Molnár, P., Azzi, G., Roubaud, D., & Hagfors, L. I. (2017). On the hedge and safe haven properties of Bitcoin: Is it really more than a diversifier?. Finance Research Letters, 20, 192-198. (Q1)

2. Charfeddine, L., Maouchi, Y., & Benlagha, N. (2020). Investigating the dynamic relationship between Bitcoin and major financial assets in the BRICS economies. Resources Policy, 69, 101816. (Q1)

3. Gomber, P., Kauffman, R. J., Parker, C., & Weber, B. W. (2018). On the Fintech Revolution: Interpreting the Forces of Innovation, Disruption, and Transformation in Financial Services. Journal of Management Information Systems, 35(1), 220-265. (Q1)

4. Makarov, I., & Schoar, A. (2020). Trading and arbitrage in cryptocurrency markets. Journal of Financial Economics, 135(2), 293-319. (Q1)

5. Demir, E., Gozgor, G., Lau, C. K., & Vigne, S. A. (2018). Does economic policy uncertainty predict the Bitcoin returns? An empirical investigation. Finance Research Letters, 26, 145-149. (Q1)