Is Cryptocurrency Useful For Sri Lanka Amid Raging Economic Crisis?

Amid ongoing political unrest in the South Asian country, Sri Lanka has issued a warning to its residents against adopting Bitcoin, claiming that it is "mostly uncontrolled." The nation's central bank, CBSL, reminded the public last week that it has not granted any firm a licence or other authority to operate in the country and that it does not view cryptocurrencies as legal cash in the country.

As per Directions No. 03 of 2021 under Foreign Exchange Act, No. 12 of 2017 issued by the Department of Foreign Exchange of CBSL, Electronic Fund Transfer Cards (EFTCs), such as debit cards and credit cards, are not permitted to be used for payments related to virtual currency transactions,” the bank said in the statement posted on its site.

Sri Lankan Rupee has fallen significantly against the US dollar by more than 44 per cent. The Sri Lankan economy is in shambles and faces a currency substitution risk. The country's political leadership is getting its act together to secure a bailout from the International Monetary Fund. The process is lengthy and time-consuming. In this, some crypto industry expert has noted that the current state of affairs has created a favourable case for crypto adoption by the Sri Lankan population. 

"Crypto adoption is generally higher in economies faced with fiscal uncertainty. Like Ukraine, crypto is likely to be used to channel monetary relief for Sri Lankans. Near real-time settlement and low transaction costs make a compelling case for crowdsourcing economic relief using crypto for Sri Lankans," says Sharat Chandra, vice president of research and analysis of EarthID, a global blockchain company. 

What Is The Progress of Cryptocurrency In Sri Lanka? 

Some crypto industry experts based in Sri Lanka while talking to Outlook Money said that since Covid-19 the Sri Lankan Rupee has seen rapid devaluation and is now further shaken by the present political turmoil. This has made many explore alternative investments and crypto has been one such investment. 

"The global crypto demography mostly consists of Gen Z, who are tech savvy and do not trust the traditional investment vehicles. PaxFul, one of the leading P2P trading platforms, recorded a growth of over 730 per cent in 2020-2021 only from Sri Lanka," says Sanjay Mendis, a Sri Lanka-based cryptocurrency and blockchain strategist. 

Notably, in 2021, the Sri Lankan government formed a panel to recommend a regulatory framework covering the growth of digital banking, blockchain and cryptocurrency mining. Developing an integrated system of digital banking, blockchain and cryptocurrency mining is crucial for Sri Lanka to keep up with its regional neighbours while expanding international trade, the government-issued press statement said.

A survey in 2021 by the blockchain analysis company Chainalysis identified Central and Southeast Asia as one of the world's top regions for cryptocurrency adoption. South of India's island country Sri Lanka has lagged behind other Asian nations in adopting cryptocurrencies. It only has one company that presently accepts cryptocurrencies as payment, and it did not rank on Chainalysis' global cryptocurrency adoption index for 2021.

Mendis further added that Sri Lanka now has over 320,000 crypto holders which will only keep growing in the present context. "Many corporates too are exploring the crypto offering as an alternative investment option to their clients and even some international schools have reached out to me to adopt education on crypto in their curricula," he said. 

Is Crypto Useful For Sri Lanka In Present Economic Crisis?

What’s the fundamental impact of an economic crisis in most countries? It’s the fall of its currency’s value against the USD. However, the USD too is fast falling out of favour due to bad fiscal policies. Recently, India has purchased oil from Russia using INR, an indication of a questionable future for the USD. Most global reserve currencies have a lifespan of 100 years, and the USD is in the last few decades of this cycle. 

Though the sell-off in the cryptocurrency market over the past few months hasn't had much of an impact on the broader financial markets, the rising energy and food prices and supply-demand imbalances, partly due to the Ukrainian conflict, are fueling global inflation (IMF), according to the International Monetary Fund.

"However, Sri Lanka confronts unprecedented inflation (up to 70% by some estimates), and a flight towards commodities (gold and silver) is natural at such times. Arguably, if cryptocurrencies retain or gain in value, some flight towards crypto is also likely; especially if it is buoyed up by vested intrastate who aggressively market it as an investment to less informed retail investors," says Utkarsh Sinha, managing director of Bexley, a boutique investment bank. 

"It is unlikely that even a large-scale buy by Sri Lankan retail investors will lead to a global rise in crypto prices," Sinha added. 
Purushottam Anand, founder and CEO of the law firm Crypto Legal, believes that as the Sri Lankan Rupee has depreciated significantly and inflation is rising, people can use Bitcoin and other leading cryptocurrencies to hedge against inflation and other systematic risks associated with the local government and economy. "Bitcoin is global in its usage and price movement and is comparatively less affected by the economic conditions and inflation of a specific jurisdiction," he added.