The challenge of financial inclusion in the age of digital currency

In May of 2017, Mercy Corps published a white paper entitled “A Revolution in Trust”.  In that paper, the agency set forth a vision for how blockchain and digital currencies could advance the cause of humanitarian aid and development. In the two years since that paper was published, the technology has made great strides. Technical problems that existed in early 2017 have fallen by the wayside and the murky regulatory picture has finally begun to gain some clarity. Blockchain applications have launched at scale in fintech, supply chain, and shipping, to name but a few.

What has changed very little, however, is the adoption rate of blockchain and digital currencies among aid and development actors. The sector has remained a laggard in experimentation and adoption of these new technologies. While reluctance to embrace new tech is an understandable factor in a sector driven by difficult cost equations and demanding donors, by sitting on the sidelines, aid agencies run the risk of inadvertently contributing to greater inequality by allowing the development of new technologies to be driven by traditional commercial concerns.

Exploring the potential of digital currencies

While it is widely recognised that a large portion of the world’s population is ‘unbanked’ — that is, lacking access to financial services — what is less commonly discussed is that the phenomenon is not limited to the developing world. Research shows that economic hardship is the primary cause of persons existing outside the traditional banking system, and that this cause cuts across geographies. Solutions to this problem have often focused on how to bring the unbanked into the traditional banking system. There is a growing body of evidence that this approach is flawed. The rise of blockchain and digital currencies creates the possibility of another approach to this difficult problem, one rather more focused on providing services that fit the individual, rather than trying to make the individual fit into traditional services.

A digital currency, backed by an immutable transaction record and coupled with a digital identity scheme, creates a powerful tool for financial inclusion. Such a system could be used to create a secure, permanent record of who someone is, what they’ve done, and what they own. The record the system creates could serve as the basis for credit history, the ownership of land and other assets, and as a way to provide the individual with access to related services. The platform could easily offer additional benefits, from microfinance loans to micro-insurance — all without the necessity of participation in the traditional banking system. When we look at the current state of the digital currency landscape we see the pieces falling into place to support the creation of a financial ecosystem relevant to the broader population; a system characterised by easy access, low costs, and relevant services, all backed by a decentralised architecture that reduces potential for disruption and fraud.

Digital currencies also show great promise for other populations under stress. For refugees in flight, or for individuals at the mercy of an economic system in the throes of hyperinflation, a digital currency can provide a safety net; a way to preserve their assets and their dignity. Consider the oft-cited case of Venezuela: With the local currency marginalised by hyperinflation, citizens have few official options for preserving the value of their cash assets. To cope with the situation, a number of Venezuelans have turned to digital currencies. While Bitcoin and its ilk are often criticised for their volatility, in the face of hyperinflation, holding your assets in Bitcoin becomes an acceptable risk. Though the situation in Venezuela is grabbing the lion’s share of today’s headlines, it is by no means unique. Unstable economies exist in a number of countries around the world and, increasingly, those citizens are taking matters into their own hands and moving assets into digital forms, where they can be easily moved across borders and across banking systems.

The role of the humanitarian community

The unbanked not only lack access to traditional financial services, they also lack an organised voice in the development of financial tools and policies. Traditional financial institutions are unlikely to be the solution for this particular problem. Banks are commercial concerns interested in profit. Helping financially disenfranchised individuals doesn’t contribute to the balance sheet. The same can be said of the majority of the entrepreneurs driving fintech innovation. In the rush to develop new products and protocols, the focus is typically not on the populations at the fringe.

One of the valuable roles that development agencies can play is to act as an advocate for disenfranchised populations and help assure that the considerations that will reduce disenfranchisement are priorities in development of new technologies. Humanitarian aid and development agencies need to engage actively in this space to make their voices heard on behalf of the populations they serve. Agencies like Mercy Corps need to engage with both commercial partners who hold specialised technical expertise and with the policy makers that are shaping this new field.

Partnership between the development sector and private enterprise will be essential for success. Development agencies lack the deep technical expertise of the private sector. Similarly, private sector companies often lack the deep on-the-ground experience with the local culture and economies that a development agency brings to the table. Bringing parties from both groups together to foster the development of new technology is the best way to create systems and tools that reduce disenfranchisement of both the unbanked and the underbanked.

We live in what is, increasingly, a deeply connected world, a world where everyone should have an equal chance. Blockchain and digital currencies can help humankind realise the potential of a deeply connected world. If we get it right, blockchain can address fundamental issues of trust and digital currencies can bring financial services to many of the unbanked. These technologies will bring about this revolution by increasing trust through transparency, by helping to ensure data privacy and protection for the people and by radically improving accountability.

While it is true that a deeply connected world and new technologies can both pose risks to society, risks that we may be unable to predict, see, or comprehend at this point in time, we must recognise that if we get it wrong these new technologies could unjustly exclude the most fragile people and places from emerging opportunities and thereby exacerbate existing inequalities. Organisations like Mercy Corps must seek to harness the power of blockchain and digital currencies for the people and communities they serve while doing their utmost to minimise risks.