Cryptocurrency Vs. Hawala Networks: The Path to Lowering Inflation within Yemen
Austin Freed | Sydney Finver
Yemen’s rising inflation has led the nation to a critical juncture in its banking sector. This article will explore two options that could dictate the future of Yemen’s banking position: first, pivot to cryptocurrency, and second, continue using the hawala network system but with a new currency that invalidates the original Rial. The lens this article will be looking at these options through is one with the aim of lowering inflation and getting around sanctions that control the central banks. It is not an article that aims to support the Houthis, but is rather a demonstration of the Houthis’ options to decrease inflation. It also must be recognized that local information surrounding cryptocurrency may be sparse due to Houthi suppression of the news, as cautioned by the Committee to Protect Journalists.
The History of Yemen
Yemen, a country on the Arabian Peninsula, borders Saudi Arabia and Oman. It is situated on the Red Sea to the west and the Gulf of Aden to the east, occupying a key geographical location: the Bab el-Mandeb Strait, through which 12% of the world’s cargo passes through. The importance of the Strait has made the civil war in Yemen particularly important to the United States, as the Iran-backed Houthis have taken over much of the country’s oil production. Amid civil war, the U.S. has enacted sanctions to combat the Houthis. On September 21, 2014, the Houthi rebels took over the capital of Yemen, Sana’a. This marked the start of the current civil war in which, according to the Arab Center in Washington, D.C., the Houthis now control 70% of the population, which is just over 20 million people. The other portion of Yemen is controlled by the U.S.-backed Dr. Rashad Al Alimi, the legitimate president of Yemen. Once the rebels first took over and fully embedded themselves in the economy, the value of the Yemeni rial crashed by 80%. Now with inflation on the rise, the country is expecting an 18.5% increase this year alone. The cause of this inflation is the extensive U.S. sanctions on the Yemeni Central banks under Houthi control and the Houthi Blockade of the Bab el-Mandeb Strait, making it extremely hard for Yemen to import or export goods, a key factor in building and sustaining stability in the nation’s economy. Thus, Yemen is in desperate need to find a feasible solution to reduce inflation in both the Houthi and legitimately controlled areas of the country.
The Benefits of Cryptocurrency
In the last 10 years, the Houthis have worked towards digitizing their currency system: first with vouchers in 2016 that failed, then with an app in 2019 that failed but is still active, and now they are working on the Rial Currency. According to Chainalysis, a blockchain data platform, the digital Rial currency has led to Yemen ranking 16th globally in cryptocurrency adoption. The advantages of cryptocurrency include its ability to circumvent U.S. sanctions and lessen inflation. Cryptocurrency has the potential to combat inflation by allowing a flat cap on the amount of currency that can circulate, setting limits on what the government can control in financial output. For the Houthis, cryptocurrency serves multiple valuable purposes. First, digitized finances are extremely difficult to track, making laundering and moving money around sanctions far easier. Second, the shift towards cryptocurrency leaves the Houthis’ controlled region less reliant on the country’s Rial. This is a beneficial alternative, given the persistent friction between the internationally recognized Yemeni government and the rebel group over managing the nation’s funds. This discord is seen in the AP news article that reports that the Houthis have issued their own coins that are not recognized by the established government.
To add, Yemen is not the only country looking to cryptocurrency to avoid inflation. In 2016, Nigeria faced similar setbacks, and were ultimately successful in lowering inflation when the nation’s citizens shifted to stable coins. Today, cryptocurrency in Nigeria has made cross-border payments (remittances) far smoother due to a far lowered cost. Because Western banks are often highly expensive, cryptocurrency offers a cheaper alternative, allowing for the transfer of money in seconds with little cost. Yemen could see similar benefits, as the nation also faces the same remittance challenges.
The Negative Implications of Cryptocurrency
Although cryptocurrency serves the Houthis’ governmental goal of curbing inflation, implementing it poses many challenges, as they lack regulatory frameworks, infrastructure, and education. The primary infrastructure needed in Yemen is high-speed internet, of which Yemen ranks 148th, making the nation one of the slowest internet networks in the world. The implementation of these components is crucial for cryptocurrency to be used recreationally, which can only help the Houthis. These additions are in the rebels’ best interest because the ability for everyday citizens to use cryptocurrency would help cement their monetary control, demonstrate their governance capacity, and increase the revenue available for taxation.
