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Last week Abdul Wakeel, a self-styled “management, Islamic banking and finance student” in Afghanistan, took to Twitter to make a strong appeal to the new government in Kabul. “[The] The Taliban should. . . Think about [using] Bitcoin to avoid the negative effects of [American] financial sanctions, âhe said, pointing out that if the government in Kabul started using cryptocurrencies, they could reduce the impact of exclusion from the global dollar-based banking system.
One of Wakeel’s supporters quickly disapproved. The Taliban “should definitely consider cryptocurrency, but avoid Bitcoin because it has been very volatile,” they warned. Fair enough. While I cannot verify the identity of those trading these views, I can certainly confirm that bitcoin prices have risen sharply.
Leaving aside the details of the current bitcoin price, the fact that such conversations are taking place a few weeks after the fall of Kabul is a striking sign of the times. In the past, when countries like Afghanistan sank into chaos and conflict, the wealthiest people relied on either paper money (like dollar bills) or precious metals ( like gold) to store their wealth. Sometimes they turned to chains of Islamic brokers (this is called hawala) to send money across borders.
Now crypto is seeping in, and while it’s still in its infancy, the development should give us pause for thought on the slippery subject of trust and ‘credit’ in finance. Even though we live far from Afghanistan, and even though we love or hate bitcoin.
The Taliban should also think about Bitcoin to avoid the negative effects of financial sanctions. pic.twitter.com/gQzRvGsMKj
– Abdul Wakeel (@ awakeel132) September 18, 2021
The issue at stake is well laid out in a recent article by Hyun-Song Shin, professor of economics at Princeton and chief economist at the Bank for International Settlements. He argues that the best way for an economist to look at cryptocurrencies like bitcoin is to recognize that these tokens only have value because people create a shared computer ledger of transactions to create a sense of trust.
Yet creating that ledger with computing power and then making deals on it also creates “friction”, which is economic costs.
Sometimes the costs associated with a distributed trust system such as cryptocurrency are much higher than the alternatives. In particular, if a trusted institution such as the US Federal Reserve issues money in an efficient and credible manner, the costs of use are relatively low.
But, as Shin notes, on other occasions the costs of using a decentralized ledger actually seem less onerous than the risks associated with dealing with discredited institutions (such as a failed government) or trying to get your hands on rare dollar bills (if, say, they’re banned). “Understand [crypto] you have to start by asking yourself how trustworthy is the central authority – do you have good governance and an accountable central bank? Shin said. âIf you are in an unstable or authoritarian system or if you have a failed state, you are better off with a robust decentralized system, but you pay a cost. “
Many emerging markets are entering this camp. When Chainalysis, a cyber analysis and due diligence firm, recently released its preliminary annual survey of crypto use in 154 countries, the top ranked countries (in terms of weighted crypto use for economic activity) were Vietnam, India, Pakistan, Ukraine, Kenya, Nigeria, Venezuela, Togo and Argentina. The only developed country on the top 10 list was the United States, ranked eighth.
As for Afghanistan, when Chainalysis conducted a previous crypto survey last year, Kabul was near the bottom of the rankings for crypto use. This may have reflected minimal confidence in government, or access to dollar bills, at least among the elite. Another, more likely, explanation is that Internet use has historically been low in Afghanistan, being one-seventh the level in Kuwait, for example, according to World Bank data.
Despite this hurdle, recent rankings showed that Afghanistan had suddenly jumped to 20th place for the use of crypto, relative to the size of its economy. âAfghanistan has a nascent cryptocurrency economy,â the company explained in a tweet. But they “climb into the top 20 [because] we weight the metrics that feed the index according to the purchasing power of the countries and the population using the Internet â. To put it another way, Kabul is now suddenly striking above its crypto weight.
Why? Perhaps this is because the Taliban are already trying to evade sanctions. However, media reports from Kabul suggest that some educated and relatively well-off Afghans are also turning to crypto, using it to store wealth, or to move money abroad or receive remittances from. parents outside Afghanistan.
Some Afghans, in other words, may have embarked on the cost-benefit calculation described by Shin – and decided the crypto made sense. Indeed, it probably makes more sense in Hindu Kush than in Silicon Valley or any other western realm where luminaries like Elon Musk are creating a buzz with bitcoin memes. It’s a striking sign of how the internet can diffuse innovation in improbable ways, with implications that can be good – and bad.
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