Born in the Indian city of Tamilnadu, Sudhir is one of the 1.7 billion adults who are unbanked in 2018. As an unbanked person, he does not have access to a bank account and essential financial instruments like loans or savings accounts.
This puts him at a significant disadvantage. Without a safe place to store money, it is much more likely to get lost, stolen or irreparably damaged. Without a savings account, he can’t earn compound interest, instead of effectively losing money due to inflation.
Additionally, starting a business without capital is really tough. Most entrepreneurs need a loan to bridge liquidity gaps or finance bulk purchases at some point. As an unbanked person, Sudhir has to rely on his family, or a loan shark, for money.
Being unbanked introduces a huge level of uncertainty and risk into the financial lives of those affected. Typically, it is the role of the government to ensure its citizens have access to fundamental tools and services.
In emerging markets this is not always the case. In countries like Ghana, India, Brazil, and China, rapid economic growth has overwhelmed national infrastructures. In many cases, cryptocurrency offers an obvious solution.
Let’s look at this claim in more detail.
Crypto’s Impact on the Unbanked
Sadly, the plight of the unbanked went largely unnoticed in the 20th century. Only in 2015, did the World Bank set targets, aiming to reduce the number of unbanked people by 1 billion by 2020. This ambitious target centers on:
- Creating a supportive regulatory environment
- Expanding access points
- Improving financial literacy
- Supporting government programs
Although these measures are sure to have a positive impact in the years to come, crypto offers a far more immediate solution.
Anyone with internet access can open a cryptocurrency wallet and use it to store and transfer value. This is a game-changer for states in Sub-Saharan Africa and Southern Asia, where banks are few and far between. In Nigeria, for example, the World Bank estimates a paltry 5.4 banks per 100,000 adults, compared to 24 per 100,000 in the European Union.
Consequently, there are roughly 118 million Nigerians without a bank account, meaning that only 40% of the population has access to basic financial services. Compare this to the 46.1% of the population who have regular internet access, and you can see how crypto could have a huge impact in the region. No wonder why crypto exchanges like Luno are keen to gain a foothold in Africa’s biggest economy.
On the other side of the continent, we can see the impact of digital cash first hand. Kenya has been a pioneer in mobile-phone based money transfers, with M-Pesa processing over 1.7 billion transactions between 2016-2017.
Although the effect so far has been positive, M-Pesa is owned by Vodafone. Considering that an estimated 46% of Kenya’s GDP now runs through M-Pesa, the national economy risks becoming dependent on one or two multinational corporations.
Crypto, on the other hand, offers a way of leveraging the power of the internet without becoming dependent on profit-driven corporations. Even more importantly, cryptocurrency can ramp up financial inclusion, bringing the millions of unbanked households into the modern, digital economy.
Crypto’s Impact on Remittances in Emerging Markets
Many westerners have never heard of remittances, but they play a crucial role in many emerging markets.
Remittances are cross-border payments, usually performed by people sending money back to less wealthy family members in developing markets. The global remittances industry comprises roughly 230 million people and is estimated to be worth $500 billion. For most of the 21st century, Western Union and MoneyGram have dominated the market.
This relative lack of competition has caused fees to skyrocket. According to the World Bank, fees for remittances to Sub-Saharan Africa hover around 10%. For low-income families, this seems like an unacceptable amount.
Unsurprisingly, startups are using crypto to tackle this problem head-on.
BitPesa, for example, is a Nairobi-based fintech that enables cross-border remittances for a fee of 1-3%. Now active in seven African countries, BitPesa is lead by Elizabeth Rossiello and promises to one day fulfill its potential as Africa’s leading remittances platform.
Remittances go well beyond Africa. In South Korea, for example, Filipinos send back $231 million every year, with excruciating fees. Using Western Union, a Filipino would expect to pay a $4 transfer fee, plus a 4% exchange fee on a $20 transfer. When the funds finally arrive, that $20 has been chiseled down to an eye watering $15.15.
Clearly, innovation is needed.
Coins.ph is a blockchain-powered solution that is turning the Filipino remittance market on its head. Using digital currency, the Manila-based startup manages to bypass the antiquated SWIFT system, bringing fees down significantly.
As of September 2018, Coins.ph only charges around 4%, and has already been used by 5 million Filipinos.
How Crypto Impacts Land Registry in Emerging Markets
When Haiti suffered a devastating earthquake in 2010, it threw the whole country into turmoil. With pictures of the aftermath broadcasted around the world, countries and organizations did their best to help rebuild the nation.
One major problem that arose regarded property ownership.
More specifically, Haiti, like many countries, had failed to implement a modern form of land registry. This made it very difficult to identify the rightful owner of a plot of land.
According to a report by the United Nations, recovery efforts and construction projects stalled because land ownership could not be properly determined:
“Businesses and homes that are desperately needed to help the citizens of Haiti get back on their feet are not being built. The current land registry system is rife with corruption and inefficiencies..”
Blockchain technology offers a chance to fix many of these issues.
To start with, blockchains are typically transparent, meaning that all transactions are publicly visible. Additionally, blockchain technology is immutable, meaning it cannot be tampered with. These two factors alone make it a vast improvement on the almost non-existent systems currently used in many emerging markets.
This belief is shared by the United Nations, who is now piloting a blockchain-powered land registry in the Indian city of Panchkula. Should this pilot prove successful, it will open the gates for other emerging markets to revolutionize land registry using blockchain technology.
How Crypto Impacts Corruption
According to the Brookings Institute, bribes in the global public sector amount to $2 trillion annually. The amount of money laundered and misused by corrupt governments is estimated to be even higher than that.
In Brazil, for example, probes into institutionalized corruption lead to prison sentences for politicians, mass layoffs and billions of dollars in fines. More specifically, the state-owned oil company Petrobras was caught accepting bribes from firms in exchange for contracts.
Apart from the questionable morals, the problem is that cash makes corruption very easy. Using blockchain technology, governments and institutions in emerging markets can now track every penny that is being spent.
Countries like India, Brazil, and Russia could use crypto to develop a publicly visible and immutable digital currency. This would then be pegged to a physical currency in order to minimize volatility.
Cryptocurrencies that are pegged to physical currencies are not unknown. Tether, for example, is pegged to the Euro and is gaining a lot of traction. The reason being, that it brings all the benefits of a typical cryptocurrency while cutting out the price volatility.
From the government perspective, the most prominent example is Petro. This is the world’s first sovereign cryptocurrency, which is sanctioned by the Venezuelan government and backed by the national oil company PDVSA.
The idea behind Petro is interesting: give Venezuelans a way to save their money from hyperinflation (inflation stood at 40,000 per cent at one point). The reality seems to be a cryptocurrency pegged to the failing oil company.
Cryptocurrency undoubtedly has the power to solve significant pain points in emerging markets. As the first point of order, the 1.7 billion unbanked adults need to be brought into the financial system using crypto wallets and exchanges.
Secondly, sending money across borders should be comparable to sending an email. Crypto platforms are already showing that innovation and competition in this field can bring down prices and alleviate the financial burden on people living in emerging markets.
Beyond the financial system, crypto can help bring strong governance infrastructures to countries all over the world. The United Nation’s pilot in India is a great step in the right direction.
Finally, we need to be conscious of the impact blockchain technology can have on corruption. The obvious advantages of a transparent and immutable record of transactions can help governments fight corruption on every level.
As the Petro token illustrates, crypto can be misused by failing governments to equally negative effect.
Nevertheless, blockchain technology offers a fascinating new tool for emerging markets to grow across a myriad of industries.