By Lorenzo Gutierrez Boker
As of 2022, approximately 1.4 billion adults worldwide still lack access to essential financial services, commonly referred to as being unbanked. Among this group, a significant number consists of minority and low-income populations, who face various barriers preventing them from utilizing banking services. These factors include language and cultural differences, fear of deportation, and limited financial literacy. Achieving global financial inclusion is imperative to ensure the full integration of all segments of the population into society and to foster the expansion of globalized economic systems. Disparities in banking access are evident, with the 2019 Federal Deposit Insurance Corporation report highlighting that 13.8% of Black households and 12.2% of Hispanic households remain unbanked, compared to only 2.5% of white households. Moreover, financial institutions may perceive low-income populations as undesirable customers due to the perceived higher risk of loan defaults (reflected in their low credit scores) and the limited profitability resulting from their relatively low disposable income. However, the emergence of digital currencies has revolutionized the financial sector, introducing a decentralized and platform-based system that holds great potential for fostering financial inclusion among minority populations.
Digital currency has not only established itself as a universal medium of exchange but has also emerged as a viable alternative to traditional brick and mortar banking institutions. Through user-friendly cryptocurrency wallets such as Coinbase and SafePal; individuals who have been excluded from conventional banking services can now securely allocate their income to these platforms, enjoying the potential for yield growth on their initial capital. This has become increasingly crucial as an escalating number of banking institutions are closing branches in low-income areas, averaging around 4,000 closures per year, due to the aforementioned inflated risk-to-reward ratio faced by banks. Digital currencies can also serve as a hedge against local currency depreciation to protect savings. In Turkey, as the lira has lost more than 22 percent of its value against the US dollar in the past year, a greater segment of its population has adopted cryptocurrency platforms as a means of financial stability. Now, over 2.4 million Turkish people, amounting to 2.94 percent of its total population, own cryptocurrencies and use them for transaction purposes on local platforms like Bitfinex. U.S-based platforms like BlockFi and Tala offer crypto loans, a service that individuals with low credit scores typically lack access to. To ensure prompt debt repayment and eliminate exclusion based on identity, these digital platforms have implemented alternative assessment methods beyond traditional credit scores and wealth evaluation. Instead, they verify individuals’ identities, analyze their cash flow history, and consider referral sources when providing loans. An illustrative example is Tala, which extended crypto loans exceeding $5,000 USD to over a million unemployed female small business owners in Mexico during the COVID-19 pandemic, aiding them in navigating the economic setbacks caused by the global health crisis. By seeking to integrate rather than exclude low-income populations, crypto platforms offer opportunities for investment and wealth accumulation. Furthermore, their decentralized nature and independence from central banks allow for global loan outreach, enabling greater interconnectivity of financial services and facilitating engagement with retail clients, remittance receivers, investors, and regulators worldwide.
As governments worldwide increasingly incorporate cryptocurrencies into their payment systems: macro-level financial analysts have identified several weaknesses in this banking alternative when it comes to achieving financial inclusion. One significant drawback often highlighted is the high transaction fees, known as gas fees, associated with cryptocurrency payments. Users essentially bear the cost of the environmental impact caused by mining cryptocurrencies in energy-intensive areas, making it expensive to utilize cryptocurrencies as a primary payment system. While this concern is valid, it is essential to acknowledge that unbanked individuals already encounter high loan and payment fees when accessing financial services, such as dealing with loan sharks and pawn shops. Moreover, the introduction of newer environmentally-friendly cryptocurrencies like IMPT, built on the Ethereum platform, offers the possibility of implementing currencies with lower gas fees as an alternative to highly-polluting ones like Bitcoin. Another concern raised is the high volatility of cryptocurrencies themselves, rendering them an unstable financial system that does not necessarily contribute to the economic well-being of low-income populations. As highly speculative and largely unregulated assets, cryptocurrency prices can fluctuate significantly, creating uncertainty regarding yearly returns and wealth growth. The adoption of stablecoins by digital platforms, however, represents a potential solution. A stablecoin’s value is often pegged to a specific asset, reducing the volatility associated with traditional cryptocurrencies, providing a reliable medium of exchange and store of value and low-cost cross-border transactions.
The integration of blockchain technology and cryptocurrencies, such as stablecoins, holds immense potential for advancing financial inclusion among low-income communities. By leveraging the stability, affordability, and accessibility offered by these digital assets, individuals in underserved populations can gain access to secure financial services, cross-border transactions, and reliable storage of value. Blockchain technology empowers individuals with limited access to traditional banking systems, enabling them to participate in the global economy and take control of their financial well-being. As governments, organizations, and financial institutions continue to explore and embrace blockchain solutions, the path towards a more inclusive and equitable financial landscape becomes increasingly tangible, opening doors of opportunity for communities across the income spectrum.
The views expressed in this article are the author’s own, and may not reflect the opinions of The St Andrews Economist.
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