Don’t Blame Crypto for Corruption

An IMF study suggesting crypto is facilitating corruption is off target.

AccessTimeIconApr 26, 2022 at 6:44 p.m. UTC
Updated May 11, 2023 at 6:04 p.m. UTC
AccessTimeIconApr 26, 2022 at 6:44 p.m. UTCUpdated May 11, 2023 at 6:04 p.m. UTCLayer 2
AccessTimeIconApr 26, 2022 at 6:44 p.m. UTCUpdated May 11, 2023 at 6:04 p.m. UTCLayer 2

Is crypto fueling corruption? The International Monetary Fund (IMF) seems to think so. Using crypto usage data from Statista’s Global Consumer Survey, a group of IMF researchers recently found that countries with high crypto adoption tend to be perceived as corrupt.

As to why this relationship exists, the IMF team suggests that crypto is being “used to transfer corruption proceeds." With crypto facilitating corruption, their advice is the product needs to be regulated, the idea being that regulation – especially know-your-customer requirements – will end graft.

J.P. Koning, a CoinDesk columnist, worked as an equity researcher at a Canadian brokerage firm and a financial writer at a large Canadian bank. He runs the popular Moneyness blog.

The IMF has this one backwards. Crypto doesn't fuel corruption. Rather, whatever underlying malaise is fueling corruption is probably also fueling crypto adoption.

Why nations fail

In "Why Nations Fail: The Origins of Power, Prosperity, and Poverty," economists Daron Acemoglu and James Robinson offer an explanation for why some nations seem to function well and are relatively free of corruption, like Canada and Sweden, and others do not, like Nigeria and Syria.

It isn't geography or culture that determines success, say the authors, but institutions. By institutions they mean the rules that govern and shape economic and political life: property rights, contract enforcement, licensing standards, financial regulation and more.

Inclusive institutions create the incentives necessary to harness the energy and entrepreneurship of all members of society. Extractive institutions do the opposite. They create a non-level playing field and narrowly concentrate access and benefits for those with political power.

Acemoglu and Robinson offer the city of Nogales, which straddles the U.S.-Mexico border, as an example. “The inhabitants of Nogales Arizona, and Nogales Sonora share ancestors, enjoy the same food and the same music, and … have the same culture,” write the authors. But those on the northern side are prosperous while those on the south suffer from poverty. They suggest this is because U.S. institutions are more inclusive than Mexican ones.

Under Acemoglu and Robinson’s framework, corruption is a by-product, or symptom, of extractive institutions. A profusion of bribes is the return flowing to the small set of politicians, bureaucrats and soldiers who have managed to seize control of a country’s gears.

Regulating crypto is important but it won't fix corruption

Which returns us to crypto. Solving a problem like corruption requires the tearing down of underlying institutions that abet the graft-addicted elites, and their replacement with institutions that actually work for the people. The IMF's prescription for fixing corruption – crypto regulation – is just a cosmetic change. It does nothing to alter the sick institutions driving corruption, poverty and inequality.

If the IMF's prescription is inadequate, I’d suggest that its explanation for the correlation between crypto and corruption is wrong, too.

Instead of crypto fueling corruption, as the IMF seems to think, it's the other way around; the very same extractive institutions that drive corruption are fueling crypto usage. Put differently, the reason we see high rates of crypto adoption in undeveloped nations where elites rig the rules of the game is not because those elites are dealing in crypto bribes, but because the suffering masses see crypto as a form of escape.

Why do people adopt crypto as a reaction to bad institutions? There are two opposing camps. I'll call them crypto-as-redemption and crypto-as-tragedy.


For advocates of the crypto-as-redemption viewpoint, the correlation between corruption and crypto adoption is a sign that crypto is acting as a redeeming force. Citizens in corrupt countries are using it as a hack around the extractive institutions that subjugate them.

Take Cuba for instance, a country long bedeviled by extractive institutions. Most Cubans lack connections to the ruling regime. This makes it very difficult to make ends meet, and so they are reliant on remittances from Cuban family members living in the U.S.

