Blockchain & Financial Inclusion in the 21st century

Recent technological progress has allowed DeFi and fintech to emerge as a way to break down barriers and positively impact the world through digital financial inclusion. Financial inclusion is defined as having access to useful and affordable financial products and services that meet the needs of business and individuals – transactions, payments, savings, credit, and insurance – delivered in a responsible and sustainable way.

According to the most recent Findex figures, nearly one-third of adults — 1.7 billion – are still unbanked. Those in developing countries with a lack of infrastructure and government regulation, poor female-led households in rural areas, and people out of the labor make up about half of the unbanked.

The technology behind blockchain has the potential to the change that. It allows financial services to be delivered over the internet by replacing trust, which has been a key component of the financial system for centuries, with transparency built into a decentralized network. As a result, blockchain has the potential to empower the unbanked, particularly women, lowering transaction fees, and providing an alternate source of liquidity.

By offering a fairer and more transparent financial system, cryptocurrencies and blockchain pose an alternative to conventional financial services. Recognizing cryptocurrency and blockchain for financial inclusion could be critical to catering to people’s need for access to affordable financial services. A user-friendly platform has the potential to facilitate transactions for individuals and businesses. Let’s see how.

The World Economic Forum describes the technology as “global, open-sourced, and accessible to all who have access to the Internet, regardless of nationality, ethnicity, race, gender, and socioeconomic class.” At its most basic level, the technology is essentially a decentralized method of organizing transactions in a database, or ledger, so that several parties may agree on the status of those transactions without the need for a mediator. All transactions are recorded in an immutable, transparent, and encrypted format. In this way, blockchain is altering the role of banks, governments, and corporations by enabling more secure, cheaper, and efficient financial transactions than previous methods.

There are four clear ways where blockchain could put immediately into use to achieve financial inclusion:

• Payment services: With instant, cheap, traceable transactions that can hold multiple currencies, in multiple mobile networks both nationally and internationally, blockchain applications are becoming an attractive technology to use, especially for small money transfers.
• Savings: Different apps and companies use blockchain as an alternative platform that makes it easier (and less intimidating) for those who lack a bank account, credit, or financial fluency to save and invest.
• Credit: This is a more diverse area, with a multitude of projects. One excellent example is the blockchain project Grassroots Economics, based in Kenya & funded by UNICEF’s Innovation Fund. The project aims to close the credit gap in low-income communities by creating Community Inclusion Currencies, or CICs, that allows it to issue tokens backed by all the actual goods and services in a specific community, such as the town’s water, food, or the work of carpenters or babysitters.
• Insurance: Insurance policies tend to require IDs, proof of financial solvency, and additional paperwork that can present a barrier to entry. Blockchain insurance policies rely on other forms of securities, that reduce the barrier for the individual investor.

This is only at an incipient stage of course. To reach its full potential, widespread adoption of blockchain technology becomes necessary. We need developers to make blockchain infrastructure more efficient and environmentally conscious, governments to create adequate legislation that regulates and stabilizes the market, entrepreneurs to pilot blockchain solutions and share their findings, and funders to provide capital to promising applications to move the industry forward. But it does highlight the benefits of this technological tool.

Unfortunately, there is one lingering danger over the potential benefits of blockchain technology – overregulation. Over the past few years, many jurisdictions have investigated regulating cryptocurrency & blockchain-related operations. We have seen regulators take different approaches on how to go about applying regulation to blockchain-based technologies, particularly in the financial sphere. As with all industries, there is a legitimate need for standards & regulation. The ideal path would be moderate legislative suggestions for blockchain regulation to boost investment and protect consumers and investors. However, a point must be made against overregulation. Crypto-assets and, particularly, blockchain technology have recently been consolidated as secure platforms for validating transactions in an increasingly decentralized economy. Regulation should not change the nature of these technologies in any way; it should merely make them safer for their users. 

Overregulation is typically the result of the regulators attempting to tackle volatility and risk management – but those are factors inherent to any financial market. Regulations on asset-classes should focus on making them safer and easier to utilize, not on erecting barriers for the sake of security. Fundamentally, regulation should focus on reducing abuse, providing consumer protection to investors and stakeholders, and combating illegal activity.

Overregulation would likely, in addition to countless other negative effects, limit the abilities of new blockchain-based technology to help incorporate more people into the global financial system, which would deny associated benefits to billions in the global south that many people in the developed world already take for granted. For this alone, western regulators should proceed intelligently & carefully towards establishing a regulatory framework that ensures safety while not stifling innovation, creativity or investment. 

Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.