Written by Bradley Duke, Chief Strategy Officer, ETC Group
Digital Assets as a Force for Financial Inclusion
There is no doubt that the way one views digital assets depends heavily on one’s own context. Someone working in Financial Services in Frankfurt or London, with access to a veritable smorgasbord of investment choices, might see crypto as a fascinating nascent asset class; a way to help diversify a portfolio and boost performance. We have seen a tremendous growth in the number of digital assets investment products available to investors, especially Crypto ETPs which are “physically” backed by cryptocurrencies like Bitcoin and Ethereum or even a basket of cryptocurrencies tracking an MSCI index.
To someone based in Zimbabwe, Venezuela, Argentina and even Turkey, all nations that are suffering from rampant inflation, digital assets are seen as something else entirely. Having access to Bitcoin, Ethereum and importantly stablecoins pegged to USD, can be a lifeline. Whether you’re an entrepreneur trying to buy or sell goods at fixed prices, or someone simply looking to protect the purchasing power of his/her monthly pay cheque or savings, digital assets offer very practical help to a very real problem. Being able to convert the local currency into, for example, a USD stablecoin, effectively pegs the current value of their local currency (that is quickly eroding) to a far more predictable major currency and brings a much needed level of stability and value retention. This contrast sharply to trying to convert local currency to say USD cash where you will almost certainly pay usurious fees.
According to TradingEconomics, inflation in Argentina was measured at 124% year-on-year in July 20231 while Turkey is currently at 58.9%2 down from a 24 year high of 85.5% last October. It is not surprising to find these two countries at the top of a table in a Reuters3 article published in May 2023, measuring the rise in crypto ownership by country:
But it is not just in high inflation countries where digital assets are seen through a different lens to those in developed markets. In many countries around the world there are large sections of the population that are either unbanked or underbanked meaning they have no bank account at all or have access to a bank account but don’t use it because it’s extremely expensive to use or the services available are substandard or they simply don’t trust the banks.
The unbanked often find themselves in this predicament because they come from the wrong social caste or because they are female or because they are simply just poorer and less educated. Refugees and migrants are also often barred from accessing bank accounts in their host countries. According to the World Bank, a staggering 1.4 billion people4 count themselves amongst the unbanked. It makes sense that an alternative banking system with far, far lower barriers to entry and far lower fees could be game changing for these unbanked people, giving them the opportunity to lift themselves and their families from poverty or simply improve their quality of life.
To buy bitcoin or other cryptocurrencies, all that is needed is access to the internet via a smartphone. This makes crypto and digital assets, in general, far more inclusive than legacy banking systems. There is no doubt that it is a force democratising banking for millions of people around the globe. But what does this access actually mean in practical terms?
Besides the example given about digital assets providing shelter from rampant inflation, cryptocurrencies like Ethereum are not just a conduit for peer-to-peer payments and global remittances, Ethereum is a platform on which developers can build increasingly sophisticated financial (and non-financial) applications. The Ethereum blockchain is one which supports smart contracts, meaning that within this public blockchain, contracts can be written and programmed to execute automatically if specified conditions are met, meaning both simple and complex financial transactions can take place without a bank or other intermediary. A good example would be releasing funds for a loan once collateral requirements have been met. This rapidly growing world of DeFi or Decentralised Finance is available today to the holders of smartphones and made seamless by the rapid growth of Web3 technology.
In short, blockchain technology and digital assets are now facilitating increasingly sophisticated financing possibilities for anyone who takes the time to educate themselves about the services available and the associated risk. Loans can be requested and approved quickly. Yield can be earned by participating in the consensus mechanisms of certain Proof-of-Stake blockchains (Staking) and, through tokenisation, an almost limitless array of investment products including popular traditional finance (TradFi) investments can be bought and sold. For example, an unbanked person can, through a smartphone, invest seamlessly in the S&P500 or Gold ETFs, products that are plain vanilla to those with bank or brokerage accounts in the developed world, but that are now available to these aspirational but unbanked investors.
This is just the beginning of an unfolding story of banking democratisation and financial inclusion. Let’s not forget that cryptocurrencies have only been around for just over 13 years and DeFi (in practical terms) less than five years, and there is so much more innovation to come. Now, I want to be clear that digital assets and DeFi are certainly not a panacea or silver bullet for all the shortcomings of traditional banking. When money is involved, there will always be bad actors looking to exploit the less sophisticated, and crypto is not immune to similar grifts that have been around for ages. But there is no denying the incredible value and utility that digital assets have brought to the world, and I for one am fascinated to see what is still to come in this unique phenomenon that is an undoubtedly a powerful force for banking democratisation.