Abstract:
This article examines the challenges digital currencies pose to monetary policy and government control in poor countries. Given the weakness of financial institutions and high rates of financial exclusion, digital currencies represent a double-edged sword. On the one hand, these technologies offer significant opportunities to enable a broad segment of the population to access the financial system, while on the other, they threaten governments' ability to implement economic policies and collect tax revenues. The article also addresses the difficulty of regulation, risks associated with financial stability, and the technical knowledge gap within central banks. It concludes with a set of practical recommendations for adapting to this new reality, such as developing central bank digital currencies, adopting flexible regulatory frameworks, and enhancing international cooperation.
the introduction:
Over the past decade, the world has witnessed a qualitative transformation in the nature of money and financial transactions with the emergence of digital currencies, which are not issued or monitored by a traditional central authority. While some developed countries have begun to establish regulatory frameworks to govern this phenomenon, poor countries remain more vulnerable due to weak financial institutions, limited technical capabilities, and low levels of financial inclusion.
This paper aims to analyze the impact of digital currencies on monetary policy and government control in poor countries, identify key challenges, and explore possible solutions to adapt to this changing reality.
First: Weak financial institutions and local currency crises
Poor countries typically suffer from fragile economic structures, particularly their financial institutions and central banks. Local currencies in these countries are often subject to sharp fluctuations and high inflation rates, prompting citizens to seek alternatives to store the value of their savings. In this context, digital currencies represent an attractive and easily accessible option, accelerating the process of "digital dollarization" or "cryptodollarization," thereby weakening the ability of monetary authorities to influence the money supply and control fiscal policy.
Second: Financial inclusion and the shift towards digital currencies
In many developing countries, a large number of citizens lack access to formal banking services. Cryptocurrencies, thanks to the proliferation of smartphones, provide an alternative financial gateway that allows them to participate in the digital economy. However, this informal engagement makes it difficult for governments to monitor cash flows, implement economic policies, and impose taxes, leading to an expansion of the informal economy.
Third: Regulatory and supervisory challenges
The lack of human and technical resources is one of the most significant challenges facing poor countries in regulating the cryptocurrency sector. The absence of effective legal and regulatory frameworks opens the door to the use of cryptocurrencies for money laundering, financing illicit activities, and tax evasion, undermining a country's sovereignty over its financial system. Furthermore, the weak ability to track cross-border transfers exacerbates capital flight.
Fourth: Impact on government revenues
The proliferation of digital currency transactions outside the traditional banking system is eroding the tax base. With the diminished ability to track business transactions and profits, governments face difficulty collecting taxes, negatively impacting their ability to fund public services and infrastructure, especially in countries that rely heavily on tax revenues as the primary source of public budgets.
Fifth: Risks to financial stability in developing countries
Financial systems in poor countries are characterized by limited resilience and vulnerability to shocks. The widespread reliance of a large number of citizens on digital currencies could lead to a liquidity withdrawal from banks, creating crises in the banking sector. A sudden collapse in digital currency markets could have disastrous effects on local economies, including the collapse of some banks or a loss of confidence in the entire financial system.
Sixth: The knowledge gap and technical readiness
Central banks in poor countries often lack specialized technical expertise in blockchain and cryptocurrency technologies, which weakens their ability to understand the phenomenon, predict its repercussions, and design effective tools to address it. This lack of knowledge can also lead to hasty or ill-considered regulatory responses that further complicate the problem.
Seventh: Proposed strategies for adapting to digital currencies
Despite the aforementioned challenges, there are a number of solutions that can help poor countries take advantage of the opportunities offered by digital currencies, without sacrificing their monetary sovereignty:
Issuance of central bank digital currencies (CBDCs):
A tool for maintaining monetary control and increasing financial inclusion through safe channels and under state supervision.Adopt a smart and flexible organization:
Instead of a blanket ban, adopt regulation that balances innovation and consumer protection.Raising community awareness:
Launching awareness campaigns about the risks of cryptocurrencies, especially unstable ones.International cooperation:
Benefit from the expertise of international financial institutions and countries that have made significant progress in this field.
Conclusion:
Digital currencies represent a qualitative shift in the nature of economic and financial relations, but their impact on poor countries is particularly complex due to the structural challenges they face. Addressing these challenges requires flexible policy responses, investments in technical infrastructure, and effective international partnerships. Rather than resisting this development, poor countries should seek regulatory and technological models that help them transform this challenge into an opportunity to enhance their economic sovereignty and achieve sustainable financial inclusion.
the reviewer:
World Bank (2023). “Financial Inclusion Indicators.”
https://data.worldbank.orgInternational Monetary Fund (2022). “Digital Currencies and Financial Stability Risks in Emerging Markets.”
https://www.imf.orgBIS (2021). "CBDCs and financial stability in developing countries".
https://www.bis.orgChainalysis (2023). "Global Crypto Adoption Index".
https://www.chainalysis.com
