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Crypto’s Role in Financial Inclusion: How Digital Currencies Empower the Unbanked

Crypto’s Role in Financial Inclusion: How Digital Currencies Are Empowering the Unbanked

How cryptocurrency can increase financial inclusion for the world’s unbanked populations.

Bitcoin’s iconic whitepaper laid out a new utopia to fix the world’s financial system woes. As interest in Bitcoin and digital currencies spread, governments and traditional finance began to take note.

Today, running the gauntlet of regulatory compliance is tempering much of Bitcoin’s utopic vision. Even so, Bitcoin and other cryptocurrencies independent of central governments provide compelling new tools for improving the financial lives of millions of people. Let’s take a closer look.

Understanding Financial Exclusion

Financial exclusion is a global challenge affecting millions of people. People outside the traditional banking system are often called “unbanked.” They lack access to basic financial services, including bank accounts, credit, and insurance.

Traditional banking systems often fail to serve marginalized populations primarily due to the high costs of servicing small transactions. In some cases, classism, gender, ethnic discrimination, or other cultural biases play a role.

Financial exclusion is a barrier to overall social and economic development. It can perpetuate poverty and financial illiteracy, limit economic opportunities, and hinder personal financial stability.

When considering crypto’s potential for “the unbanked,” it’s important to remember that the term has different meanings depending on the context, such as developed vs. emerging economies.
The UN Conference on Trade and Development (UNCTAD) divides the world into the Global North and Global South.

Confusingly, the terms don’t refer to geography but to grouping countries based on socio-economic and political characteristics. For example, they consider Australia part of the Global North, even though it sits squarely in the Southern Hemisphere.

The Global North includes North America, Europe, Israel, Japan, South Korea, Australia and New Zealand. The Global South covers countries in Africa, Latin America, the Caribbean, China (sometimes), Asia (without Israel, Japan, and South Korea), and Oceania (without Australia and New Zealand).

The Global North generally contains countries with more stable economies and lower poverty levels. The distinction matters for crypto because financial inclusion issues and how citizens view and use cryptocurrency differ significantly in the Global North vs. the Global South.

With that in mind, you can check out the map below from Chainalysis that summarizes global crypto adoption and see how it compares.

Understanding Financial Exclusion
Source: Chainalysis

Unbanked in the Global North

There are fewer truly “unbanked” citizens in the Global North, so informal marketplaces using crypto as currency have not grown as quickly as in the Global South. Crypto’s financial appeal in the Global North has mainly been as a speculative investment asset rather than a currency.

Factors such as regulatory uncertainty and poor user experience have stalled crypto’s adoption as an alternative currency in the Global North. For example, the Brookings Institution, a US-based center-left leaning policy think tank, takes a somewhat contrarian view.

They maintain that crypto is not, in fact, a miracle cure for the unbanked or financially underserved in the US, starting with the simple fact that US-based individuals generally have to have a traditional bank account to buy crypto.

Secondly, BI points out that the unregulated nature of crypto has given rise to a tidal wave of fraudulent activity preying on lower-income people. This kind of fraud means that scammers often target the people that crypto is supposed to help, i.e., those who feel outside of traditional finance.

In that sense, crypto has not been an empowering tool for many financially underserved populations in the Global North.

Financial Exclusion in the Global South

When crypto proponents talk about the benefits for the unbanked, they often refer to people in developing countries like Africa or India who do not make or have enough money to access financial services. They tend to live on a cash and barter basis.

However, it’s wrong to assume that lower-income people in the Global South are penniless. In some countries, people prefer to remain unbanked. In Mexico, for example, tax authorities have access to personal and business bank accounts. Banks offer credit cards tied to the cardholder’s bank account, with predatory interest rates ranging from 50% to over 100%.

Financial inclusion groups have worked to create services that help poor people access fair credit for years. Dr. Muhammad Yunus, now Nobel Peace Prize winner and founder of Grameen Bank, was the first to see that poor women in Bangladesh were very entrepreneurial; they simply lacked mentorship, support, and access to funds.

Dr. Yunus pioneered micro-credit in the 1980s, loaning out the equivalent of a few dollars to local women in his town. The women formed self-governing lending circles that provided support and accountability among the members. From those humble experiments, the microcredit market grew to an estimated global valuation of US $226B in 2022.

If the idea of small amounts of capital deployed peer-to-peer in a decentralized manner sounds familiar, it should. Let’s look at how crypto is offering innovative solutions to financial inclusion.

Crypto Solutions for Financial Inclusion

Cryptocurrencies offer several advantages to the problems of financial exclusion.

KamPay,​ an African DeFi company, serves as a prime example of how cryptocurrency operations diverge from conventional finance systems.

