Could Digital Currencies Make Being Poor Less Costly?

 

Blockchain eliminates middlemen, relies on networks of users and collective trust, reduces the need for centralised networks and data storage. This has made blockchain-powered currencies popular among the dark web users, but it has the potential to do more than being used for shadowy transactions.

Blockchain-based payment systems can bring on board people who are unbanked into the formal economy. However, India has successfully transitioned into digital transactions, partly aided by the lockdown due to pandemic. This can render obsolete the informal financial services that people use. 

At present more than 70% of the world's central banks are exploring the merits of central bank digital currencies - the digital version of currencies. A national currency could reduce reliance on commercial banks as principal agents for money management and give more options to customers, many of whom may be excluded due to poor credit or funds. As the blockchain-based system is decentralised, it enables these people with the 4S's of payments- spend, save, secure and send money.

For this to work, we need open and interoperable payment trails - universal, open, and user-directed payment networks. This is in a way market expansion, bringing the unbanked into the formal banking fold, and lowering the risk from reliance on, many times, opaque financial world.

Ripe for disruption

Having no access to the banking channel increases the cost of the transaction especially when you are poor, remote and disconnected. The banking industry is very similar to how the telephone networks five decades ago, in terms of price, competition, access and connectivity. At that time only a select people, staying at the right postal code, the country had access to the telephone and most had to be without reliable, low-cost communication. Mobile telephony, broadband and low-cost devices made it possible to extend the reach of connectivity. The same has now to be extended to the banking industry, using the mobile phone into a payment endpoint.

An internet-enabled mobile phone is the entry point into the banking system. Breakthroughs in mobile banking technology have improved the financial inclusion, blockchain can further reduce the cost substantially and improve access further. The best example is peer to peer remittances which is estimated at $700 billion today. The average cost of a remittance transaction is 7% and the target is to get it own to 3%.

This will require large scale, open-source technological modernisation of the world's payment networks. Private-public collaborations and digital currencies can ensure the right balance between required levels of compliance and innovation and lower the costs and complexity of cross-border cashflows.

Way forward

How would a peer-to-peer payment infrastructure look like? How would it work with digital currencies? There are two ways to achieve this 

1. Promote regulatory certainty and promotion of competition around the stable coin projects.
2. Create regulatory sandboxes, where various experiments can be tested.

Compliant blockchain-based payment networks can extend the formal economy, complementing the financial system, rather than competing against them. This system should get the compliance right from the start on money laundering, financial terrorism. This will include developing frameworks to harmonise digital assets around the world. One key area of opportunity is a tiered KYC requirement as well as addressing the people who have no nationally issued ID. Here the blockchain technology with biometrics can improve financial access. 

The solutions and technology must be open source. Enabling free development of mobile-native digital wallets would result in broader reach than what traditional brick-and-mortar financial access could achieve. Extending the boundaries of the formal economy in a way that balances compliance, risk management and financial services is not about innovation but optionality.

There are already precedents in this direction. Innovations of low-cost, user-directed internet-ready payment systems have come from Asian countries lie India, China and are quickly becoming mainstream, especially the focus on the peer-to-peer, user-directed domain, is poised to unlock a wave of digital currency competition.

A system we need now

In the US, the epidemic has made clear a need for such a system not just for international but for domestic payment systems too. The government grants to citizens require a citizen digital wallet to facilitate real-time direct payments. As more and more people lose their jobs and be dependent on payday lending, many families have to wait for weeks to receive their physical cheques. For rural families, encashing the paycheck is cumbersome, costly and amid the epidemic, perilous.

Digital currencies and blockchain-based systems alone are not solutions for poverty and financial exclusion. But it can surely make a difference in digitizing payments without the risk of fraud, hyper-volatility, compliance. 

Could Digital Currencies Make Being Poor Less Costly?

by Dante Disparte HBR August 05, 2020