From Exclusion to Empowerment: How Crypto Could Hold Key to Financial Inclusion

According to the World Bank’s most recent Global Findex report, as many as 1.7 billion people around the world lack access to formal financial services, living without the ability to obtain a bank account or effectively manage their finances. Unable to securely save, borrow, or invest money, they are denied the fundamentals of financial empowerment. Known as the “unbanked” — these individuals are excluded from traditional legacy banking systems and remain trapped in a perpetual cycle of economic disparity. Despite their financial exclusion, two-thirds of the world’s unbanked own a mobile phone, which could help them access financial services.

The Global Digital 2019 report indicates that there are 5.11 billion unique mobile users in the world today, and 4.39 billion internet users last year. In such a highly globalized, technology-driven world, cryptocurrencies could be the answer to ensuring greater financial inclusion and opportunities for all. Even multinational companies such as Facebook and JPMorgan have embraced the potential of cryptocurrencies by unveiling their own iterations of stablecoins, affirming the vital role that digital assets will play in the evolving digital economy.

The problem with being unbanked

A vast majority of the world’s unbanked are located within emerging economies, with many facing the dual threat of poverty and economic hardship. For low-income individuals living in developing countries, the barriers of entry to traditional financial services are simply too high. Banks are subject to heavy regulation and high costs related to money-handling that incur high overheads. This makes the cost of traditional banking services far too expensive for them. In addition, traveling to physical bank branches can prove inconvenient and costly for those living in rural areas. A lack of formal identification and financial education are also contributing factors to the problem.

Essentially, unbanked individuals are missing out on opportunities to be connected to an ecosystem that could significantly improve their quality of life. Without a bank account, they will be completely reliant on physical fiat currencies, which can be unsafe to store personally and difficult to manage. They are left unable to transact online, invest, or securely store their money. Without a credit history, their access to loans and insurance will also be limited, making it harder for these individuals to start businesses or even buy a home. The effects which a lack of basic financial services may have stretch to every aspect of a person’s life.

Crypto revolution – the panacea for the unbanked

Providing financial inclusion for all is undoubtedly a goal of great importance, and the answer could lie in cryptocurrencies and blockchain technology — both of which have a role to play in creating a more equitable financial ecosystem. Since bitcoin entered the financial scene in 2008, the rules of the game have changed, and traditional financial institutions no longer hold all the power. Not only has bitcoin provided an alternative means of exchange, but it has also paved the way for a new asset class. Digital currencies have made it possible for the unbanked population to more easily store and manage their money without a bank account — the only thing they need is access to a smartphone and an internet connection.

Anyone who is unbanked can create a digital wallet and transfer cryptocurrencies internationally, with the advantage of much lower transaction fees. There are no costs for holding or managing crypto, and unlike banks, cryptocurrencies don’t require a lengthy approval process—simply proof of identity. For countries with limited banking systems, the distributed networks that cryptocurrencies like bitcoin rely on provide a financial infrastructure that is always online and accessible, and since transactions are done over the internet, the issue of distance to physical bank branches becomes non-existent.

Cryptocurrency adoption can bring a particular advantage to countries where currency volatility, compounded by a non-existent financial infrastructure, is the norm. For instance, ongoing economic crises and political unrest in Venezuela has resulted in a spike in the use of cryptocurrencies to combat the devaluation of the local fiat currency. For these Venezuelan citizens, cryptocurrencies like bitcoin and Dash are not just a means for protecting their wealth, but also an alternative medium for conducting everyday transactions.

The road to inclusion

Along with rapid technological advancement and interconnectivity between regions, the ubiquity of mobile phones today provides unprecedented opportunities to ensure that more people can benefit from financial inclusion. For developing countries, in particular, an inclusive financial system can inadvertently boost socio-economic growth and lift communities out of poverty. With the demand for cryptocurrency on the rise and a growing number of digital natives, it is foreseeable that in the near future, cryptocurrency could very well be a solution for the unbanked. However, if cryptocurrencies are to have the desired impact in bringing the unbanked into the financial ecosystem, promoting mainstream adoption will be key.

There needs to be a coordinated approach between global regulators and policymakers for cryptocurrencies to be regarded as a legitimate alternative to fiat currency and traditional banking. Smart regulation is crucial to ensuring a secure and equitable system in which cryptocurrency holdings are protected, without hindering the potential of the technology. Whatever the future holds, the possibility that cryptocurrencies can empower the unbanked and solve the longstanding issue of universal financial inclusion is one that should definitely not be overlooked.

This article is published in Nasdaq publication - https://www.nasdaq.com/articles/from-exclusion-to-empowerment%3A-how-crypto-could-hold-key-to-financial-inclusion-2020-01-07