As stories of crypto bros driving Ferraris recede from the public view, it is time to ask whether digital currencies like bitcoin might not just be a toy for the world's richest, but rather an unexpected tool for its poorest. Central bankers in the developing world have often treated their deposits as the personal piggy banks of the ruling political class. But money should not be subject to political whims, and cryptocurrency, backed by fixed algorithms, may be the solution to financial mismanagement.
In recent years, the developing world has seen massive monetary problems. From hyperinflation in Zimbabwe to a Turkish lira that has lost more than 90 percent of its value amid geopolitical and internal tensions over the past decade, politicians often turn to the printing press for short-term relief. But money is, first and foremost, a measurement rod. Much like inches and kilograms, euros and dollars should not be allowed to fluctuate day to day. Stable money allows buyers and sellers to transact and employers and employees to enter long-term contracts. When these foundations of a market economy are thrown into question—as most famously with Weimar Germany—major nations face political collapse.
This is where cryptocurrency comes into play. Bitcoin and similar private digital currencies are based on a predetermined supply—in bitcoin's case 21 million. No matter how much someone may want to create 31 or 41 million bitcoins, the network has a set of rules that cannot change without global consensus. Decentralized cryptocurrency networks operate through a kind of democratic consensus that transcends borders. It is true that someone is free to run their own version of bitcoin with different parameters, just as any group is free to start their own language. But the network effects involved make doing so improbable.
To be sure, the price of many cryptocurrencies fluctuates, but the key point is that the supply is fixed. As more market participants enter, including BlackRock's application for a bitcoin ETF, and the price-discovery process continues, we should expect volatility to go down in the largest, most liquid digital assets.
It is precisely because private digital currencies transcend borders that they are a powerful tool for the developing world. Allowing a digital currency to act as legal tender would be a form of dollarization—a situation where an unstable country chooses to make the U.S. dollar their official currency and outsource their monetary policy to the Federal Reserve. This strategy for central banks and has been used both de facto, as with Argentina, or de jure, as in the recent case of Zimbabwe.
Another benefit here is the censorship resistant nature of many digital currencies. Ensuring that individuals are not discriminated against in the financial system for political views is a key aspect of the rule of law and the more independent a currency is from the ruling powers, the better.
Our forthcoming research in the Journal of Financial Stability and Brown Journal of World Affairs, demonstrates that making private digital currencies like bitcoin legal tender creates definite economic gains in developing countries. These gains occur through a number of mechanisms. First, currency competition restrains the inflationary impulses of central banks. A permissive attitude toward digital currency also increases local investment, and allows for diversification. By tying itself to the mast of a fixed monetary policy, a central bank signals both to foreign and domestic investors that their investments will not be eroded.
Our research shows that even selfish governments benefit from establishing more stability in monetary policy. The government's gains primarily come through increased tax revenues from expanded investment. Ideally, that commitment to stability has to be rock solid.
Thus far, the most prominent example of adopting crypto has come from El Salvador, which in 2021 announced that it was making bitcoin legal tender for all debts public and private. While this experiment has yet to yield results, it proves that this approach is no farfetched idea because El Salvador has not faced economic ruin by allowing a competing digital currency to exist alongside the dollar. As with all goods and services on the market, money is better with competition.
As we enter into a bitcoin winter, and those searching for a quick buck jump to their next project, we ought not throw out the good with the bad. Cryptocurrency offers a powerful tool to help some of the poorest countries in the world.
Max Raskin is an adjunct professor of law at New York University and a fellow at the school's Institute for Judicial Administration. His Twitter is @maxraskin.
Richard Epstein is a law professor at New York University, a senior fellow at the Hoover Institution, and a senior lecturer at the University of Chicago. His Twitter is @RichardAEpstein.
The views expressed in this article are the writers' own.
