According to a recent report by WorldBank, approximately 1.7 billion people around the world lack access to a formal financial system. Living without the ability to access a bank account and manage their finances efficiently, these 1.7 billion people are denied fundamentals to financial empowerment. They are unable to securely save, borrow, or invest money.
Identified as the unbanked, they are trapped in the perpetual cycle of economic disparity and remain excluded from banking systems. Two-third of the unbanked people own a mobile phone regardless of their financial exclusion. There are 5.11 billion unique mobile users today and 4.11 billion internet users last year, according to a report by Global Digital 2019.
In such a highly technological environment, cryptocurrencies could be the answer to this financial disparity. Realizing the importance of cryptocurrency, even companies like Facebook and JPMorgan have come up with their versions of digital currency.
The issue with being unbanked
A vast majority of unbanked people belong to developing countries where the state of economy and poverty pose a dual-threat to these people. Moreover, the financial institutes are under the burden of high regulatory requirements that incur high overheads. For a low-income individual with little to no knowledge about how financial systems work, it is difficult to cross the entry barriers of the traditional financial system.
In short, unbanked individuals in developing countries are missing on many opportunities that the financial system has to offer them. Without a bank account, they had to rely on physical fiat currencies, which is unsafe to store and manage. They are denied access to online transactions, investment, and security. Without any credit history, they are unable to apply for loans and insurance, which makes it harder for these individuals to start a business or buy a home.
Cryptocurrency- the solution for the unbanked
Providing access to financial services for all is a goal of great importance. Cryptocurrency and blockchain hold the solution to this problem. Both of these technologies have a role to play in creating a more equitable financial system. Since the inclusion of bitcoin in 2008, the game around the financial ecosystem has changed and traditional financial institutions no longer hold all the power. Bitcoin not only provided an alternative means of exchange, but it has also paved ways for the new digital asset. Previously, gold was used as an asset and fiat currency was being utilized as a means of exchange. Bitcoin provides a single replacement to both of these. With a smartphone and internet connection, unbanked people could easily secure and manage their money, without requiring a bank account.
However, two problems that persist are the identification of the person using crypto and a cost-efficient way to reach unbanked. Since anyone can create a crypto wallet and transfer money internationally with a very low transaction fee, the money launderers and criminals take advantage and use it for illicit purposes. For reaching out to unbanked, a technology that is cost-effective and easy to deploy is required.
For instance, Shufti Pro (an AI-based identity verification service provider) already has the solution to the problem of identity verification for the crypto industry. Online identity verification using different identification methods including biometric verification and document verification can be used to verify the identity of an individual within seconds. Further to incur the second problem, FinTech is adding several blockchain features to democratize lending services.
Nonetheless, if cryptocurrencies are to have the desired impact in bringing unbanked to the financial ecosystem, promoting mainstream adoption of crypto will be key. Global regulators and policymakers need to agree upon a coordinated approach for replacing fiat currency with digital currencies globally. Smart regulation and collaboration will help in creating an equitable and stable financial environment, in which cryptocurrency holdings will be protected, without hindering the potential of technology.