How could cryptocurrencies help with financial inclusion?


Over the past decade or so, increasingly affordable mobile phones, microfinance programmes and user-friendly mobile financial services like M-Pesa have enabled many millions of people to pay, be paid and save more easily than ever before. However, as of 2017, as many as 1.7 billion people around the world were still without financial accounts. And up to 1.8 billion more relied on informal or semi-formal systems rather than banks for their financial services, according to a recent Deloitte article citing research from the World Bank and First Data.

That suggests some 3.5 billion people still lack access to modern credit and the other kinds of financial services that would enable them to fully participate in today’s global, digital economy. Among those looking for solutions, many say the answer could lie with distributed ledger technologies or, more specifically, cryptocurrencies.

Blockchain, Deloitte notes, “can be an accelerator for financial inclusion”.

How? Deloitte says blockchain technology can help in three ways: by reducing the time and expense of financial transactions, by supporting alternative identification solutions such as biometrics for people who don’t possess more traditional IDs, and by eliminating the need to depend on a single third-party authority for trust in the system’s validity.

But what about cryptocurrencies in particular? With so many digital tokens used mostly for investment purposes, how could they benefit the unbanked and underbanked?

“A good replacement for access to a transaction account could be access to a universally accepted and secure cryptocurrency,” writes economic and social systems researcher Jan Ohnesorge in a 2018 paper for the German Development Institute. “It would enable payments, offer the possibility to store money and could also provide a gateway to other financial services (blockchain-powered or not).”

However, while cryptocurrencies typically offer the benefit of not having formal access restrictions, Ohnesorge notes that their user-friendliness needs improving.

“This might also increase adoption rates, which are arguably the biggest hindrance to fulfilling the game-changing potential of distributed ledgers,” he adds.

The digital wallet service Abra, for example, enables peer-to-peer transfers in a variety of fiat and crypto currencies. All users typically need is a smartphone with the app, which lets them quickly send and receive funds around the world. While the transactions use Bitcoin traders called ‘tellers’ and cryptocurrencies to enable such exchanges, users don’t have to understand what cryptocurrencies are – and might not even realise that cryptocurrencies are being used to pave the way for Abra’s services.

“No bank account is required, which means anyone, anywhere in the world can participate as long as they have internet access through a smart phone,” Andreas Freund – blockchain advisory head for Tata Consultancy Services – writes in the recently published “Handbook of Blockchain, Digital Finance, and Inclusion”.

In the Philippines, where as many as 70 per cent of residents are unbanked, Unionbank has partnered with ConsenSys and a number of other banks and tech companies to create an Ethereum-based payment platform for rural banks. Designed to support domestic remittances, Project i2i aims to “overcome the challenges of connectivity and lack of basic technological resources across rural areas, and to build the infrastructure that would effectively bring the rural banks into the domestic financial system, together with the customers they serve.”

“The Philippines is a rapidly emerging economy with a population of over 100 million," ConsenSys noted in its i2i case study. “However, two thirds of its population lives on less than $2 a day and remains unbanked. This means that 70 million Filipinos have severely limited access to both the domestic and global financial ecosystems. This is a significant problem when up to 10 per cent of the Philippines’ GDP is made up of international remittances sent from overseas workers to family members across the country.”

Another Silicon Valley startup, the nonprofit-supported Stellar, was founded in 2014 with a mission to “promote global financial access, literacy, and inclusion” through low-cost financial services. Stellar and its partners support this mission through an open-source protocol, a global transaction network and a native cryptocurrency called Lumens, which isn’t mined but is distributed through a combination of direct signups, partnerships and a Bitcoin program.

Using Stellar’s protocol, IBM in March launched its Blockchain World Wire for real-time global payments.

“We’ve created a new type of payment network designed to accelerate remittances and transform cross-border payments to facilitate the movement of money in countries that need it most,” IBM Blockchain general manager Marie Wieck said in a company press release. “By creating a network where financial institutions support multiple digital assets, we expect to spur innovation and improve financial inclusion worldwide.”

IBM’s wire service currently supports payments in 72 countries.

“Personally, I think cryptocurrencies could very well serve as a viable settlement instrument,” IBM Blockchain head Jesse Lund told Forbes recently. “We’ve started with Lumens, which is the native asset of the Stellar network, but we already have the capacity to introduce other cryptocurrencies that could include Bitcoin or Ether. We will add more digital assets based on client demand and participants on the network.”

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