The Impacts of High-frequency crypto currencies and forex trading over the economies of least developed countries.

Regardless of the form, money must fulfil three main functions. Firstly, it has to be accepted as a medium of exchange for the trade of goods and services. Secondly, it must be suitable as a medium to store value for saving wealth. Thirdly, it must act as a unit of account, to measure and compare the value of goods.

 A developing country is a country with a low Human Development Index and a less developed industrial base relative to other countries. There is no agreement which countries are categorized as developing countries. However, most of the countries which are declared commonly as “developing countries” have various aspects in common, which can therefore be seen as criteria for developing countries.

These similarities are inadequate supply of food for large groups of the population, low per capita income and poverty, a lack of educational opportunities, a lack of access to quality health care which goes along with a high infant mortality rate and low life expectancy. All these aspects lead then to higher unemployment in developing countries, and an overall lower standard of living. Furthermore, the existing assets in developing countries are often extremely unevenly distributed.

crypto currencies are compared with gold, the oldest form of money, and with central bank-issued fiat currencies with regard to different traits of money a digital currency that would enhance and allow secure, peer-to-peer transactions without the involvement of any middleman, whether that be the government, financial institutions system or a company.

A cryptocurrency is a digital asset that can circulate without the centralized authority of a bank or government.

Nowadays there are around 22,703 crypto currencies on the market which corresponds $1 trillion at large

“What is needed is an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party or middleman.” (Nakamoto 2008).

To provide a comprehensive overview of the opportunities of crypto currencies in developing countries, it is necessary to understand the general advantages and disadvantages crypto currencies provide for users compared to central bank-issued fiat currencies, like the Euro or the US dollar, and to discuss how they emerge from the underlying technology.

For this purpose, the example of two crypto currencies is used in this article. The underlying technology of most crypto currencies is blockchain technology.

A blockchain is a decentralized database that is distributed in the network on a variety of computers. It is characterized by the fact that its entries are summarized and stored in blocks.

The first crypto currency discussed in this article as an example is Bitcoin which is technically, “an algorithm that records an ongoing chain of transactions between members of a decentralized peer-to-peer network and broadcasts these records to all members of the network". Bitcoin is the world’s biggest crypto currency with a market capitalization of more than $189 billion1.

It was invented by Satoshi Nakamoto in 2008 when he has published his white paper “Bitcoin: A Peer-to-Peer Electronic Cash System” (Nakamoto, 2008). Secondly, Ethereum is used as an example which is a blockchain-based, public, open-source, computing platform and operating system for smart contracts.

The underlying crypto currency is called “Ether”. It is the second biggest crypto currency in the market with a capitalization of over $11 trillion.

General advantages and disadvantages of crypto currencies This section presents the main advantages and disadvantages of crypto currencies compared to central bank-issued fiat currencies and discusses how they emerge from the underlying technology.

Furthermore, a comparison with existing solutions is provided to show the practical relevance of crypto currencies.

the main economic issues of developing countries will be explained. Note that they are not exhaustive, and there are also other problems like a low educational level and inadequate medical care, which can be considered in addition. One reason for poverty is the limited access to financial services.

The financial inclusion is essential for the development of a country.  poverty is linked to access to financial services, and that limited access to financial services is a significant problem itself. Financial services can help because they provide people with the opportunity to protect themselves against situations of financial shortage.

Financial intermediaries are not only crucial for individuals but also for companies because they provide jobs and can grant loans. Furthermore, firms could be forced to a suboptimal behavior, if financial frictions are severe .

Due to the detrimental situation of the companies, when they do not have access to financial intermediaries, they cannot get funding for innovation leading to competitive disadvantages compared to companies abroad. Additionally, they cannot exploit potential complementarities between innovation and export activities, which further increases the productivity gap (Thus, firms in developing countries are not able to generate as much revenue and profit as desired and therefore, support the local economy less through fewer jobs, lower salaries and an overall lower tax volume.

Another problem of the limited access to financial services for companies and individuals is that they cannot participate in worldwide trade. This is because a bank account, with an international transaction identification, for example SWIFT identification is required.

Firms without bank accounts are excluded from a wide range of international services and are hindered in selling products outside their region.

Another problem in developing countries is a low level of social trust, because social trust tends to improve economic growth and the standard of living (As social trust is highly correlated with equality, economic equality and equality of opportunities, social trust is inferior in most of the developing countries. It would be helpful for these countries to increase the level of social trust, but many countries with low social trust are stuck in a so called social trust trap.

The logic of such a situation is that social trust will not increase as long as there is high social inequality. However, public policies that could remedy this situation cannot be defined because there is a lack of trust.

The next problem in developing countries is the issue of corrupt government institutions. Corruption tends to lead to a welfare loss as only a small group of people benefits from bribes, and many people suffer from the consequences of lower government income. In some cases, corruption can even outweigh the benefits of redistribution programs.

Regardless of the form, money must fulfil three main functions.

 Author: Alain Nsabimana