Banking and financial markets

Blockchain and the unbanked: Changes coming to global finance

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global lightsCryptocurrencies may have become better known for their wild fluctuations and unwanted links to scams in recent times, but it’s worth remembering the potential that digital coins hold as a force for good. The world has over 1.7 billion people who have no access to any form of banking infrastructure, despite many of them having access to technology like mobile phones. Writing for Forbes, Robert Anzalone suggested that, “stablecoin can become a path for the unbanked to create a stable store of monetary value and exchange. If access to digital technology increases across all nations, the implication for the unbanked and poor may well be widespread crypto adoption over local and less resilient financial systems.”

Because stablecoins are tethered to tangible assets like gold or the US Dollar, they’re designed to maintain a consistent value that’s ideal for everyday usage. The idea of a currency promoting financial inclusion is one that’s been met with skepticism from financial commentators worldwide. But could the notion of bringing blockchain-based financial solutions to unbanked citizens across the world carry merit?

Bring new transparency, simplicity and efficiency to every financial transaction

The Financial Times listed a key flaw in the potential effect stablecoins can have on the unbanked based on the fact that over one-third of those listed as unbanked are in their position due to not having enough money to open a bank account. If 34 percent of the unbanked are unable to open an account, it immediately wipes off a significant chunk of the 1.7 billion-strong market. However, that still leaves a hefty number of potential adopters who could benefit from some form of digital banking. The topic of financial inclusion is still a hot one worldwide. In fact, the UN’s 17 sustainable development goals reference financial inclusion as an enabler.

After much furor surrounding its initial announcement, it’s looking increasingly likely that the currency won’t be capable of delivering on its promise to provide financial solutions to unbanked populations, but this doesn’t take blockchain out of the reckoning. Could the technology take a significant step in bridging the gap between finance and the unbanked? Let’s take a deeper look at how blockchain technology can spark a revolution in global banking:

The significance of the unbanked

There’s a widely acknowledged desire for change when it comes to looking at the needs of citizens in deprived areas across the world. Influential tech leaders like Bill Gates have readily pointed to the problem and highlighted the benefits of working on a solution. On the subject of the unbanked, Gates said, “including the poorest in the financial system increases the value of their assets, transforming the underlying economics of financial services through digital currency — helping those who live in poverty directly.”

The significance of bringing banking to the unbanked comes in the form of a vital step in taking populations out of poverty. Financial facilities and bank accounts are dependent on users carrying valid forms of identification as well as access to an infrastructure that allows them to store their money. The key problem is that this doesn’t appear to be an issue that will naturally resolve itself without some form of direct action being taken.

One of the most significant issues that affect many of those without access to banking stems from a lack of formal identification. Without valid IDs, there are very few opportunities for the unbanked to build a credit history that can pave the way for any form of loans. Without lending and the wealth that it can potentially create through production, there are very few options for unbanked citizens to break out of their debt cycles and, in turn, poverty.

Could blockchain provide a credible solution?

Banks are traditionally considered essential when it comes to bringing inclusive finance to large portions of the planet that are still unbanked today. The most deprived areas include 80 percent of sub-Saharan Africa, 67 percent of adults in the Middle East, 65 percent of Latin America, and over 870 million individuals across East and Southeastern Asia. Add to the mix the 60 million adults in Western Europe and North America who remain unbanked and the full scale of the problem becomes a little clearer.

Supplying a financial infrastructure for the unbanked is filled with risk for many banks. The associated costs with such endeavors are high, and there are no guarantees that there will be a return on investments. This is where technology like blockchain has the potential to step in where banks are fearful of taking a gamble. It’s logical to see blockchain as the current best hope for bringing financial inclusivity to parts of the world where the notion of a financial infrastructure previously seemed like something of a pipedream.

There’s little doubting blockchain’s financial pedigree. Although there are questions surrounding the arrival of new digital currencies, the technology was an instrumental player in Bitcoin’s seismic rise to prominence in 2017, and its heavy levels of accessibility mean that there’s strong potential to bring banking to deprived citizens on a large scale. The high level of security within blockchain networks means that the technology can set up financial transactions both quickly and efficiently with no need for any intermediaries to become involved for cross-border payments and transfers.

The immutable structure of the privacy blockchain can provide to customers ensures safety while making or receiving payments. As long as a customer can access a device that has the power to access eWallets, there are minimal costs attached to operating the technology. There are also plenty of wallets out there that are built to be effective on blockchains like Ethereum.

Most importantly, blockchain allows users to carry their very own tangible digital identity with them whenever they transfer money on both a domestic and international scale. The technology fundamentally excels in places that were originally considered as stumbling blocks for established banks.

Blockchain driving change

The beauty of blockchain is that it can seemingly make things that seemed impossible a generation ago become entirely logical. Bitcoin could have never taken the world by storm were it not for its blockchain framework, and now its underlying technology is being explored across a number of industries.

Statistics show a large number of communities across the world still suffer from a lack of financial infrastructure. The arrival of algorithmic stablecoins like can be utilized entirely on secure accounts and transferred internationally could be the only actionable solution we have for progress. The algorithm allows users to support the stablecoin through a recapitalization mechanism of accounts with lack of collateral, at the same time receiving a set commission. Fortunately, it’s a good one.

While there may not yet be a cryptocurrency that finally helps deprived populations to manage their finance, blockchain is more than capable of creating an environment that can finally bring inclusivity to banking.

From time to time, we invite industry thought leaders, academic experts and partners, to share their opinions and insights on current trends in blockchain to the Blockchain Pulse blog. While the opinions in these blog posts are their own, and do not necessarily reflect the views of IBM, this blog strives to welcome all points of view to the conversation.

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