But the regime extracts its pound of flesh. Remittances made through Western Union have historically been routed through a set of Cuban-military linked financial companies, which take a cut of around 5%-10% of each remittance for themselves. By avoiding the regime’s intermediaries, crypto provides Cubans with the chance to get better exchange rates.

Crypto also offers a route when those intermediaries cease working altogether. In 2020, the Trump U.S. presidential administration placed sanctions on the military-linked companies involved in remittances, making it difficult for Cubans to send in dollars at all. Some Cuban-Americans turned to couriers, or "mulas," to physically transport cash to relatives. Others used banks in Europe, which were still willing to interact with non-sanctioned Cuban banks.

Crypto emerged as one of these alternative remittance channels. With Western Union down, Cuban Americans could send crypto directly to their relatives who converted it into Cuban currency to buy food and pay bills. For Cuban recipients who don’t want to handle crypto directly, tools like BitRemesas allow local traders to bid for the right to deliver these remittances in person as cash or to their bank account.

And thus crypto became a redemptive force in Cuba, helping fill in the cracks when institutions stop working for people.


The crypto-as-tragedy view takes the opposite view. Most developing nations' crypto usage isn't very redemptive at all. Instead, crypto is a last-gasp gambling venue for the desperate.

Take the case of Nigeria, a country beset by extractive institutions and corruption. Citizens who want to advance in life have fewer options than in the West. They are excluded from many of the official channels that lead to financial advancement: gainful employment, genuine business opportunities and investment. Desperate, they've turned to the only available channel for advancement: get-rich schemes, Ponzis and hyper-volatile crypto.

According to Statista crypto adoption data, Nigerians are the most likely of all nationalities to say they used or owned cryptocurrency. Nigeria also happens to be the world capital of the Ponzi scheme. Starting with MMM in 2016, waves of Ponzis have torn through the country including Ultimate Cycler, Icharity Club Nigeria, Get Help World Wide, Givers Forum, Twinkas, Crowd Rising and Loom.

Surveys show that more than half of Nigerians have either participated in a Ponzi or know someone who has. Many are unemployed students, which isn't surprising given Nigeria's 33% unemployment rate. In one survey of Nigerian Ponzi investors, 60.3% cited harsh economic conditions as their reason for joining Ponzi schemes.

For a young Nigerian with few prospects for advancement, a cryptocurrency that promises to moon by 100 times serves the same purpose as a Ponzi scheme like MMM.

If Nigeria’s failed institutions are driving a culture of long-shot financial bets, these bets aren't genuine escapes. Volatile zero-sum games allow citizens to temporarily dissipate their desire to escape their lot in life, but they don't create any real economic value. The elites that control institutions in undeveloped nations may even welcome these sorts of financial games. Not only do they not threaten their control over national resources – they may also distract people from their plight.

And that's why crypto usage is tragic. It is a symptom of an underlying sickness. But just as Nigeria’s Ponzi schemes do nothing to solve the actual problem, neither does its rampant crypto speculation.

Which view is correct, crypto-as-redemption or crypto-as-tragedy?

Both crypto-as-redemption and crypto-as-tragedy counter the simplistic IMF connection between crypto and corruption, suggesting a deeper explanation for the relationship.

Both stories are accurate, to a degree. There are some neat non-speculative crypto use cases where the stuff is being used as a life hack to help those living in dysfunctional nations, such as the example of Cuban crypto remittances. At the same time, a big chunk of developing nation usage involves crypto serving as the focal point for the gambling impulses of the downtrodden, not as a useful life hack or an agent of change.

In its purest form, the crypto-as-redemption view elevates crypto to more than just a personal hack for those coping with bad institutions. Crypto is a peaceful revolution. It sneaks in like a Trojan horse and destroys the extractive institutions that bedevil less-developed nations, setting them free.

While crypto can certainly be a good life hack, this hyper-idealization of crypto is dangerous. It gives people the mistaken idea that a product that serves their gambling instinct can somehow solve the developing world's problems.

To reform the institutions that keep citizens of poor nations, crypto won’t cut it. Deep change requires real work.

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JP Koning

J.P. Koning, a CoinDesk columnist, worked as an equity researcher at a Canadian brokerage firm and a financial writer at a large Canadian bank. He runs the popular Moneyness blog.

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