Claims that crypto boosts financial inclusion are dubious
The cryptocurrency industry has recently become increasingly bold in selling its products to the public. Flashy TV commercials, major celebrity endorsements and renowned sports arenas are just a few examples of the industry’s growing influence. A particularly noteworthy element of this advocacy has been claims by industry leaders that the growth of crypto assets will boost financial inclusion by providing lower-income people with easier and cheaper access to financial services – such as banking. savings accumulation, credit building and payments – than those offered by the traditional financial services sector.
Increasing financial inclusion is a laudable goal. But the idea that crypto can dramatically expand financial inclusion in the United States doesn’t hold up to scrutiny. There is no systematic evidence that crypto transactions are cheaper than traditional financial transactions, and crypto assets are still primarily used for speculation rather than payments. The fundamental goal of financial inclusion is to improve the overall economic well-being of low-income people, and encouraging people to use their hard-earned paychecks or savings to buy high-risk assets could do just the same. contrary.
Crypto asset trading uses new technology that can improve outdated systems and have a positive effect on the economy if properly regulated. Yet there are significant concerns about financial stability, volatility, market manipulation, fraud and illicit finance. These risks must be considered in any discussion of whether crypto assets can further the goal of financial inclusion.
While the claim that crypto supports financial inclusion may be true in some cases — indeed, some crypto transactions can be cheap, much like how some traditional money transfers can be outrageously expensive — this does not necessarily apply to the entire sector. Proponents should stop using these talking points unless and until crypto transactions demonstrably achieve financial inclusion goals.
Defining and addressing financial inclusion
Financial inclusion is defined as access to financial products and services, such as payments, savings and credit, which are “provided in a responsible and sustainable way”. Financial inclusion is typically measured by the percentage of a community’s population that has access to a bank account. People who have no access to any financial services are considered “unbanked,” representing about 6% of the U.S. population and disproportionately made up of people of color. Meanwhile, people who have a bank account but rely on alternative financial services like payday loans are considered “underbanked” and make up about 16% of the US population.
The main obstacle for these people is the cost: bank account fees, especially overdraft fees, can be prohibitive for low-income people. Additionally, the cumbersome U.S. payment system, in which transactions typically take a few days to clear and checks can take up to six days to clear, is a significant barrier for people who live off checks. pays to another and need access to cash. quickly to cover basic living expenses.
Financial inclusion generally refers to reducing unbanked and underbanked populations by expanding access to safe financial services. But it also has a broader purpose beyond simple access to a bank account: expanding access to financial services should help reduce poverty and improve the overall economic well-being of the unbanked by enabling individuals to build up savings, carry out financial transactions at lower cost and better prepare for future financial risks.
Disproving claims that crypto boosts financial inclusion
Proponents’ claims that crypto assets can boost financial inclusion typically include several points, including that crypto is easier to access than traditional financial services because it only requires the internet and a device; that crypto assets can help unbanked people accumulate savings without needing a bank account; that crypto assets can help unbanked people make payments more easily than using existing financial services; and that crypto assets can help unbanked people invest their money without the need for traditional intermediaries such as banks.
These claims have become more prominent as Congress becomes more interested in drafting new legislation to combat crypto assets and federal regulators have stepped up efforts to use existing authorities to crack down on illegal activity. and protect investors. In recent congressional hearings and elsewhere, industry leaders and lawmakers have used many of these talking points. The subtext of these claims seems to be the implication that stricter regulation would reduce the potential for financial inclusion.
This rhetoric is illogical in several respects.
First, although fees for money transfers and bank accounts can be high, crypto asset fees are often even higher. Crypto networks charge transaction fees, often at a high rate. Notably, the so-called gas fees on the widely used Ethereum blockchain can be extremely high, even for small transactions. Recent investment firms such as ConstitutionDAO – in which organizers funded millions of dollars in a failed effort to purchase a copy of the Constitution, but then struggled to return the funds to investors and racked up high fees in doing so – have demonstrated both how quickly fees can add up and that these fees are more likely to harm smaller investors.
Second, the inherently speculative nature of crypto assets is at odds with the goal of financial inclusion. Crypto assets are still a particularly risky form of investment and consumer protections are lax. Well-documented issues in crypto markets, such as price volatility, crashes, fraud, market manipulation, “rug shots” and outright theft, cast doubt on defenders’ claims. that crypto assets can help unbanked people invest their money safely, especially since low-income people could be most at risk of losing their money in the event of a crypto-related financial crisis. Any investment involves some risk, but the risks associated with the crypto markets are particularly high. Even stablecoins – assets that are technically designed to hold stable value – currently pose significant systemic risks, totally lack consumer protections beyond the promises made by issuers, and are barely, if at all, used. for normal payments at present.
The inherently speculative nature of crypto assets is at odds with the goal of financial inclusion.
The third, individuals still generally need a bank account to use crypto assets. In order to buy crypto on a reputable exchange, customers need to deposit funds into an online account from a debit card or bank account. Likewise, since crypto-assets cannot be widely used for payments, when holders need to sell their crypto for cash, they usually need a bank account to deposit the money they have received from the sale. While it’s true that trading crypto assets technically only requires internet access and a device, the same can be said of a bank account – and research has shown that lack of internet access makes it difficult to access the internet. -even increases the likelihood of being unbanked and outside the financial system.
Ultimately, crypto assets do not fundamentally solve the problem that financial inclusion seeks to solve. The goal of financial inclusion is more than simpler and more accessible financial transactions; it ensures that individuals and households enjoy greater financial stability and economic well-being. Crypto assets use new technology that can make old processes more efficient, but there is no evidence that they reduce income inequality or put more money in people’s pockets. Crypto simply offers a new way for individuals to transact and speculate with the money they already have.
As Sen. Sherrod Brown (D-OH) recently said, “Allowing more people to trap their money in risky, speculative investments is not the kind of financial inclusion we need. It will do nothing to help Americans who work hourly and don’t put their paychecks in the bank because of excessive fees.
Presenting crypto assets in the language of financial inclusion is, at least today, wishful thinking. Although cryptography may have potential as an easier and cheaper method of making international money transfers and supporting financial inclusion abroad, this does not necessarily mean that it strengthens financial inclusion in the country. Lawmakers, especially those genuinely interested in the goals of financial inclusion, must be careful to use this rhetoric until the industry can prove that it actually helps the unbanked better than the banking industry. traditional financial services.
Allowing more people to trap their money in risky and speculative investments is not the kind of financial inclusion we need.
Senator Sherrod Brown (D-OH)
In the meantime, there are other ways in which policy makers could significantly increase financial inclusion. Congress could pass legislation reducing the ability of banks to charge overdraft fees and change existing legislation to require that more money in deposits become instantly available, reducing two of the biggest barriers to unbanked and underbanked populations. . Congress could also establish a low-cost banking system through the US Postal Service. Finally, major banks should be encouraged to offer low-cost basic accounts, which many are already doing.
These policy changes would likely have a more tangible effect on increasing financial inclusion than simply letting crypto markets grow unabated.