In February 2020, the World Bank Group released a report entitled “FinTech in Europe and Central Asia: Maximizing Benefits and Managing Risks” highlighting the opportunities associated with the development of FinTech in countries torn between a desire for more regulation and a growing need to catch up in this sector, currently dominated by Nigeria, Vietnam, Turkey and the United States (by total number of users).

According to the report, cryptocurrencies offer a unique opportunity to address the unmet needs in traditional financial services by empowering citizens in Central Asia, being especially suited for countries with a diaspora sending income from abroad, which is the case of the five post-Soviet republics—Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, and Uzbekistan.

Despite all advantages, the Central Asian governments are remaining reluctant to adopt cryptocurrencies at a national scale, as El Salvador did, while regional differences are remaining when it comes to legislations as underlined by the recent “Regulation of Cryptocurrency Around the World” report issued by the American Library of Congress.

On March 30, 2018, Daniyar Akishev, head of the Kazakhstan National Bank, stated that the National Bank had a very conservative position on the issue of cryptocurrencies and welcomed only strict restrictions because of multiple issues related to consumer protection, money laundering, and tax avoidance. He also added that legislative amendments had already been prepared to prohibit the purchase and sale of cryptocurrencies for national currency, ban the activity of exchanges, and ban any type of mining.

In contrast, on January 17, 2018, the head of Kyrgyzstan’s National Bank, Tolkunbek Abdygulov, stated that the Bank did not plan to impede the development of the cryptocurrency market. He concluded that it is very difficult to ban something that the Central Bank does not issue and that citizens investing in cryptocurrency do so at “their own risk and peril.” In October of 2017 the Central Bank reportedly stated that it was not considering introducing any restrictive measures regarding the mining of such asset.

In contrast, increasing worries regarding the adoption of cryptocurrencies and terrorism have emerged and impacted the Uzbek and Tadjik approaches. In September of 2017, the Central Bank expressed the opinion that it was not advisable to allow operations with cryptocurrencies because of the possibility of terrorism financing and other criminal activities. While the Bank of Tajikistan clarified that cryptocurrency cannot be considered an official means of exchange or savings, or a unit of account.

These debates in Central Asian states arises because a number of factors have propelled the adoption of online services among the public, driven by ubiquitous and increasingly fast connectivity, massive data storage, advances in cloud computing, and changing expectations of citizens regarding investments in various currencies offered by digital banks.

Nonetheless, this conservative approach is difficult to understand because families depend on remittances from members living abroad as an additional source of income, while remitters often incur considerable costs when using traditional channels—in Q1 2019, the average cost of remittance services in Central Asia, excluding Russia, was 7.18% (6.67% including Russia) according to the World Bank Group.

By leveraging digital technology, advanced data analytics and, in some cases, distributed ledger technology, FinTech players can offer fees that are almost half those of traditional players. If sending charges were effectively halved, senders of funds to Eastern Europe and Central Asian beneficiaries could save an estimated US$1.59 billion per year.

The arguments behind the lack of initiative to support crypto-currencies in Central Asia

Cryptocurrencies not only bring advantages such as fast transfers and no fees, but also introduce new risks and exacerbate existing ones. Cyber-attacks, money laundering and terrorist financing, as well as threats to data privacy and consumer protection are examples of such enhanced threats.

On this account, while cryptocurrencies users can avoid relying on printed physical banknotes and counterfeit money, they can be easily hacked if citizens and institutions are not well prepared to deal with these challenges. Hacking of financial services are increasing as was the case in Bangladesh when unidentified hackers stole $81 million from Bangladesh’s central bank at the New York Fed in February 2016, using fraudulent orders on the SWIFT payment system.

In addition to cyber-security issues, cryptocurrency adoption by citizens is also linked to looming concerns such as the rise of drug trafficking and illegal activities on the dark-web, which require higher standards in policing and cross-border cooperation to ensure that the opportunities offered are matched by regulatory oversight.

An example of this risk was highlighted by the online platform “Silk Road,” which was operating on the dark-net before the American Federal Bureau of Investigation (FBI) managed to arrest the owner. In summary, FinTech services and cryptocurrencies, like many other developments, will require adaptability and technical capacity building for both state institutions and citizens using them.

Due to the proximity of conflict areas such as Afghanistan, Central Asian states will require strengthening police and military training in cyber-security, and possibly cooperation with countries that have expertise in this area such as the United States, Russia, China or even Estonia.

The direct relation between cryptocurrencies and citizen empowerment

While education in the FinTech area will need to be strengthened, both in financial institutions and in law enforcement agencies, the benefits can exceed the costs, as it can empower citizens.

The Central Asian diasporas are used to sending back part of their income to support their relatives, and the received income is exchanged from one currency to another one at a certain price. To that exchange rate is then added the cost of sending the income from one bank to another. As a result, the diaspora loses between 5-15% of its income in bank transfers.

In consequence, the national adoption of national digital currencies or an already existing crypto-currencies could empower citizens as the transfer from one account to another is anonymous, free of charges, and transactions are done almost immediately. Moreover, the blockchain technology ensures the reliability of peer-to-peer network with publicly distributed larger and avoids as such abuses and fake transactions, which is a major concern in emerging economies.

