Cryptocurrency is all the rage in media reports these days, though it’s usually presented as something of interest only to savvy investors.
However, the technology has the potential for social change far beyond this.
Cryptocurrencies can open access to financial services for underserved populations in developing countries. They even have the potential to reduce global poverty by facilitating better access to capital and financial resources, and by enabling small business transactions.
The need for financial support for the unbanked and underbanked
Around 2.5 billion people around the world are unbanked or underbanked, meaning they lack access to basic services such as checking accounts and loans in the case of a financial emergency. This leaves these people—often the poorest among us—unable to access legitimate forms of lending such as credit cards and therefore vulnerable to loan sharks or other predatory lending practices. These types of predatory lending typically involve extortionate interest rates and lead to further financial instability among those who have the least capital and resources.
How technology can facilitate banking access
The goal of financial inclusion requires making banking services available in places with limited access to physical bank branches. Particularly in the developing world, many people’s primary method of internet access is through their mobile device rather than a computer, so it makes sense to use the platform for inclusive banking. To some extent, mobile money services have helped bring banking services to this population; however, the fees incurred are still punishingly high.
There are also large numbers of people who lack an established identity in the form of bank records or credit history, and it is especially difficult for these people to access financial services. Technology can help to both provide services to these people and to enable them to build up an established identity for the future.
What is special about blockchain?
Blockchain technology and cryptocurrencies, in particular, can provide access to financial services to unbanked or underbanked people. Although it was once difficult to understand and use blockchain technologies, a recent wave of apps and services have made the technology simpler and easier to use than ever before. The big advantage of blockchain over other financial structures is that it is truly international—unlike other centralized payment methods, cryptocurrencies can be traded across borders by anyone around the world.
A further advantage of cryptocurrencies for bringing financial services to the underbanked are the low transaction costs. Because these services have no physical branches to maintain and minimal staffing costs thanks to the blockchain’s distributed network, these savings can be passed onto users in the form of reduced transaction fees. This allows the easy passing of small amounts of money between individuals or businesses, removing a barrier for entry into financial transactions.
Finally, blockchain technology can increase transparency and limit corruption through systems of automation and digitization. Blockchain systems maintain a record of financial transactions across a distributed ledger which cannot be manipulated by individuals or companies, thus preventing fraud or theft. For this reason, blockchain is already being tested for oversight of land registration and government contracts in Sweden and Japan, and these benefits could be spread to developing countries as well.
The role of small businesses in alleviating poverty
One way to help increase the wealth of developing countries is by facilitating small business growth. When people have access to small loans to start up a business, they can develop an ongoing income stream for themselves, whilst also providing a service for those in their community. The money spent by these small business patrons stays within the community rather than being exported to large international corporations.
In order to promote small business growth, systems need to make available opportunities for entrepreneurship and allow the borrowing of money through micro-credit transactions such as small loans to cover starting business costs. This is the kind of practical support that can be facilitated by blockchain technologies.