Digital Asset’s role in redefining financial inclusion

For many consumers and businesses that made the switch to digital payments, there is probably no turning back, as the Covid-19 pandemic accelerated the shift to digital and contactless payments as well as mainstreaming physical cash alternatives. With digital assets, equity plays a central role, which is not traditionally found in traditional banking. By deploying digital technology, financial inclusion is aimed at providing formal financial services to the economically excluded and under-served populations at affordable prices that are suitable for their needs and economically sustainable for service providers.

The financial services industry has grown more customer-centric as a result of the digital revolution. On the supply side, incumbents have been left with antiquated technologies such as an overreliance on stiff mainframes and an overextended branch network, while newer generations want to bank using their mobile phones.The fast adoption of mobile phones has actually changed the game. Customers who used to transact exclusively in cash are increasingly using mobile phones and other digital technologies to access formal financial services. The goal of financial services made available through digital platforms is helping emerging nations achieve their goals of poverty reduction and financial inclusion.

For many institutions, providing a financial infrastructure for the unbanked is fraught with danger. The related costs are significant, and there are no guarantees that there will be a return on investments. Where banks are hesitant to take a risk, technology like blockchain came as the ability to step in. People typically safeguard themselves by investing in assets that preserve their worth over time and crypto has become a more popular alternative in recent years. According to Campbell Harvey of Duke University, the current fall is unlikely to prevent venture capital participation in the broader crypto industry. He cites the year 2018, when bitcoin’s value plummeted by more than half.

The primary goal of blockchain, or more broadly distributed ledger, the technology that underpins crypto-products, was to eliminate financial intermediation, and hence banks.  

The blockchain-based financial ecosystem continues to grow, and the developing decentralized finance industry may now provide further services to the unbanked. Companies can offer decentralized borrowing and lending services without the need for KYC or credit scores. An alternative open and inclusive financial system architecture is already emerging, thanks to the growing popularity of internet-based open source technology development and greater investment in cryptocurrencies, public blockchain networks, and protocols.

Bitcoin, cryptocurrency, and tokenization are all buzzwords these days, due to their massive market capitalization and the emergence of new use cases like non-fungible tokens (NFTs). The rise of digital currencies may affect our perceptions of value exchange. Reduced settlement time and risk, as well as greater liquidity for all asset classes, are all advantages.

Unbanked people can open a digital wallet and use it to send crypto around the world, with considerably cheaper transaction fees. The distributed networks that cryptocurrencies like bitcoin rely on provide a financial infrastructure that is always online and accessible for countries with limited banking systems, and because transactions are done over the internet, the issue of distance to physical bank branches becomes non-existent.

The battle between Russia and Ukraine has demonstrated the critical need for cryptocurrencies and blockchain, the technology that underpins crypto, especially in disadvantaged populations around the world.

The enthusiasm for cryptocurrency among world leaders and investors is well-founded, but how does it relate to sustainability?

Decentralized autonomous organizations, decentralized finance, tokenization, and non-fungible tokens (NFTs), on the other hand, are challenging traditional models. Existing restrictions on cross-border data transfers, intellectual property rights, and money controls may be in direct contradiction with this. It might also create ambiguity in the tax environment, as well as a slew of other policy issues.

In light of the potential implications of cryptocurrencies for global financial stability, as well as the unique nature of the underlying technology, national and global regulatory discussions and decisions are necessary. The operations of some digital asset trading platforms and services providers have grown in size along with complexity at an accelerated rate, and they may not be governed or supervised by applicable legislation. Financial efficiency and inclusivity are among crypto’s commonly touted virtues, but negatives such as extreme volatility, lack of regulation, and anonymity, which can lead to potentially illicit financing, have prompted critics to warn against it.

Cryptocurrencies and stablecoins are all touted as viable alternatives to central bank digital currencies (CBDCs), but yet no single technology is able to overtake physical cash. It is not happening with cryptocurrency by itself. Stablecoins may have more potential, but have limited reach. UST, a “algorithmic” stablecoin that is backed by code rather than cash maintained in a reserve, has failed to keep its value stable as investors fled in droves. A CBDC is not widely accessible either. Although digital payments as a means of democratizing finance may contribute to income and wealth inequality, and the future of money appears to be cashless, this does not mean the system will be without flaws.