Crypto Adoption in Afghanistan - An Effective Means of Protecting Wealth?

Afghans have increasingly turned to Cryptocurrencies as a means to protect their wealth from either brute confiscation by the Taliban or through loss due to anticipated economic instability following the Taliban take over.

And anyone who predicted economic chaos was correct - According to Cheddar News - Afghanistan's' economy has effectively ground to a halt - banks have shut down so no one is able to withdraw any money, wages have stopped being paid and the the prices of staple goods such as flour are increasing rapidly.

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Afghans queuing outside a bank to get their money.

The country is also rapidly being cut off economically from the outside - it no longer has access to its $9 billion of foreign reserve currency, and the IMF and World Bank have cut off all loans and aid to the country.

Western Union and other money transfer systems have also shut down, meaning it's difficult for individuals to get fiat money in and out of the country too.

This is especially messy as the US dollar and the Afghani (the currency of Afghanistan) have been closely tied for two decades, and all of a sudden the supply of US dollars has just dried up - it's kind of the economic version of the 'rapid withdrawal of troops'.

Finally, there is currently no functioning central bank either, although even if there was I can't imagine it could do much to stem an economic crisis - given that the only recourse to action is to print more money, or issue a new currency that would have even less value in the eyes of the international community because it's been issued by an unrecognised authority.

Crypto as a solution?

It's difficult to get a feel for how many people have invested in crypto in Afghanistan, because unlike the vocal and enthusiastic crypto adopters in the USA and Europe, people in Afghanistan would much rather stay anonymous!

But Chain Analysis' gives us some insight - their latest report reveals that Afghanistan ranks 7th in 2021 for use of P2P exchanges (20th overall), and this is the largest rise of any country since 2020 when Afghanistan didn't even register for crypto usage.

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This excellent article from CNBC also points to several examples that interest in Bitcoin in Afghanistan has been growing steadily for at least a couple of years.

Why Crypto...?

All of the usual reasons for increasing adoption in developing countries apply here (protecting wealth against inflation, keeping businesses going, keeping money circulating) but the addition of the more immediate and physical threat of having of having your assets confiscated.

Afghans have sought refuge for their wealth by converting it to crypto to take advantage of the borderless security it offers them - once into crypto, their wealth is no longer subject to the likely economic fluctuations and largely hidden from the authorities: passwords/ sets of keys/ back up phrases are, in the grand scheme of things, easier to keep hidden than physical assets.

Crypto also offers Afghans access to outside Markets at a time when access to fiat markets have been shut down, even if any money earned cannot be spent in Afghanistan.

Crypto - as usual, not a magic bullet!

This brief video clip from India Today does a decent job of pointing out the limits of crypto in protecting wealth in Afghanistan:

There is a lack of financial infrastructure in Afghanistan which means it's going to be practically impossible for someone holding Bitcoin or any other currency to convert that easily into local currency.

I imagine converting crypto to local currency or dollars for that matter would probably depend on going through the financial black markets, which would almost certainly mean a terrible rate or exchange and/ or exorbitant fees, >25% wouldn't surprise me AT ALL.

Just the sheer overwhelming extent of absolute poverty in Afghanistan means that the vast majority of people didn't and don't have any significant wealth to convert to crypto anyway, so we are here talking about an extreme minority of people.

And of course for those investing in crypto, they are exposing probably a large chunk of that wealth to the volatile crypto markets, which is very different to exposing 5-10% like many of us do in the West.

Final thoughts

Yes, crypto adoption is increasing in Afghanistan, but just as with Venezuela, it is only a minority of people taking it up, that small proportion of the population who already had wealth.

And even these people face more problems accessing that wealth while still in Afghanistan, but at least if people have their wealth in crypto it's safe, as long as they can keep hold of their keys.

I don't know what the future holds for Afghanistan, my feeling is that it will fracture, so maybe the best hope for any individual wanting to protect their wealth (assuming they don't want to get out altogether) is to try and position themselves so they are in one of the more liberal new nation states when it does?

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