What we can learn from Afghanistan’s nascent crypto economy

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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…