Many people think of blockchain technology in terms of tokens, cryptocurrencies, and crowdfunding via digital assets. These are only a few examples of technology that can transform many industries and organizations. Blockchain technology, like the internet, can transform billions of lives by creating social impact. Many companies from various sectors, including finance, healthcare, education and supply chain management, have begun to explore blockchain technology. Kimberly Rosales is a blockchain expert and the founder of ChainMyne, and explains how blockchain technology can help financial inclusion.
Blockchain technology’s ability to bank the unbanked is one of its key features. The World Bank estimates that nearly half the world’s population live on less than $5.50 per person. The situation is not only dire if we consider how gross domestic product (GDP per capita) is distributed in India and Africa.
The Shifting Wealth of Nations report from previous years shows that the majority of the world’s private capital has been concentrated in fewer hands. Many people living in extreme poverty and without credit have no access to banking services. They may also have little credit history, so they might not be accepted by the traditional financial system.
Blockchain technology can promote financial inclusion for those who truly need it. The first is to reduce costs. It can help people all over the globe spend and exchange money cheaper and more quickly. Intermediation that is subject to high tariffs could be eliminated by cryptocurrencies. While the banked population of rich countries doesn’t usually require wire services, the most vulnerable do and often pay high fees.
Rosales points out that “Blockchain technology can be used to bring transparency and accountability to public spending by the government that should be dedicated for financial inclusion projects.” Blockchain technology can provide traceability and transparency of how funds are distributed and used. This could help eliminate corruption and diversion of funds.
However, many people who are not able to afford identity documents due to lack of funds do not have them. Blockchain-based IDs will not require traditional documentation. They will allow billions to be identified easily on a public blockchain. This would open up new possibilities for commercial banks as credit history could be linked to a public blockchain, allowing unbanked people to access financial services.
This process has been made possible by several financial institutions, which allow the creation of digital personal profiles that include different records of financial and personal activities. These profiles could be accepted by financial institutions as valid identifying information.
Transacting transactions in a secure, automated and decentralized way could result in significant reductions in intermediation costs when applying for loans or sending wire transfers. Blockchain technology can also be used to reduce payment times and prevent mishandling. It provides real-time traceability of transactions, without any double-spending.
Public and decentralized blockchains will provide an environment that allows financial inclusion. However, traditional financial players will still be able to participate as long as there are clear incentives. Rosales asserts, “Blockchain technology could reduce the infrastructure costs of banks by $15 billion to $20 Billion by the end of 2022, according to a World Bank report.”
This is due to international payments, securities transactions and regulatory compliance. The report also states that even low-income countries have over 50% cell phone penetration, so mobile apps that use blockchain technology directly could bring in a significant number of new customers.