Financial inclusion is still a dream for many people around the world. Financial inclusion is understood as the availability of formal financial services to individuals and enterprises. Those formal financial services are typically access to banking, loans, insurance, and payment systems.
While for many, using these bank services is an inherent part of life, this is not the case for many people all around the world.
So, in Morocco, over 70% of people don’t have access to banking services. In Vietnam, 69% of the country’s population is unbanked. In Egypt and the Philippines, 67% and 66% of people respectively cannot use banks for one reason or another. Even in the USA, 4.5% of households were unbanked in 2021.
The reasons for this are different, with the main ones as follows:
- Not enough money to meet the minimum balance requirements.
- No trust in banks, especially in cases when the bank accounts were frozen or a bank was announced insolvent and its clients had to recover their funds in long and time-demanding legal processes.
- High service fees.
- No infrastructure is available to use bank services.
- Lack of documentation necessary to obtain a bank account.
It is hoped that cryptocurrency can change it by fostering financial inclusion globally.
Why Is Crypto Believed to Foster Financial Inclusion?
Cryptocurrency is a different type of finance, with no central authorities and no limitations. It is decentralized which means that there is no bank or another body that can block your account (we don’t speak about centralized exchanges and other similar types of companies here but about cryptocurrency as a phenomenon).
It is trustless which means that you don’t have to trust to the other party to perform a transaction or store your funds. You just store your digital coins in your wallet, and you are the only one who can access to them.
It is borderless and accessible in any country. Sending cryptocurrency from one user to another takes from some seconds to a couple of minutes, and depends only on the blockchain processing speed. It doesn’t matter how far from each other are, crypto is sent super fast compared to traditional currencies.
Crypto wallets do not require a minimum balance, you can keep even one of the cheapest tokens, and it is still fine.
There is no need to look for an ATM or a terminal to withdraw money or make a payment, you can do everything directly from a wallet.
You don’t need to provide any documents or pass any due diligence to get crypto and use it unless you are into trading and managing significant volumes of finance.
It seems that cryptocurrency has immense potential to change the lives of millions of people by providing them access to easy-to-use financial services. Then, why it hasn’t happened yet?
Challenges in Introducing Crypto into Financial Services
While the potential of crypto in fostering financial inclusion is immense, not everything is that bright. There are many challenges to overcome before this dream can come true.
Challenge 1: the lack of infrastructure
Funnily, the same challenge is present in traditional finance. In the case of crypto, the main problem is that there are still very few places where one can pay for goods or services in cryptocurrency. Do many shops accept Bitcoin in your location? Well, in Nigeria, one of the poorest countries in the world, there may be even fewer such places. So, you may have crypto but if you are able to pay with it, is a different question.
Challenge 2: legal limitations
While crypto is borderless, it is not everywhere permitted. For example, in Egypt, a country with one of the highest levels of unbanked population, cryptocurrency is illegal. Thus, using it or just storing it may have very negative consequences.
Challenge 3: dependence on traditional finance
Have you tried to use cryptocurrency in the real world? It is pretty challenging if you don’t live in El Salvador or another country where crypto is legal tender. Otherwise, you are pretty limited in choices.
To convert crypto to fiat, you again need to register an account on a centralized exchange, pass all verification procedures, and have a bank account. Even if you withdraw crypto directly from your wallet, you still need to have a bank account, otherwise, where are you going to withdraw it?
In other words, this dependence of crypto on traditional finance eliminates the advantage of not requiring any specific documentation to use crypto, not passing verification procedures, and similar.
Challenge 4: high blockchain fees
Traditional banks charge for sending money but blockchain charges, too. Moreover, some blockchains (Ethereum, for example) charge fees higher than any bank would do. However, this is not a major challenge because there are a lot of cheap blockchains or those that charge almost nothing for sending coins within the same network.
Bottom Line
Cryptocurrency indeed has the potential to boost financial inclusion. But it won’t happen until legal limitations are eliminated or at least a unified legal framework is created, and crypto adoption grows. Over time, when governments and regulators find a way to make the world of crypto safe, reliable, and accessible without depriving people of the privilege to leverage the decentralized finance sector, global financial inclusion may happen.