To make cryptocurrency safe for everyday citizens, the Houthi authorities would need to implement two-step verification, encrypted user data, and enable offline storage options such as a vault or wallet. Without such security measures, the Houthis would struggle to expand cryptocurrency access nationwide for everyday users. Further, Yemen currently has no regulations on cryptocurrency, making it extremely dangerous for any citizen to invest in it, as there are no protections for the customer. Customers also need to be concerned about regulations that protect them from the government. There needs to be established citizens’ rights pertaining to the use and holding of cryptocurrency. What happens if cryptocurrency is stolen while in the citizen’s account – is it insured? These are questions that must be answered before country-wide implementation. Money laundering is also a concern. Organizations using cryptocurrency for money laundering can make Yemen a home for international criminal organizations, other than just the Houthis and multiple other rebel groups.
Finally, cryptocurrency requires a steep learning curve, and therefore, it is important for Yemen to educate its citizens on how to use it and how to keep their money safe. Yemen today reports that multiple citizens have fallen victim to fraud schemes, resulting in financial losses. Therefore, it is necessary for education to be provided on cryptocurrency and how to use it safely. Cryptocurrency can also be very volatile. Yemen today reports the concerns about cryptocurrency, including its volatility, with the possibility for the currency to make dramatic value changes in a matter of a few hours. Further, if cryptocurrency is lost or stolen, it is almost impossible for the victim to get their funds back, which further underscores the need for regulation.
The Benefits of the Hawala Networks
Yemen’s other option is to replace Hawala networks with a new currency other than the current Rial. Hawala networks are trust-based money transfer systems in which, according to Sanna’a Center for Strategic Studies, 70% of current money transfers are made in Yemen, making it the main source of banking for the country. This comes amid sanctions aimed at Houthi-controlled central banks. Hawal networks are unique in how they operate. For example, when I go into a local market in Yemen, I would see a shopkeeper who operates in the hawala network. I would then give them 50 bucks and tell them where I wanted the money to go. I further hold a unique number, code, or password. When I go to the specified location, where I wanted the money to be sent, I would give the other storekeeper the agreed-upon password and then receive my 50 bucks. This system requires no name and no paper trail, making it popular among people who want to bypass the strict sanctions of the U.S. hawala networks, which also require no new infrastructure or education to be put in place. Hawala networks are already established, and the most popular form of banking, with no infrastructure needed, thus they would offer more points of sale faster than if cryptocurrency were put in place.
The Negative Implications of the Hawala Networks
Hawala networks do not fix the inflationary problem in Yemen because they operate using Fiat money, meaning money backed by the government. The government already has too much money in circulation, which is a major driver of inflation. To reduce inflation, slowly taking some of that money out of circulation would be necessary. Hawala networks could still work if the government issues a new currency, thereby reducing the amount of money in circulation. However, there is nothing stopping the government from continuing to produce more of a new currency, meaning it would be a temporary fix.
Concluding Statements
Although cryptocurrency and Hawala Networks have different pros and cons, they are united by one problem: a fractured government. Both governments have different visions of how they want to run the country economically. A big help to the inflationary issue would be one of uniting the government so that all central banks and economic policy makers are under one roof.As mentioned, the two central banks – the Bank of Aden and the Bank of Sana’a – have had severe disagreements on banking policy, as they each continue to make staunchly different currency decisions. An example is implementing coins accepted in one half of the country but not the other, as reported by AP News. Further, the sanctions would likely be lifted under a single, internationally recognized government that is not deemed a terrorist organization. This would make free trade much easier, thereby lowering prices. Although both ideas have their drawbacks, for cryptocurrency to be implemented on a national level, the government needs to ensure it does so responsibly, or else it will further the economic destruction of the country.
Austin is a part of Columbia College’s class of 2029 and plans on majoring in Economics and Political Science. His future goals include law school, though he has deep interest in international relations and economics. Austin’s areas of interest are the emerging markets of Latin America and the Middle East.