Cryptocurrencies and Financial Inclusion: A Promising Solution for the Underbanked

Cryptocurrencies have been gaining popularity in recent years as an alternative to traditional banking systems. While they are often associated with investment and speculation, cryptocurrencies have the potential to provide financial services to those who are unbanked or underbanked.

In this article, we will explore how cryptocurrencies can help the unbanked and underbanked and why they are a viable alternative to traditional banking systems.

Who are the Unbanked and Underbanked?

The unbanked are individuals who do not have a bank account, while the underbanked are those who have limited access to banking services. According to a 2017 survey conducted by the FDIC, 6.5% of households in the United States were unbanked, while 18.7% were underbanked. This translates to approximately 8.4 million households that are unbanked and 24.2 million households that are underbanked.

Globally, the numbers are even more staggering. The World Bank estimates that 1.7 billion adults around the world are unbanked, which is approximately 31% of the world’s population. These individuals do not have access to traditional financial services, such as checking and savings accounts, credit cards, and loans.

Why are so many people unbanked or underbanked? There are several reasons

Lack of access: Many individuals live in areas where banks do not operate or where there are no ATMs or bank branches.

High fees: Traditional banks often charge high fees for their services, which can make them unaffordable for low-income individuals.

Lack of documentation: Some individuals do not have the necessary documentation, such as a government-issued ID or proof of address, to open a bank account.

Mistrust of banks: In some cases, individuals do not trust banks or the financial system and prefer to keep their money in cash or other assets.

How can Cryptocurrencies help the Unbanked and Underbanked?

Cryptocurrencies offer several advantages over traditional banking systems that make them a viable alternative for the unbanked and underbanked. Here are some ways that cryptocurrencies can help:

Lower fees: Cryptocurrency transactions are generally much cheaper than traditional banking transactions. This makes them more affordable for low-income individuals who cannot afford high bank fees.

Accessibility: Cryptocurrencies can be accessed from anywhere in the world, as long as the user has an internet connection. This makes them an ideal solution for individuals who live in areas without banks or ATMs.

No documentation required: Unlike traditional banking systems, cryptocurrencies do not require users to provide identification or proof of address. This makes them accessible to individuals who do not have the necessary documentation to open a bank account.

Decentralized: Cryptocurrencies are decentralized, which means that they are not controlled by any government or financial institution. This makes them more trustworthy for individuals who do not trust banks or financial institutions.

Greater control: Cryptocurrencies give users greater control over their money. Users hold their own private keys, which means that they are in complete control of their funds. This is in contrast to traditional banking systems, where banks hold the funds and can freeze or seize them at any time.

Here are some specific ways that cryptocurrencies are being used to help the unbanked and underbanked:

Remittances

Remittances are a significant source of income for many families in developing countries. According to the World Bank, global remittances are expected to reach $708 billion in 2021. Traditional remittance services, such as Western Union or MoneyGram, charge high fees for their services, which can eat into the funds that are being sent.

Cryptocurrencies offer a cheaper alternative to traditional remittance services. They allow individuals to send money directly to each other without the need for a third-party intermediary. This means that fees are significantly lower, and more of the money being sent reaches its intended recipient. Additionally, cryptocurrencies can be sent instantly, which is particularly important in situations where the recipient urgently needs the funds.

Several cryptocurrency projects are focused specifically on remittances. For example, Ripple (XRP) has developed a global payment network that enables fast, cheap, and secure cross-border payments. The network is being used by banks and financial institutions around the world to facilitate remittances.

Micropayments

Micropayments are small transactions, usually less than a dollar, that are used to pay for online content or services. In traditional banking systems, micropayments can be difficult to process because the fees associated with each transaction can be higher than the value of the payment itself.

Cryptocurrencies, however, are ideal for micropayments because they have low transaction fees. This means that content creators and service providers can receive small payments for their work without being burdened by high fees. Additionally, cryptocurrencies can be used to pay for content or services without the need for a credit card or bank account, making them accessible to individuals who are unbanked or underbanked.

