Cryptocurrency: New Hope for Inclusion?

Many have thought that Cryptocurrency is a bubble which should have burst by now, but against many expectations, it’s still going strong. In fact, stronger than ever. By 2018, all the cryptocurrency in circulation was worth USD 720 billion – the height of the crypto bubble at that time. Of course, it did burst…but by May 2021 the value of crypto had reached USD 2.4 trillion! This is not a fad.

What’s more, even though Bitcoin led the way since 2009, there are now thousands more cryptocurrencies around the world. In 2015, Bitcoin had 86% of the crypto market share by value, but by 2021, it was down to 47% share – major other cryptocurrencies (especially Ethereum but also others such as Tether, XRP, etc.), stealing its share. More crypto is a good thing because it ushers in innovations and new use cases – case in point, NFTs on the Ethereum network (another story for another day). But it’s also really the Wild West here, which is why the market is generally so volatile, but also so full of potential.

But hold up. What exactly is cryptocurrency and why does it seem like the next best thing for financial inclusion?

Wait…what is cryptocurrency?

Think of cryptocurrency as currency (money) that is entirely digital, but made secure by cryptography and which can be sent from person to person without ever having to pass through the traditional/normal channels such as banks, etc.

In fact, it’s an alternative to the current financial system in a way that current players and regulators have no control over it…at all. Which means it can’t be confiscated by the government. And unlike ‘real’/fiat currency, it also knows no boundaries – you can send it anywhere across the world.

Again, unlike fiat currency, you don’t have to provide an identification to open an account or mobile wallet before you send the money to others. It is open to everyone, as long as you have access to the internet. And when you exchange cryptocurrency, you can choose to do so completely anonymously.

It is some of these characteristics that give people hope for its place in driving financial inclusion.

How can it drive financial inclusion?

The key word with cryptocurrency’s role in financial inclusion is ‘open’. With its’ typically decentralized nature, it’s meant to be currency that literally anyone can partake of, especially those who have been left out of the ‘closed’ traditional financial system - that’s almost one-third of all adults in the world. That’s the whole point of financial inclusion – to make sure that people and businesses have access to affordable financial services (e.g., payments, savings, insurance, investments, etc.) that meet their needs; and not only just to have access to them, but be able to use them effectively.

So apart from allowing anyone and everyone to participate in the new financial system, how else can cryptocurrency help drive financial inclusion as defined above?

For one, it gives anyone the opportunity to store wealth. As a digital asset that is accessible to anyone at all, it is much easier for someone with no identity card, no proof of home address or other documentation to simply purchase coins/tokens online and hold it as an investment.

Second, the same concept applies for using cryptocurrency for international remittances. If you’ve ever tried to send money abroad through a bank, you’ll understand the frustrations of unclear fees, high fees, long transfer times, application forms, etc. And how do you do this easily between people who don’t have bank accounts? Using a cryptocurrency exchange or wallet to send crypto is becoming a more viable and cheaper alternative than traditional banking channels – especially as Bitcoin transactions are free or almost free. It’s also becoming a contender for the newer remittance fintechs as well.

Third, with much of the unbanked in emerging and developing economies, the use of a currency (which can also be used as a store of value for investments) that isn’t weak is appealing. That means a crypto holder can easily avoid their local currency devaluations and adverse effects of inflation by investing in cryptocurrency…without being entirely visible to a government that may not be entirely democratic and can seize assets at any time.

Finally, cryptocurrency is also a useful tool in emerging economies with minimal or failed financial infrastructure. That way, people still have an alternative way to transact when those traditional financial systems have failed. A good and recent case study is El Salvador which recently declared Bitcoin as a legal tender…to mixed responses from global financial markets. Over 70% of the population are financially excluded, with no bank accounts. But within a month of this regulatory declaration, more than half the population had downloaded the Bitcoin wallet – that’s about 3 million downloads!

But it’s not all rosy - there are challenges

Despite its prospects though, there are challenges with cryptocurrency fulfilling its potential in financial inclusion. Probably the biggest challenge being knowledge about how it works. The average educated layman is still confused about what cryptocurrency even is, how to buy it, how to use it, etc. With many financially excluded populations being un/under-educated, this awareness gap will be exacerbated.

Furthermore, even though cryptocurrency can be sent relatively easily, at no/little cost, the recipient will still have to change it to cash if they’re not just keeping it as a store of value (which is unlikely in a remittance case). In emerging markets where there aren’t as many crypto players, this will prove difficult. This is an issue that fintechs such as Bitpesa are trying to address. But such players who can help with this conversion e.g., agents or Bitcoin ATMs providers are critical for it to catch much traction for remittances. If regulations allow though, this may not be an issue – e.g. El Salvador’s Bitcoin wallet allows for easy exchange between Bitcoins and Dollars, as well as easy payments to merchants directly from the app.

A final, but glaringly obvious, challenge is Internet access. Exchanging cryptocurrency or using it as a store of value needs Internet access. With only 44% internet penetration in developing markets (by 2019), the scalability of crypto is in question. Still, this penetration has been growing constantly – global internet users increased from 4.1 billion in 2019 to 4.9 billion in 2021 (no doubt helped in some way by the pandemic lockdowns).

The way forward

Interestingly, there has been a lot of debate about cryptocurrency’s role in fostering a more inclusive financial system, but most arguments conclude with ‘unlikely’, or ‘there’s still a ways to go’ because of the reasons above and then some. For example, regulations undoubtedly play a big part. For example, Bitpesa mentioned above is currently unable to operate in Kenya (where it was founded) because of government bans. The main point of agreement though, is that cryptocurrency is showing us what is possible, but it can’t do much for financial inclusion without some major upgrades – currently mostly unclear. What’s more, a lot of developing markets are now turning to mobile money as a viable channel for financial inclusion. Mobile money seems much easier than a cryptocurrency wallet in a lot of dimensions, so how will crypto effectively compete?

Given the above, I’ll put myself on the skeptical train as well, although I would bank on one use case - cryptocurrency being effectively used in failed states, or states with failed/failing financial systems. The case of Lebanon comes to mind. With its failed systems - ~70% of the population living in poverty, its currency having lost 90% of its value, a shortage of dollars, restrictions on Dollar withdrawals, and ~22% of its population refugees (with 78% of these having no legal papers), its unfortunate situation is ripe for the use of cryptocurrency (particularly stablecoins which are tied to fiat and so are a better option for daily use). Here, the stablecoins have more stability than the national currency (Lira), users don’t need any IDs or papers to open a digital wallet, it’s not under the control of a failed government, and the stablecoins can be exchanged for US Dollars through an informal network of agents. It is in situations and cases like this that cryptocurrency really shines now.

Let me know what you think about cryptocurrency and its role in financial inclusion.