When thinking about blockchain technology, many people often tend to think only of cryptocurrencies, tokens, and crowdfunding through digital assets. However, these are just expressions of technology with the potential to transform multiple industries and organizations. Like the internet, blockchain technology has the ability to transform the lives of billions of people around the world by generating social impact. In this context, many companies around the world, from different sectors such as healthcare, education, supply chain management, insurance, finance, and donations, to name a few, are exploring blockchain technology. Jason Simon, a cryptocurrency consultant with extensive experience in blockchain, explains how the technology can have a positive impact on financial inclusion.
One of the crucial features of blockchain technology is its ability to bank the unbanked. According to the World Bank, almost half of the world’s population lives on less than $5.50 per day. If we only take into consideration how Gross Domestic Product (GDP) per capita is distributed in India or Africa, the situation is dire. Furthermore, when looking at the previous years’ Shifting Wealth of Nations report, the results show that a large portion of the world’s private capital is becoming increasingly concentrated in fewer and fewer hands. Many people without access to credit live in rural areas of extreme poverty where there is no direct access to banking services. In addition, they often have no credit history, so the traditional financial system may not accept them or give them credit.
The good news is that blockchain technology has the potential to promote financial inclusion for those who really need it. And the first way is by reducing costs, as blockchain technology can clearly help people around the world spend and exchange money more cheaply and quickly. Cryptocurrencies could eliminate intermediation that generates high tariffs. The banked population in rich countries does not usually need wire services, but the most vulnerable use them all the time and therefore often have to pay exorbitant fees.
Simon notes, “Blockchain technology could be used to bring transparency to government public expenditures that should be dedicated to financial inclusion projects. By providing traceability of how funds are actually distributed and used, blockchain technology could make a radical contribution to the process by eliminating typical situations such as corruption or diversion of funds.”
On the other hand, in many situations, the unbanked population does not have identity documents since they do not have the means to pay for them. Blockchain-based IDs would not require the typical traditional documentation and would allow billions of people to be easily identified on a public blockchain. That would open up a whole new range of possibilities for commercial banks, as credit history could be easily linked to a blockchain allowing the unbanked to access financial services. Several financial institutions have been contributing to this process by enabling the creation of personal digital profiles composed of different records of personal and financial activities. Financial institutions could largely accept these profiles as legitimate identifying information.
By executing transactions in a secure, automated, and decentralized manner, a radical reduction in the intermediation costs incurred when applying for a loan or sending a wire transfer could be achieved. Blockchain technology could also reduce payment times and eliminate mishandling by providing real-time traceability of transactions without double-spending issues.
Decentralized and public blockchains will always provide a working environment that will enable financial inclusion, but traditional players in the financial system will also participate in the process, as there are clear incentives. Asserts Simon, “According to a World Bank report, by 2022, blockchain technology could reduce banks’ infrastructure costs by $15 billion to $20 billion attributable to international payments, securities transactions, and regulatory compliance. Add to that equation the fact that (according to the report) cell phone penetration even in low-income countries is over 50%, and mobile applications that interact directly with blockchain technology could generate a massive addition of new customers.”