Crypto for financial inclusion – Case in point: El Salvador 

The value and appeal of cryptocurrencies stems, among other things, from their versatility and broad applicability. Thanks to their advanced technology and innovative design, cryptos can be used in many different ways: as virtual currencies, to purchase an increasing variety of goods and services; as investment instruments, to boost profits and build a more diversified portfolio; as reward tokens that motivate users to engage in different activities; as remittance tools, to transfer money across the borders in a fast secure and cost-effective manner; as utility tokens, to facilitate access to resources and enable operations in specific blockchain environments, and more.  

This means digital currencies are able to provide a solution for many of the issues that traditional finance is dealing with, one of them being that of financial inclusion. As the original crypto, Bitcoin was the first to discuss the possibility of using a peer-to-peer (P2P) electronic cash system to reduce financial inequalities and ensure access to banking facilities for excluded groups. 

Newer cryptos like Worldcoin (WLD) draw upon the same idea of offering unbanked populations the possibility to benefit from basic financial services and become active participants in the economy, although they employ different strategies to achieve this bold goal.

Worldcoin plans to level the playing field by offering free tokens to people from all over the world for the mere fact of being humans and thus create a more unified and equitable global economy where individuals enjoy similar opportunities. If their plan succeeds, the WLD to USD price is bound to soar, and the WLD token could one day become as mainstream as fiat. 

It’s not just Bitcoin and Worldcoin that aim to tackle economic disparities and promote fair competition. Financial inclusion is an objective that many crypto projects share, but it’s difficult to tell if any of them will be able to reach their purpose. 

The deeply troubled traditional financial systems 

By the latest count, there are around 1.4 billion unbanked adults globally. These disadvantaged groups are not served by their local monetary systems and can’t use basic financial services that most people take for granted. Common products and actions like credit cards, opening a bank account, making purchases online, or getting approved for a loan are out of reach to them, so they have to rely on cash-based alternatives exclusively to carry on financial operations, which can be cumbersome and costly. 

This makes one wonder what is wrong with the conventional economic systems that cause certain citizens to remain stranded on the outskirts of the financial sphere. Many of the unbanked live in countries with developing economies (CDE), where there’s a constant struggle with political instability, poor policies, and chronic economic issues such as soaring debt and hyperinflation. 

As a result, a large percentage of their residents face numerous challenges, such as long travel distances, limited financial literacy, lack of trust in financial institutions, gaps in infrastructure, and inability to meet basic requirements, which limit their possibilities and act as barriers to financial integration.

The problem of the unbanked and underbanked is also exacerbated by income inequalities as the gap between the rich and the poor is only getting wider. 

Banking the unbanked with crypto 

Whether we’re talking about Bitcoin, Ethereum, or Worldcoin, all crypto projects share characteristics that allow them to act as suitable solutions for enhancing financial inclusion. First of all, digital currencies are enabled by blockchain technology, so they don’t rely on governments or financial authorities for issuance, storage, or distribution. 

The lack of central control creates a decentralized economy where individuals can skip all the bureaucratic hurdles and transfer funds virtually on a peer-to-peer network. Moreover, in countries that deal with high levels of corruption and unreliable banking systems, digital currencies can be seen as a safe haven, giving people the power to control their own money.  

Cryptocurrencies have very low barriers to entry compared to traditional banking services, meaning anyone can gain access to them with only a smartphone and a good internet connection.

With digitalization reaching even the most remote corners of the earth, where banking systems are non-existent, and mobile phone use being on the rise in developing countries, a larger number of people can take advantage of crypto capabilities to conduct swift and secure transactions.   

Crypto also makes it easier to move money across borders, revolutionizing the remittance sector with its fast speeds and low fees. This benefits both senders and receivers and ensures greater financial inclusion. 

EL Salvador – a trailblazer in crypto adoption 

In 2021, El Salvador became the first country in the world to adopt a digital currency as a legal tender. The initiative proposed by President Nayib Bukele and subsequently passed by the Legislative Assembly involved the integration of Bitcoin into the country’s financial structure as an official currency alongside the US dollar and the launch of a cryptocurrency wallet called Chivo that would facilitate transactions with the newly adopted coin. 

The Central American nation had been grappling with major economic downturns since the 2001 dollarization, which was supposed to have the opposite effect. Therefore, the passing of the Bitcoin law was intended to bolster the country’s frail economy and boost financial inclusion after this resounding failure. 

According to Bukele, this move was supposed to make it easier for Salvadorians working abroad to send money back home to their families. In a country where remittances account for over 20% of the annual GDP, increasing remittance efficiency via crypto was expected to have a significant impact on the local economy.

At the same time, the widespread use of Bitcoin also aimed at decreasing the number of unbanked citizens – 70% of El Salvador’s population didn’t have a bank account. 

Despite El Salvador’s ambitious goal, the road to crypto adoption and financial inclusion proved more challenging than expected, and the country had to scale back on its plans due to concerns regarding financial risks. 

This proves that despite crypto’s undeniable potential, there are still many hurdles that authorities have to overcome to leverage their benefits while also controlling the risks.