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Crypto and the unbanked
- Authors
- Name
- rose8
- @rose_eight
2021-10-11: added TL;DR
There is this phrase that crypto could "bank the unbanked". But what did and can crypto really do?
TL;DR The text shows that we need to look at why people are unbanked to include them in the world economy. The reasons are not mainly missing technological infrastructures but the lack of financial opportunities caused by a perpetual circle of inequalities. However, crypto is also not only a technical solution. It is a movement that provides a community. Crypto can give opportunities because it's more accessible. Nevertheless, its primary users still live in wealthy countries, foremost in the US. The most important to make crypto more inclusive is to spread knowledge of how to use it safely. The "Crypto community project" is one example where young people can learn this. Furthermore, we need more learn-and-earn projects like 1729 to earn crypto while creating knowledge and skills.
El Salvador's legal tender: Bitcoin
Bitcoin Beach [1] is the name under which the village of 3,000 inhabitants in El Salvador became famous when it introduced Bitcoin as a means of payment. The small town, actually called El Zonte, is a surfer's paradise with hostels on beaches darkened by the ash of the nearby volcano. The village is popular with surf tourists, and yet it is characterized by poverty. There has never been a bank there. But since 2019, you suddenly see the famous orange B all over town because merchants accept payments in Bitcoin. Since then, the financial life in El Zonte has changed. Residents used to make a three-hour bus trip to the nearest bank to make a transfer, and now it's just a few clicks away. [2] Many can save or even invest money for the first time. [3]
El Salvador's President Nayib Bukele has chalked up the developments in El Zonte as a success and has expanded the strategy to the entire country. El Salvador is the first country to make Bitcoin its official currency alongside the US dollar. As a result, Western Union is expected to incur significant losses because residents usually have to pay high fees to cash their salaries. Instead, that money now stays with the people and flows into El Salvador's economy.
Nevertheless, some citizens are protesting against Bukele's decision. [4] Maybe they don't want to be the guinea pigs of this “Bitcoin experiment.” We don't know if Bitcoin can really solve any of El Salvador's severe economic issues. The high volatility is an extreme risk factor. But it might be precisely this volatility that Bukele is counting on in hopes of an upward trend that would consequently boost his population’s prosperity.
Being unbanked
In 2017 about 1.7 billion adults didn’t own a bank account. China has the world's largest unbanked population. Together with India, Pakistan, Indonesia, Nigeria, Mexico, and Bangladesh, they make about half the world's unbanked population. Women are overrepresented among the unbanked, and unbanked adults mainly live in the poorest households. [5]
Being unbanked or underbanked* means that you rely on non-bank financial services. [6] These services are not supervised or controlled by the government's banking regulations and often contain unfair and abusive lending practices. Often people who are vulnerable to those “predatory lending” [7] practices live in so-called banking deserts. [8] It is not lucrative enough for large institutions to offer their services at these locations. That often applies to rural areas where mainly elderly live, low-income communities, and places consisting of minority groups and native communities. [9]
It becomes clear that being unbanked or underbanked includes historical dimensions of class, race, and gender. Usually, it means being born into a perpetual cycle of economic inequality. When you grow up in an environment where everyone is limited to checks and cash and is vulnerable to financial abuse, it is hard to increase your chances of financial literacy.
The reasons for not having a bank account are deeply interwoven. No physical access, language barriers, unstable income, and lack of identification documents often go together. It all accumulates in the main reason for being unbanked: not having enough money. [10] In sum, it’s the lack of financial opportunities that leaves people unbanked.
Is crypto the solution?
Crypto doesn't care who you are and where you live. Anyone can start with crypto. The only thing you need is a mobile phone and an internet connection that doesn't even have to be especially good. Most people today have both. Even though centralized exchanges such as Binance or Coinbase require you to provide identification documents, crypto wallets require no such thing. Crypto is a solution for anyone who needs to receive or send money anonymously.
But the lack of regulation also opens up opportunities for fraud and criminal activity. In a debate about the question "Can crypto bank the unbanked or is it a dangerous idea that could do more harm than good?" [11] Peter McCormick and Yaya Fanusie are discussing the pros and cons. McCormick, a Bitcoin enthusiast and the host of the "What Bitcoin Did" podcast, obviously believes that the advantages of Bitcoin exceed the downsides. He demonstrates that for everyone using Bitcoin for illicit purposes, someone is using it for economic freedom. For everyone getting money out of fraud, there is a protester in an authoritarian regime receiving donations in crypto.