KamPay is currently ​helping to construct​ a digital ecosystem that encompasses cryptocurrency trading, featuring its own tradable digital currency, as well as an array of crypto-based services. ​Over ten African governments have already adopted or have plans to implement KamPay’s services.

What sets KamPay apart is its unique approach to utilizing the revenue generated from these services. Instead of following the traditional financial model, KamPay channels its earnings into a crypto-based micro-loan initiative. One of these programs specifically targets smallholder farmers in sub-Saharan Africa.

These micro-loans​ differ from traditional micro-loans. Instead of disbursing physical currency, KamPay issues vouchers ​that farmers can redeem at affiliated stores operated by Africa Grain and Seed (AGS), a farming collective with a presence in South Africa, Zimbabwe, Zambia, Malawi, and the Democratic Republic of the Congo (DRC).

Yigal Weinberger, Chief Technology Officer at KamPay, ​notes, “The farmers receive a voucher that can only be redeemed for agricultural products at AGS outlets, typically seeds. Once the crops are grown and sold, the loan is repaid through the KamPay wallet, which can subsequently be converted into fiat currency. While we do not require collateral, AGS collaborates with us in the selection of loan recipients.”

In essence, KamPay’s approach ​leverages blockchain technology to facilitate micro-loans for farmers, promoting agricultural sustainability and economic growth within the region.

Cryptocurrency can also provide a lifeline in times of extreme inflation. 

Argentina is amid a currency crisis with soaring interest rates at 97 percent and a crippling inflation rate of 108.8 percent. Cryptocurrencies, such as bitcoin and stablecoins, offer some citizens a potential lifeline. Argentina ​has a  shadow (meaning, not legal) banking system ​called “Cuevas” ​that allows users ​to gain exposure to Dollars, Euros, and Digital Assets like Bitcoin. ​

Whether its institutional exclusion or monetary policy problems, here are more benefits crypto can offer to people outside of traditional banking systems:

Accessibility: Digital currency holders can store and transact with an internet connection and a smartphone.

Low Barrier to Entry: In its pure form, cryptocurrencies require minimal documentation and fewer credit checks. The caveat is that as governments fold crypto into mainstream finance, KYC rules mean more paperwork and less anonymity for crypto users.

Regional and global reach: Cryptocurrencies are unique because they are not tied to governments – unless a government issues them. For example, the price of ether is the same no matter what country you are in. There is no currency conversion based on geography. Anyone with internet access can securely send, receive, and store value, even in remote areas.

Reduced Costs: Traditional banking often involves high fees for small transactions. Crypto transactions can be cost-effective, lowering banks’ costs or eliminating the need for intermediaries.

Faster Transactions: Cryptocurrencies can complete cross-border transactions in seconds that take days for fiat transactions. Cross-border payments are vital to Riple’s business model – leveraging crypto to speed up global fiat transfers. Many Central Banks are reforming fiat transfer processes and testing CBDCs to help speed up the rate of transfers in-country.

Digital Wallets: Digital wallets empower unbanked individuals with a secure, portable way to control their funds.

Financial services: Crypto-based platforms are beginning to offer various financial services, including savings accounts, peer-to-peer (P2P) lending, and insurance, accessible to the unbanked population. For example, according to the African Blockchain Report 2021, blockchain companies in Africa raised $127 million of venture capital for crypto projects.

Cross-border remittances: Millions of people in the Global South receive remittances from relatives working in the Global North. The value of 2021 global remittances was almost US $49B. Traditional institutions charge high fees, and transactions sending currency across borders can take days to weeks. Cryptocurrency can automate and process transactions at a fraction of current fees.

Inflation hedge: Corruption, fiscal mismanagement, and global economic forces can mean high inflation rates for many countries in the Global South. Venezuela and Sub-Saharan Africa are living lab experiments of people using crypto as a hedge against inflation at scale.

Reality Check: Fraud Knows No Borders, Too

Just as fraud has plagued crypto in the Global North, the Global South digital currency space has seen its share of scams, too. A study by Chainalyis found that Africans had lost at least US $5.9B in 2022 crypto scams. Education about cryptocurrency and scams is a priority not just for the Global South or North but for the Global Everywhere!

Moving Ahead

Weakness in financial systems worldwide has fueled the demand for digital currencies since the birth of Bitcoin. Today, we are on the cusp of fully integrating digital currencies into global finance, potentially opening up access to capital for millions of people.

Do you follow crypto’s progress in the Global South? If you invest in cryptocurrency, ZenLedger can help you stay organized for tax time. The platform aggregates transactions across exchanges, computes your capital gain or loss, and generates the necessary paperwork. In addition, you can identify opportunities to reduce your tax burden using strategies like tax-loss harvesting.

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The above is for general info purposes only and should not be interpreted as professional advice. Please seek independent legal, financial, tax, or other advice specific to your particular situation.