Can Crypto Address the Biggest Obstacle Facing the Unbanked?

The largest obstacle among the unbanked isn’t know-your-customer requirements. It’s that they don’t have an income — 59% cited that as the primary reason why they do not have a bank account, and 18% cited a lack of documentation.

Trying to convince someone with no income to open an account sounds like a tall order, and offering a crypto address as an alternative doesn’t look like much of a solution either. But people much brighter than I seem to think crypto can help. And it begins with understanding why 59% don’t have an income — or enough of an income worth storing somewhere safe. 

We sat down with Wallex, an asset and digital asset services provider, to learn more.

A vicious cycle

The global banking system excludes a staggering 1.7 billion people.

Behind that number lies a vicious circle of economic conditions and banking alternatives perpetuating global income inequality. 

Financial exclusion is expensive. Let’s take El Salvador, for instance — 70% of Salvadoreños are unbanked, with many relying on overseas remittances. Yet without a bank account, money transfer services such as Western Union will charge them considerably more in fees for cash payouts.

The identity issue

Many mistakenly draw a line of causation between lack of credentialed identity and lack of banking services. Both are issues connecting to the hierarchy of needs. Rather than a line between both, it is better to visualize the causation stemming from the cycle of poverty.  

No matter where you live, credentialed identity costs money. People living in a country with a developed economy are more likely to pay that cost because they have met basic day-to-day survival needs. For people struggling financially in countries with developing economies, the incentive to pay for living essentials far outweighs what little their government can offer. Even though it can ultimately help break the cycle of poverty, it doesn’t put food on the table. 

The lack of incentive isn’t just limited to impoverished people. It costs banks hefty administrative overhead with little promise of return. As a result, small traditional banks are less likely to be proactive in developing know-your-customer (KYC) and anti-money laundering (AML) solutions for these communities. 

On top of that, research has found that 16% of the unbanked in the US cite a distrust of banks as their primary concern. Similar studies put that figure at 32% for Latin America and Central Asia.

The current policy has been ineffective when it comes to solving the problem of financial inclusion. What is needed is the application of the existing KYC/AML policy but with an entirely different methodology — one that is proactive in making onboarding easier and less expensive for these populations.  

Neobanks can help

The minds behind Wallex believe that crypto can help the unbanked through blockchain-driven neobanks. Neobanks originated as an online banking services alternative. But with advancements in blockchain technology and crypto currency integration, it can now offer these services in faster and more user-friendly ways. But most importantly, it lowers cost barriers for the unbanked. 

These app-based fintechs are platformed on mobile infrastructure. Mobile phone ownership is already high in the developing world and continues to grow yearly. Wallex has embraced neobanking with an app-based offering that facilitates both fiat and cryptocurrency, with seamless payments and transfers.

Unlike conventional banks, which are locked into legacy systems, neobanks have the flexibility to take a more innovative approach to KYC. Some neobanks have taken to offering tiered levels of service based on the level of credentialed identity provided by the user. This approach means that at least the most basic level of financial services can be provided to customers who can’t provide documentation or those opposed to doing so.

It goes beyond onboarding. Greater wealth disparity occurs when people don’t have the opportunity to access savings and investment products. It’s not just a case of access, but an ability to maintain and grow wealth through access to savings products. Studies have shown that access to savings and lending products can boost gross domestic product (GDP) by 14% to 30% in developing countries. Crypto can help move value around the economy far more efficiently than at an individual and community level.

Stablecoins — a borderless innovation

International remittances is another area of high importance for the unbanked. They offer a critical lifeline to those in need. This is where cryptocurrency, more specifically, stablecoins, can play an important role, given that they’re borderless and lack the volatility of other cryptos.  Furthermore, they enable access to the online global economy. 70% of new value created worldwide over the next decade will be based on digitally enabled platform business models.

As Wallex founder and CEO Simone Mazzuca puts it, blockchain represents an evolution of SEPA and SWIFT systems, with the bonus that it’s accessible to everyone and facilitates transfers in real time.

The fact that public blockchains are transparent is essential, as it will allow regulation to evolve to an “identity last” approach. Data and pattern recognition can be used to chase down illicit activity. Meanwhile, everyone gets equal access to finance without any cause for financial exclusion.

Through TOKASH — Wallex’s system for tokenized cash payments — the company is working toward being the first CBDC — Commercial Bank of Digital Currencies — by planning to deploy 12 stablecoins in Q3 this year. With this expansion, the company is building on its experience of launching EURST, a euro stablecoin that is fully asset-backed with FDIC-insured USD reserves that are audited in real time.

It is a time of great innovation in finance, and with the aid of cryptocurrency and neobanking, there’s every reason to believe that we can finally make financial exclusion a thing of the past.

This content is sponsored by Wallex.

---

Start your day with top crypto insights from David Canellis and Katherine Ross. Subscribe to the Empire newsletter.

Explore the growing intersection between crypto, macroeconomics, policy and finance with Ben Strack, Casey Wagner and Felix Jauvin. Subscribe to the On the Margin newsletter.

The Lightspeed newsletter is all things Solana, in your inbox, every day. Subscribe to daily Solana news from Jack Kubinec and Jeff Albus.