Yaya Fanusie, Senior Fellow at the Center for a New American Security, criticizes this statement. He says the use cases of crypto in authoritarian regimes show what exactly the problem is. Namely, an issue of freedom, which crypto as a technology cannot solve. For demonstration, he points to China and its handling of the crypto space. [12] What we should rather do, he suggests, is to help people to become free. Unfortunately, Fanusie doesn't consider that financial autonomy could be a first step into that freedom.
However, the freedom and autonomy provided by crypto also bring difficulties. If your key gets lost or stolen, your money is gone. Being banked with crypto means using financial services without a bank. There is no third party to turn to in case of problems or uncertainties. Consequently, knowledge is the most vital asset to be able to use the financial opportunities that crypto offers. Knowledge about how to use the technology and, more importantly, about cyber security. How can I keep my money safe? Which dapps are good to exchange, loan, and lend money, and how do I recognize scams?
High gas fees are the next remaining problem. When you don't want to put a third party between you and your money, you need to interact directly with the blockchain. And that's expensive. Bitcoin and Ethereum enthusiasts often don't believe in any other alternative blockchains and coins. Their usage despite high gas fees shows that they do not mainly use crypto to solve their financial problems. They use it out of ideological reasons and utopian visions. Projects like Stellar [13] or Celo [14] have put their focus directly on the unbanked. They want to enable remittances for anyone anywhere and make using DeFi as cheap and straightforward as possible.
DeFi's first world problem
But a lot still needs to happen for DeFi to actually be used by those who could benefit so much from it. According to data from SimilarWeb, most users of dapps come from western industrialized countries. In eight out of ten dapps viewed, by far the most users are from the US. For these biggest DeFi apps, only 10% of the traffic is from developing nations. The data clearly show that DeFi is currently used primarily in Western countries.** [15]
How do we solve this problem? How do we get DeFi to people who aren't in the tech scene, don't know much about finance, and don't even have an online banking account?
Financial literacy
It may be surprising, but 11.2% of households in New York are unbanked. [16] This is likely related to the city's reasonably high poverty rate, with 19.1% living below the poverty line and 41.3% near poverty. [17] In the Bronx, the number of unbanked is almost double that of the rest of New York, namely 19.3%. [16] It is not without reason that English teacher Carlos Acevedo started his "Crypto Community Project" in the South Bronx. [18] Acevedo got into the DeFi movement by a happy accident. Since then, he has believed that crypto can create equal opportunities for all. Once you're in this "small but so powerful community," he says, then paths for success open up. The "Crypto Community Project's" first Bootcamp launched in 2019. Acevedo wants to arouse the adolescent’s curiosity and give them the necessary technical and financial know-how. He says, once people have the chance to use the technology, they use it, especially young people. Acevedo has a clear suggestion of how the crypto movement can be a chance for increasing financial inclusion:
"You wanna bank the unbanked? Give em crypto."
He points to crypto millionaires and young people who have become rich because they believe in the movement. If they want it to get bigger, they have to invest in people. By doing so, they increase the market, the demand, and thus the price continues to rise. Bitcoin Beach also started with a generous anonymous Bitcoin donation. [19]
Acevedo also points to the learning effect that having your own crypto seed capital has. You can gain much more from using the DeFi apps directly, making transactions, and trading yourself, rather than just being explained how to use a crypto wallet. "Being a teacher, you realize that the only thing that brings success is the ability to fail while being supported." Hence, financial support and learning opportunities are essential. And some projects are actually combining those two elements.
Learn and earn
With Coinbase, you can earn crypto by learning about crypto. [20] You can complete courses about various cryptocurrencies and, as a reward, get them delivered directly into your Coinbase exchange. The problem with Coinbase is that you need identification documents to register.
