Decentralized Finance Can Expand Financial Services to Developing Nations

On September 7, 2021, El Salvador made history by becoming the first nation to declare Bitcoin a legal tender. Vendors in the country are required to accept the cryptocurrency and residents can use the official government wallet to purchase items, including some at a discount. Although the adoption’s success over the past 2 months has been mixed, other nations are now considering similar legislation. Panama, Ukraine, and Cuba have all seen draft legislation to officially recognize cryptocurrencies in some way, and there are speculations that a handful of other nations will follow suit by the end of 2022.

Most of the nations considering adopting digital assets alongside their traditional currencies are developing nations with a high proportion of GDP coming from remittances sent to families from those working internationally. This proportion is no coincidence, as cross-border payments that are faster and cheaper than traditional methods are one of the primary uses for cryptocurrency. It offers a glimpse into a possible future of how decentralized finance (DeFi) may disrupt traditional financial models and offer financial services to those lacking adequate, trustworthy access.

DeFi Is Growing in Rapidly Developing Nations

Cryptocurrency environments enable an entire ecosystem of DeFi services. DeFi replicates financial payments, lending, savings, transfers, insurance, and other services without depending on an established financial system. This feature has particularly strong potential in regions where traditional financial services are either lacking or untrusted.

According to an index by cryptocurrency research firm Chainalysis, DeFi adoption is strongest in two types of nations: those with strong existing cryptocurrency markets and developing nations with fast-growing economies. Of the latter group, Vietnam, Thailand, and India are the top markets for DeFi services. Of cryptocurrencies broadly, further Chainalysis research finds that Vietnam and India were the two fastest-growing markets in 2021. According to World Bank data, India and Vietnam also rank as some of the top remittance-receiving nations in a list that includes many Southeast Asian, Latin American, and African nations.

DeFi Use Cases Are Still Maturing, but Its Potential Is High

These overlapping findings suggest that DeFi may surpass traditional financial services in rapidly developing nations. This growth may be especially true for nations with a high proportion of remittances, since those funds are already in the cryptocurrency space. It also suggests that using cryptocurrency for everyday commerce may become increasingly common in developing regions. Venezuelan citizens, for instance, have shown an increasing interest in cryptocurrency as a means of accessing financial services that are insulated from the nation’s currency hyperinflation.

Although mainstream use cases for DeFi are still in their infancy, it is a technology worth following because of the impact it can have on global and local economies. If cryptocurrency transactions become common in developing nations, it can give residents in these places access to a global and secure financial system without the need to trust potentially corruptible local players. This opens financial development opportunities to many, including business development loans, microloans, yield bearing savings accounts, and insurance contracts. As the transparent and censor-proof nature of blockchain technology continues to be used as a solution to existing issues, it may also be used to simplify and expand financial services to those with inadequate access.