Several projects are focused on micropayments using cryptocurrencies. For example, Brave Browser has developed a system that rewards users with cryptocurrency for viewing ads. The payments are made in small amounts of cryptocurrency, such as Basic Attention Token (BAT), which can be used to support content creators or exchanged for other cryptocurrencies.

Loans

Access to credit is a significant problem for the unbanked and underbanked. Without a credit history or collateral, it can be difficult to secure a loan from a traditional bank. However, cryptocurrency-based lending platforms are emerging as an alternative source of credit.

Cryptocurrency lending platforms enable users to borrow and lend funds using cryptocurrency as collateral. The borrower puts up cryptocurrency as collateral, and the lender provides a loan in cryptocurrency. If the borrower defaults on the loan, the lender can seize the collateral. This eliminates the need for a credit check or collateral assessment, making it easier for the unbanked and underbanked to access credit.

Several cryptocurrency lending platforms have emerged in recent years, including Nexo, Celsius Network, and BlockFi. These platforms offer loans with interest rates that are often lower than traditional banks, making them an attractive alternative for individuals who need credit but cannot access it through traditional means.

Store of Value

Inflation is a significant problem for individuals living in countries with unstable economies. In these situations, holding cash can be risky because its value can be eroded rapidly by inflation. Cryptocurrencies, on the other hand, can provide a more stable store of value.

Several cryptocurrencies, such as Bitcoin and Ethereum, have limited supplies, which means that their value is less susceptible to inflation. Additionally, because cryptocurrencies are decentralized, they are not subject to the control of any government or financial institution, making them more resistant to economic turmoil.

For individuals living in countries with unstable economies, cryptocurrencies can provide a more stable store of value than traditional currencies. This can help them protect their wealth and provide a financial safety net in case of economic instability.

Challenges to Cryptocurrency Adoption

While cryptocurrencies have the potential to provide financial services to the unbanked and underbanked, there are several challenges that must be addressed before they can achieve widespread adoption. These challenges include:

Education

Many individuals who are unbanked or underbanked are not familiar with cryptocurrencies or how to use them. Educating these individuals about the benefits and risks of cryptocurrencies will be essential to achieving widespread adoption.

Infrastructure

Cryptocurrencies require an internet connection to access, which can be a challenge in areas where internet access is limited or unreliable. Additionally, individuals who are unbanked or underbanked may not have access to the technology required to use cryptocurrencies, such as smartphones or computers.

Regulation

Cryptocurrencies are still largely unregulated in many parts of the world, which can make individuals hesitant to use them. Additionally, the lack of regulation can make it difficult for businesses to operate in the cryptocurrency space, which can limit the availability of cryptocurrency-based financial services.

Volatility

Cryptocurrencies are known for their volatility, which can make them risky to hold as a store of value. While some cryptocurrencies, such as Bitcoin, have seen significant price appreciation over time, they have also experienced sharp drops in value. This can make individuals hesitant to hold cryptocurrencies as a long-term investment.

Conclusion

Cryptocurrencies have the potential to provide financial services to the unbanked and underbanked, who often lack access to traditional banking services. By leveraging the benefits of cryptocurrencies, such as low fees, instant transactions, and decentralized networks, individuals who are unbanked or underbanked can access financial services that were previously unavailable to them.

However, there are several challenges that must be addressed before cryptocurrencies can achieve widespread adoption as a means of providing financial services. Education, infrastructure, regulation, and volatility are all obstacles that must be overcome to make cryptocurrencies a viable option for the unbanked and underbanked.

Despite these challenges, the potential benefits of cryptocurrencies for the unbanked and underbanked are significant. Cryptocurrencies have the potential to provide access to financial services, increase financial inclusion, and improve economic opportunities for individuals who are currently excluded from traditional banking systems. As such, it is essential that efforts are made to address the challenges facing cryptocurrency adoption in order to unlock its full potential for the benefit of all individuals, regardless of their level of financial access.