Based on El Salvador experience, two distinct strategies could be adopted in Central Asia:

· The development of national digital currency/currencies by governments like in China,

· To give citizens the opportunity to adopt one or several already existing crypto-currencies.

In the first option, national blockchain technology could be developed in partnership with companies that have an extensive experience in this area. This approach is similar to what Egypt is doing in 2021.

The second option is to do such as El Salvador and let people use Bitcoin on a daily basis. As such, taxes will be paid in what the authorities are interested in as a currency (e.g. Bitcoin for El Salvador). In this scenario, governments would decide citizens are in charge of their assets and central banks will step-back. This last option would solve problems such as upgrading national financial capabilities as the transition will be from banks to citizens.

Blue Ocean strategy for cryptocurrencies in Central Asia

When we mention crypto-currencies, the two main concerns that are often raised are the volatility and the lack of state involvement, i.e. the transition from a central bank based economy to a decentralized digital economy.

Both of these questions are fundamental in stable and large size economic areas such as the Eurozone but are not as relevant in Central Asian states due to the existing volatility of national currencies.

Volatility is a major concern in countries such as El Salvador, Venezuela and Nigeria, where over 30% of the population uses crypto-currencies for payments on a daily basis. As such, citizens have found an interest in using cryptocurrencies instead of relying on the national currency because it has proven to be more stable, especially some that have a fix rate such as Tether.

The adoption of another currency is no news, and historically economies such as Kosovo and Montenegro, two non-EU member states, have de facto adopted the Euro because of the advantages offered by large scale economies, the same applies to Latin American countries relying on the USD which has proven to be more convenient to citizens. As such, adopting a crypto-currency with a fix rate (e.g. Tether) or with less volatility would have in fine the same advantages as relying on a foreign currency such as the Russian rubble.

Small size countries are not the only example, and Macau (Macao Special Administrative Region of the People’s Republic of China) uses two currencies – the Chinese yuan and Hong-Kong dollar instead of the Pataca. The Macanese Pataca, although stable, is less used due to the geographic proximity with mainland China and Hong-Hong.

Similarities between Central Asian states and Nigeria or Macao are prevalent, and in some cases the national currencies of Central Asian states are very volatile, or simply the proximity to Russia and China makes it more pragmatic to use the Russian ruble or the Chinese yuan for transactions, or at least a mix of currencies. Overall, it is a question of pragmatism.

In Central Asia, it would be beneficial for citizens to pay with crypto-currencies as this will prevent counterfeit notes, theft and volatility, and through the use of smartphones, citizens can purchase goods and services on the internet instead of having to transfer physical money to a bank account and then purchase online.

Digital payment for small businesses is now a reality thanks to innovations such as Square. The adoption of such technologies combined with the availability of smartphones will ensure that service providers in Central Asia can accept digital payment and that any citizen can pay with national currency, national digital currency or crypto-currencies, thus solving payment problems and providing more flexibility to locals and businesses.

As mentioned above, governments will have to consider the adoption of national digital currencies or move to crypto-currencies, as they will have two options: adopt an existing crypto-currency that is already available in the market, or develop their own.

By developing their own digital currency, Central Asian states could offer citizens to exchange all available currencies, from existing to digital, similar to what was done in China with the transition to the digital renminbi (e-CNY). The main question will be whether to adopt a similar attitude to that of Beijing, with central banks in charge of the new digital currency, or to let citizens handle the transactions through the adoption of blockchain and mining.

An economy relying on the central banks will have advantages and disadvantages, but it seems relevant considering to opt for blockchain and crypto-currencies, as it will ensure that citizens are in charge of the economy and will not require the central banks to strengthen their cybersecurity capabilities, as a cyber-attack is unlikely to weigh too heavily on citizens using blockchain to check transactions.

FinTech and the adoption of cryptocurrencies are subject to risks, the main one being volatility, but this applies to everything. A concrete example is the United States housing bubble where prices of the house were based on speculation.

Overall, what makes a medium of payment valuable, whether it is diamonds, gold or printed paper money (e.g. Transnistria rubble), is not what you can do with it, but the value people place on it.

It worth noting that the adoption of cryptocurrencies will depend on the willingness of governments to allow them, such as El Salvador in 2021, and that some divergence will remain between urban and rural areas.

As such, a KPMG report “Overview of FinTech Development in Central Asia,” published in November 2020, shows discrepancies between Central Asian states and indicates that financial technology is more advanced in Kazakhstan than in the other three countries. While Kazakhstan has an internet penetration rate of 79%, Tajikistan, Kyrgyzstan and Uzbekistan have 26%, 47% and 55% respectively.

According to KPMG, the main barriers to FinTech and cryptocurrency adoption in Kazakhstan are unfavorable government policy, low mobile and internet penetration in Uzbekistan and Kyrgyzstan, and poor infrastructure as well as the monopoly of state-owned telecom providers in Tajikistan. In short, the debate is not just about crypto-currencies but about the ability of Central Asian governments to provide the means for citizens to use this innovative technology.