Balaji Srinivasan started this idea with Earn.com, which then got bought by Coinbase. Now Srinivasan has extended his initial idea with the project 1729. It is a "newsletter that pays you." [21] Subscribers can complete tasks and tutorials that Srinivasan or others have posted on the platform. The assignments and tutorials are largely crypto-related but are also about math, health, or science. The level of difficulty, and thus the payment, varies widely. The idea is to generate talent by paying the learners for their effort. That way, they can spend time on learning and get some monetary support.
Conclusion
To bank the unbanked, one needs to address the reasons for their exclusion. As we have seen, it's not mainly a technological problem, but rather a lack of financial opportunities. Crypto is not only a technology which by all means can technologically bank the unbanked. Crypto is also a movement. It can provide curious young people a community which they can follow into financial literacy and autonomy. It can be a chance out of a cycle of social and economic inequality. But it's not a magical solution. The reasons for financial exclusion are rooted in deep inequalities. Historically grown issues that crypto alone cannot solve.
The need for technical knowledge makes projects like the "Crypto Community Project" extremely important. When young people feel the necessary support, they can start learning and creating their own ideas for projects. Then, with a community and relationships behind them, they can, for example, try to crowdfund their ideas and even start small businesses.
Maybe for some, crypto has a utopian and idealistic touch. But ideas live as long as people believe in them. And crypto has some firm believers, plus a substantial financial backup. However, if people really believe in this open, accessible, and diverse movement, they must enable more people to participate. Not by providing them banking services. But with projects that help create talent and professions.
*Being underbanked means having a bank account but no reasonable access to a bank.
**Even though we should not forget that it's not easy to measure website traffic correctly, for example, because many users use VPNs.
https://prologe.press/writer/0x09cc4B3a27E3715596c5eDE07E95Da490340D27a
[1] The Homepage of Bitcoin Beach.
[2] Documenting Bitcoin on Twitter, Jun 24, 2021
https://twitter.com/DocumentingBTC/status/1408124456183156752
[3] Ezra Fieser for Bloomberg Businessweek: “Bitcoin Beach: What Happened When an El Salvador Surf Town Went Full Crypto”
[4] Theo Wayt for New York Post: “Thousands protest in El Salvador after bitcoin made official currency”
https://nypost.com/2021/09/16/protests-in-el-salvador-after-bitcoin-made-official-currency/
[5] Global Findex report 2017
[6] https://en.wikipedia.org/wiki/Non-bank_financial_institution
[7] https://en.wikipedia.org/wiki/Predatory_lending
[8] Terri Friedline and Mathieu Despard for The Atlantic: “Life in a Banking Desert”
https://www.theatlantic.com/business/archive/2016/03/banking-desert-ny-fed/473436/
[9] NICOA: “Native Households Have Highest Unbanked Percentage”
https://www.nicoa.org/native-households-have-highest-unbanked-percentage/
[10] World Bank Group: “The Unbanked”
https://elibrary.worldbank.org/doi/10.1596/978-1-4648-1259-0_ch2
[11] Intelligence Squared: “Debate: Crypto Can Bank the Unbanked“
https://intelligencesquared.com/events/debate-crypto-can-bank-the-unbanked/
[12] Theo Wayt for New York Post: “China cracking down on crypto mines disguised as research, data centers: report”
https://nypost.com/2021/09/16/china-cracking-down-on-crypto-mines-disguised-as-data-centers/
[14] https://celo.org/
[15] Owen Fernau for The Defiant: “DeFi Has a First World Problem: Too Few Developing Nations’ Users”
https://thedefiant.io/defi-has-a-first-world-problem-too-few-developing-nations-users/
[16] New York Governance: “Where Are the Unbanked and Underbanked in NYC? Updated Findings (2017 Data)”
https://www1.nyc.gov/assets/dca/downloads/pdf/partners/Research-UnAndUnderbankedNewYorkers.pdf
[17] New York Governance: “New York City Government Poverty Measure 2018”
https://www1.nyc.gov/assets/opportunity/pdf/20_poverty_measure_report
[18] CoinDesk Live: “Banking the Unbanked... How the Crypto Community Can Make a Big Impact”
[19] Go Full Crypto: Episode 16: “Bitcoin Beach - Interview with Director Mike Peterson”
https://www.gofullcrypto.com/blog/guest-interview-4-michael-peterson-from-bitcoin-beach