Bitcoin surges in Zimbabwe after ban on foreign fiat and credit cards
Imagine living in a country in which the government banned its own national currency. Imagine that 10 years later the government changed its mind, reintroduced a new fiat, and banned the use of all foreign currencies. But wait, it gets worse. Your government also bans the use of credit cards for cross-border transactions. You wouldn't know whether you are coming or going.
If this scenario sounds a little far-fetched, you don't live in Zimbabwe. Native Zimbabweans know the story all too well because it is real to them. The actions of their nutty government have made it extremely difficult to conduct any kind of business in Zimbabwe, save local transactions between townspeople and small merchants. So to fight back and maintain some semblance of financial freedom, Zimbabweans have been turning to cryptocurrency.
Bitcoin is the cryptocurrency of choice in Zimbabwe. And why not? It is arguably the most popular crypto on the market. If any digital currency has the potential to completely unseat fiat as the preferred way to pay for things, Bitcoin is it. It will be interesting to see how Facebook's Libra fares in Zimbabwe when it is eventually launched in earnest.
Poor decisions in Zimbabwe
Zimbabwe is a landlocked country of some 16 million people bordered by South Africa, Botswana, Zambia, and Mozambique. Once upon a time it was a wealthy country. Today its economy relies very heavily on mining, especially platinum. Diamonds are also one of the country's biggest exports. Those not involved in the mining industry are likely depending on agriculture or tourism (such as big game hunting, unfortunately) for their livelihoods.
Unfortunately, Zimbabwe's economy has been in the tank for decades thanks to poor decisions by government leaders to strip white farmers of their land. Food is now scarce. Business taxes are extremely high there, so convincing foreign companies to set up shop in Zimbabwe is quite difficult. Tourism has also declined sharply over the last decade thanks to poor land management that is making many parts of the country undesirable.
At one point, things were so bad economically that the government banned its own national currency in an effort to stabilize the nation's economy. That happened back in 2009. From that point forward, Zimbabweans relied on international currencies for everyday trade. As you might imagine, the U.S. dollar became the currency of choice.
In the meantime, the government also banned other forms of commerce, most notably the use of credit cards for cross-border transactions. It even became difficult for family members to wire funds between themselves if that meant funds crossing borders.
A change in direction
Some 10 years after the national currency ban, Zimbabwe 's government has done a complete about-face. They created a new national currency known as the Zimbabwe dollar (RTGS). They followed up with a complete ban on all foreign currencies for domestic transactions. News reports say the ban is intended to force people to use the Zimbabwe dollar whether they want to or not.
Zimbabweans can no longer use U.S. dollars to buy food and clothing. They cannot use them to pay their rent. In essence, their U.S. dollars have to be converted to either Zimbabwe dollars or something else to have any value. For a lot of Zimbabweans, that something else is Bitcoin.
There is a lesson to be learned here for national governments everywhere. If you want to force people to put their financial resources into Bitcoin, just ban fiat. It will do the trick every time.
The lesser of two evils
Pretend for just a minute that you are a Zimbabwe resident. All of your financial resources are represented in U.S. dollars, which have just been banned. You are now faced with either converting them to Zimbabwe dollars or buying Bitcoin. Which would you do?
Your government leaders are going to try to convince you to purchase Zimbabwe dollars. They will promise you that the fiat will maintain its value and give the national economy that extra boost of stability. They will also tell you that Bitcoin is too unstable to trust.
You have to weigh the history of Zimbabwean currency against that of Bitcoin. You might even see it as having to choose between the lesser of two evils. So, which would you choose? Remember that once you convert your U.S. dollars, there is no turning back.
A choice the world over
The choice Zimbabweans now face is a choice people around the world face as well. The big difference in Zimbabwe is that residents are being forced to make the choice whether they want to or not. Most of the rest of us have the freedom to do as we please. That being said, let us dig a little deeper into what the choice represents.
Choosing to put your financial resources into fiat is the easiest way to go in most cases. Unless your nation's currency is absolutely worthless, you will be able to use it to settle all of your domestic debts. You will also be able to maintain a bank account, get loans, etc.
The problem with fiat is that it is not as stable as it appears. National governments and central banks have a long and sordid history of manipulating fiat for both political and economic gain. Their actions are based on the economic truth that whoever owns an asset controls it. And the simple fact of the matter is that fiat is owned by national governments and managed by their central banks.
Zimbabweans who might fear their new national dollar will eventually become worthless are justified in feeling that way. Their government has a history of poor economic management. But things might not be any different for you. Maybe the fiat used in your country is just one poor decision away from total collapse.
Bitcoin is decentralized
It is true that volatility is always a concern with cryptocurrency. It is a big concern with Bitcoin, given the parabolic trading it is subject to. Yet there is a fundamental difference between fiat's systemic instability and cryptocurrency's volatility: who is in control.
Fiat is centralized in every respect. This means that the fiat game is controlled entirely by national governments and central banks. Consumers have no say in the value of the fiat currencies they use. On the other hand, cryptocurrency is decentralized.
A digital coin, like Bitcoin, exists as computer code on a distributed ledger. That distributed ledger exists on multiple computer nodes scattered around the world. There is no national government or central bank with the authority to control Bitcoin. Who has control? Network maintainers, coin miners, and coin owners.
Bitcoin's price sits in the $11,000 range right now because that is the price the market will support. Its value is not being manipulated by a central bank attempting to limit the number of coins in circulation. It is not being controlled by a national government that looks to increase or decrease coin value through its own fiscal policy.
Bitcoin is worth some $11,000 because those who belong to its decentralized network have established that price through their own economic activity. This matters when you're talking stability versus volatility. The stability of any fiat rests entirely in government and central bank policy. The stability of cryptocurrency rests in its distributed ledger. As for volatility, it is self-regulating.
Bitcoin is good for Zimbabwe
Getting back to the original topic of Zimbabwe and Bitcoin, it turns out that the cryptocurrency has proved itself a very good option for Zimbabwean nationals. They had already been purchasing Bitcoin before the foreign currency ban, so they were also used to doing business with crypto when they learned that U.S. dollars would no longer be usable. Encouraging them to convert those dollars to Bitcoin has been fairly easy.
Newly purchased Bitcoin assets enable Zimbabweans to conduct cross-border transactions with ease. For example, news reports say that one of the most important things Zimbabweans are doing with their Bitcoin is sending money to relatives in South Africa, who then send various products in return.
Cryptocurrency networks are now making it easier than ever for family members throughout Africa to send money back and forth seamlessly. It doesn't matter that Zimbabweans are banned from using any currencies other than the Zimbabwe dollar. It doesn't matter that it is illegal for them to use credit cards to complete cross-border transactions. They do not need fiat or the traditional banking sector when they have Bitcoin.
As for local merchants, they are more than happy to accept Bitcoin as well. They have lived so long on the U.S. dollar that they have no trouble adopting a digital currency instead of jumping into the Zimbabwe dollar pool. Some will undoubtedly begin accepting Zimbabwe dollars, but expect merchants to favor Bitcoin payments.
Those of us in the cryptocurrency community have long speculated over whether or not crypto will ever supplant fiat as the primary means by which people pay for things. Most of the evidence points to that never happening. But when you look at countries like Zimbabwe, there is always that possibility.
All it takes is a national government adopting a very aggressive approach against fiat to turn people to cryptocurrency. Zimbabwe will be an example to other countries one way or the other.
Now we wait and see if the Zimbabwe government shuts down the internet in that country to stop people using Bitcoin.