The World Bank’s Findex survey estimates that 1.4 billion people globally lack access to banking and “reaching the remaining 30% won't be easy,” said Leora Klapper of the World Bank.
Financial inclusion is a critical aspect of economic development, particularly for individuals and communities in developing countries. It refers to the availability and affordability of financial products and services that meet the needs of individuals and businesses, enabling them to participate in economic growth.
Blockchain technology and cryptocurrencies have the potential to revolutionize the financial landscape, particularly for those in developing countries. Already cryptocurrency adoption is growing quickly, with countries like Vietnam, India and Ukraine near the top of the list of per-capita crypto holders. Let’s take a look at how cryptocurrencies are driving financial inclusion in developing countries by providing cost-effective, secure, and accessible financial services.
1. Remittances: Reducing Costs and Increasing Speed
One of the primary use cases of cryptocurrencies in developing countries is to facilitate cross-border “remittances” or payments. According to the World Bank, remittances to low and middle-income countries reached $548 billion in 2019. These funds play a significant role in poverty reduction and economic development. However, traditional money transfer services are often slow, expensive, and unreliable.
Cryptocurrencies can significantly reduce the transaction costs and time associated with cross-border remittances. Blockchain technology enables secure, fast, and transparent peer-to-peer transactions without the need for intermediaries. This cuts down on fees and accelerates the transfer process. Companies like BitPesa and Abra have already begun utilizing blockchain technology to provide low-cost remittance services, particularly in regions like Africa and Southeast Asia.
2. Access to Banking Services: Bridging the Gap
A major barrier to financial inclusion in developing countries is the lack of access to traditional banking services. Many individuals do not have bank accounts due to factors like geographical isolation, insufficient documentation, or the inability to maintain minimum balance requirements. According to the World Bank, billions of adults remain unbanked, with most residing in developing nations.
Cryptocurrencies can help bridge this gap by enabling the unbanked population to access financial services without needing a traditional bank account. With a mobile phone and internet connection, individuals can set up a digital wallet and participate in the global economy. Blockchain-based financial services like savings, loans, and insurance can be accessed through decentralized applications (DApps) or platforms like Celo, which aim to make financial tools accessible to anyone with a mobile device.
3. Microfinance and Peer-to-Peer Lending: Expanding Credit Access
Access to credit is essential for individuals and small businesses to grow and prosper. However, in developing countries, traditional financial institutions often fail to provide credit to those who need it most. High interest rates, collateral requirements, and complex application processes make it difficult for individuals and small businesses to secure loans.
Blockchain technology can facilitate peer-to-peer lending and microfinance by removing intermediaries and reducing the associated costs. Platforms like Kiva and EthicHub connect borrowers directly with lenders, enabling individuals to access affordable loans while providing investors with opportunities to support projects in developing countries. These platforms also leverage blockchain's transparency and security features, ensuring trust between borrowers and lenders and reducing the risk of fraud.
4. Digital Identity: Empowering Individuals through Verification
A lack of proper identification is a significant barrier to financial inclusion in developing countries. Millions of people do not possess formal identification documents, making it difficult to access financial services, own property, or even vote.
Blockchain technology can help solve this problem by creating secure, tamper-proof digital identities. Platforms like uPort and Civic leverage blockchain's decentralized nature to store and manage digital identities, providing individuals with a verifiable and portable form of identification. This can enable them to open bank accounts, access loans, and participate in the formal economy.
5. Decentralized Finance (DeFi): Democratizing Financial Services
Decentralized Finance (DeFi) is an emerging sector within the blockchain industry that aims to create an open, transparent, and accessible financial system. DeFi platforms leverage smart contracts to automate financial services like lending, borrowing, trading, and asset management without relying on centralized intermediaries like banks or financial institutions.
DeFi can play a significant role in driving financial inclusion in developing countries. By eliminating the need for intermediaries, DeFi platforms can lower transaction costs and provide financial services to those who might be excluded from traditional banking systems. For instance, platforms like MakerDAO, Compound, and Aave offer decentralized lending and borrowing services, enabling users to access credit without going through lengthy and cumbersome application processes.
Moreover, DeFi platforms can offer innovative financial solutions that cater to the unique needs of individuals and businesses in developing countries. For example, decentralized insurance platforms like Etherisc and Nexus Mutual provide access to affordable and customizable insurance products, while projects like Harvest Finance and Yearn.Finance enable users to participate in yield farming and earn passive income. Givepact Partner Good Dollar is making universal basic income a reality for over 500,000 people around the globe.
6. Financial Education and Digital Literacy: Building a Foundation for Success
While cryptocurrencies and blockchain technology can provide numerous benefits for financial inclusion, it is crucial to recognize the importance of financial education and digital literacy in developing countries. A lack of understanding about how cryptocurrencies work, their risks, and the best practices for managing digital assets can hinder widespread adoption.
Organizations, governments, and private entities must collaborate to promote financial education and digital literacy programs that teach individuals how to use and manage cryptocurrencies responsibly. This will empower users to make informed decisions and take full advantage of the opportunities that blockchain technology offers for financial inclusion.
Looking to the Future
Blockchain technology and cryptocurrencies have the potential to transform financial inclusion in developing countries by providing cost-effective, secure, and accessible financial services to those who need them most. From facilitating affordable remittances and expanding access to banking services to enabling decentralized lending and creating secure digital identities, the use cases for blockchain technology in financial inclusion are numerous and diverse.
However, it is essential to recognize that technology alone cannot solve all the challenges related to financial inclusion. Collaborative efforts among governments, organizations, and private entities to promote financial education, digital literacy, and supportive regulatory frameworks are critical for ensuring that cryptocurrencies and blockchain technology genuinely benefit those who need them most. With a concerted effort from all stakeholders, blockchain technology can play a significant role in driving financial inclusion and sustainable development in developing countries.