I recently came across an article prepared by students at the Columbia School of International and Public Affairs that explores the benefits cryptocurrency and blockchain can offer the world’s unbanked people. Specifically, the paper explains how cryptocurrencies can help “reach and benefit the unbanked / underbanked, who do not use traditional financial services, including banks.” One of the largest crypto exchanges, Gemini Trust Company, LLC, requested the document, and Columbia students spent their spring semester researching the topic and conducting interviews. The document is available online here.
Those who make up the “unbanked” may be part of this group for several reasons. Often, these people live in extremely poor rural areas, without the infrastructure to support a physical banking location, or to provide electricity or internet access to facilitate online banking. In addition, people in some of the poorer areas may not even have the necessary IDs to meet the minimum KYC requirements. Aside from compliance standards, how can a bank hold someone’s assets if they don’t even know who they’re holding them for? For this article, students focused on Mexico, India, and Indonesia, but these unbanked populations exist all over the world.
The financial service that these populations most lack is the ability to send and receive funds. For most of us, we can take for granted the ease with which we can move money, through the use of credit cards or bank transfers, or through companies like PayPal and Venmo. We can send large sums of money to our friends and family with just a few clicks on our phones, without ever leaving our sofas. This is not the reality for many around the world.
For example, many migrant workers in the United States frequently send money to their families back home. Even if the worker is able to access the banking system, often the intended recipients cannot. As such, many rely on money transfer services which are often much more expensive, so the poorest often pay the most in fees. Many cryptocurrencies can instead provide instant transactions, across international borders, for pennies, regardless of the amount transferred.
In addition, the financial ecosystem built on the blockchain continues to grow and the burgeoning world of decentralized finance may offer other services to the unbanked. Companies like Aave and Compound currently provide decentralized borrowing and lending services that do not require a KYC or credit rating. Rather, the system is automated through the use of smart contracts and only requires certain warranty thresholds. Obtaining any kind of substantial loan in the poorest parts of the world is virtually unheard of, but the decentralized financial industry will make it possible in the very near future. This is just one example in an ever-expanding field.
While most focus on poverty when identifying the unbanked, there are other reasons why people may need an alternative service. Venezuelan citizens have also embraced cryptocurrency due to the impact of US sanctions on the country. Although these regulations were designed to affect the leadership of the country, unfortunately they resulted in collateral damage and had a significant impact on the average citizen. Many citizens do not have access to the international banking system, as their only route may be a sanctioned Venezuelan bank. Moreover, the rampant inflation affecting the Venezuelan currency has left it virtually worthless, to the point that bills litter the streets across the country. As such, many citizens have turned to cryptocurrency and blockchain. Many Venezuelan citizens will immediately convert their wages into cryptocurrency and then use the blockchain to transfer money and make payments.
However, with these benefits always come real risks, especially for the compliance world. As the document explains, KYC checks can unfortunately prevent many poorer regions from accessing the financial system. Knowing this, is the answer really to remove all KYC checks? This is clearly problematic, extremely. These controls are in place to ensure that all kinds of bad actors are not able to manipulate the system for their benefit. A lack of KYC checks anger regulators and is a key point of contention within the cryptocurrency industry.