Crypto had a bumpy, and at times wild, 2023.
But industry observers and participants continue to believe that blockchain technology and cryptocurrencies have the potential to revolutionize financial inclusion for marginalized and unbanked communities worldwide.
There are many ways in which blockchain technology and cryptocurrencies can remove barriers, such as a lack of digital identity, for underserved individuals and communities.
“Identity is required for participation in basically any system or network, but particularly for high stakes and highly regulated financial networks,” Ajay Rajani, vice president of expansion and crypto at Tala, told PYMNTS, adding that blockchain technology lowers that barrier to participation by enabling anyone to transact on its decentralized network.
Compared to traditional banking systems, which often require specific benchmarks such as minimum deposit sizes, credit history and proof of address that many individuals cannot meet, blockchain-based assets allow marginalized populations to bridge the entrenched identity gap bottlenecking their financial options.
“It creates a great a conceptual unlock,” said Rajani, adding that lower transaction costs not only enable blockchains to be sufficient, or superior replacements, for transactions that already occur on fiat rails, but also enable “entirely new classes of transactions” to occur in safer, digital non-cash formats.
These low transaction costs also increasingly align with the day-to-day payment needs of marginalized communities, enabling them to engage in microtransactions and access financial services that were previously unaffordable.
By enabling anyone to create a wallet and transact on a decentralized network, blockchain allows individuals no matter their financial status, such as refugees, to receive aid and remittances, Rajani said.
In regions where there is mutual distrust between financial institutions and underserved individuals, self-custody wallets provide a solution, he added.
These wallets require less trust in third-party institutions and reduce the need for financial institutions to gatekeep access to their networks. By empowering individuals to manage their own funds and identities on the blockchain, self-custody wallets promote financial inclusion and address historical biases in the financial system.
Still, Rajani noted that “in a large part, crypto has not yet made good on many of its promises regarding financial inclusion and global connectedness … but we’re starting to see some meaningful progress.”
Companies operating in the digital asset space have introduced innovative banking solutions to cater to financially underserved individuals. Decentralized loan origination models and platforms for global payments have emerged, providing small businesses and digital entrepreneurs with access to credit and the ability to serve customers globally.
Additionally, Rajani said, the accessibility of stablecoins like USDC has enabled dollarized savings, serving as a wealth preservation tool in markets with high inflation.
Still, he noted that when it comes to crypto’s benefits, “a lack of familiarity can lead to a lack of comfort, which will often lead to a lack of adoption.”
Cryptocurrencies and blockchain-based assets offer transactional innovations, including programmable money and microfinance solutions, that benefit entrepreneurs and individuals with limited access to resources.
Microbusinesses can access liquidity, borrow and leverage capital through blockchain-based capital origination platforms, Rajani said, adding that digital wallets provide secure savings options, especially in markets with unstable banking systems and volatile fiat currencies.
Additionally, the global distributed ledger nature of crypto enables instant trustless settlement and reduces the need for multiple intermediaries, thereby lowering fees.
While further innovation is needed to simplify the sender’s experience and make crypto solutions more accessible, Rajani said cryptocurrencies have the potential to transform the remittance process, making it faster and cheaper for individuals in developing countries.
For broader adoption of crypto worldwide, the elephant in the room needs to be addressed: government regulation.
Government policies and regulations will play a crucial role in harnessing the positive aspects of cryptocurrencies while addressing concerns about security and stability.
Rajani said clear delineation between different types of cryptocurrencies and custody models is necessary. Central bank digital currencies (CBDCs) are expected to emerge, and regulation of self-custody wallets and recovery services will likely evolve. The regulation of custodial exchanges and wallets may resemble that of trusted institutions and traditional bank accounts.
Looking ahead, he said that innovative banking solutions, programmable money and improved remittance processes are paving the way for a more inclusive financial system.
As the technology continues to evolve and government regulations adapt, blockchain and cryptocurrencies have the potential to drive change in the global pursuit of financial inclusion.
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