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Last week, Abdul Wakeel, a self-styled “student of Management Science, Islamic banking and Finance” in Afghanistan, took to Twitter to make a striking appeal to the new government in Kabul. “[The] Taliban should . . . Think about [using] Bitcoin to avoid negative effects of [American] financial sanctions,” he declared, pointing out that if the Kabul government started using cryptocurrencies, they could lessen the impact of being shut out of the dollar-based global banking system.
One of Wakeel’s followers swiftly disagreed. The Taliban “should definitely consider cryptocurrency, but avoid Bitcoin as it has been very volatile,” they cautioned. Fair enough. Although I cannot verify the identities of those exchanging these views, I certainly can confirm that bitcoin prices have gyrated wildly.
Leaving aside the details of the current bitcoin price, the fact that conversations such as these are happening, a few weeks after the fall of Kabul, is a striking sign of the times. In the past, when countries have, like Afghanistan, tumbled into chaos and conflict, wealthier people have either relied on paper money (such as dollar bills) or precious metals (such as gold) to store their wealth. Sometimes they turned to chains of Islamic brokers (this is known as hawala) to send money across borders.
Now crypto is creeping in, and while this may still be at a nascent stage, the development should make us ponder the slippery topic of trust and “credit” in finance. Even if we live far from Afghanistan, and even if we love or hate bitcoin.
Taliban should also Think about Bitcoin to avoid negative affects of financial sanctions. pic.twitter.com/gQzRvGsMKj
— Abdul Wakeel (@awakeel132) September 18, 2021
The issue at stake is nicely laid out in a recent paper by Hyun-Song Shin, an economics professor at Princeton and chief economist of the Bank for International Settlements. He argues that the best way for an economist to look at cryptocurrencies such as bitcoin is to recognise these tokens only have value because people create a shared computing ledger of transactions to create a sense of trust.
Yet the act of creating this ledger with computing power and then cutting deals on it also creates “frictions” — that is, economic costs.
Sometimes the costs associated with a system of distributed trust such as cryptocurrency are much higher than the alternatives. Most notably, if a trusted institution such as the US Federal Reserve issues money in an effective and credible way, the costs of using this are relatively low.
But, as Shin notes, on other occasions the costs of using a decentralised ledger actually seem less onerous than the risks associated with dealing with discredited institutions (such as a failing government) or trying to get your hands on scarce dollar bills (if, say, they are banned). “To understand [crypto] you have to start by asking how trustworthy is the central authority — do you have good governance and an accountable central bank?” says Shin. “If you are in an unstable or authoritarian system or if you have a failing state, you are better off with a robust decentralised system, but you pay a cost.”
Many emerging markets fall into this camp. When Chainalysis, a cyber analytics and diligence firm, recently released its preliminary annual survey of crypto usage in 154 countries, the top-ranked countries (in terms of crypto usage weighted 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 US, ranked number eight.
As for Afghanistan, when Chainalysis made a previous survey of crypto last year, Kabul was near the bottom of the ranking for crypto usage. That may have reflected a modicum of trust in government, or access to dollar bills, at least among the elite. Another, more likely explanation is that internet usage has historically been low in Afghanistan, running at one-seventh the level of Kuwait, say, according to World Bank data.
Despite this obstacle, the recent ranking showed that Afghanistan had suddenly leapt to 20th place for crypto usage, relative to the size of its economy. “Afghanistan has a nascent cryptocurrency economy,” the company explained in a tweet. But they “rise to the top 20 [because] we weight the metrics that feed the index by countries’ purchasing power & internet using population”. To put it another way, Kabul now suddenly punches above its crypto weight.
Why? Maybe it is because the Taliban are already trying to evade sanctions. However, media reports from Kabul suggest that some educated, relatively well-off Afghans are turning to crypto as well, using it to store wealth, or to move money overseas or receive remittances from relatives outside Afghanistan.
Some Afghans, in other words, may have engaged in the cost-benefit calculation Shin describes — and decided crypto makes sense. Indeed, it probably makes more sense in the Hindu Kush than in Silicon Valley or all the other western realms where luminaries such as Elon Musk are creating a buzz with bitcoin memes. It is a striking sign of how the internet can spread innovation in unlikely ways, with implications that can be good — and bad.
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