Why Central Banks and the Unbanked Are Both Looking at Blockchain

Despite all the bankruptcies and contagion fears, 2022 set new records for blockchain and cryptocurrency adoption, particularly in countries where inflation was high and citizens were cut out of the global payment network. 

For example, the 2022 Statista Global Consumer Survey data showed that cryptocurrency adoption in Turkey, a country with the 7th highest inflation rate, increased from 25% to 40%. And in Nigeria, where 60% of the population is unbanked, adoption increased to a new record high of 45%. 

These regions’ monetary policies and payment infrastructure represent serious shortcomings of the dominant banking systems. Speakers at a recent Decipher conference panel agreed that the current financial system’s failure to reach the unbanked and provide price stability drives developing countries to lead the world in blockchain adoption. The need to protect purchasing power and settle payments instantly is still the leading use case for the technology.  

Many central banks are exploring various ways to compete with these solutions to remain at the core of the settlement process. And while some countries like China have outlawed cryptocurrencies in their authoritarian CBDC rollout, other countries like Italy are considering a collaborative approach that can leverage blockchain security and digital asset ecosystem interoperability.

The central banks exploring blockchain solutions 

In July 2022, The Bank of Italy published a report analyzing the benefits of using digital ledger technologies (DLT) for settlement purposes. The objective of the report was to discover a way that central bank money could safely and reliably be used to purchase something like a tokenized security, cryptocurrency or digital asset. The authors concluded that both the TIPS Hash-Link and TIPS-Algorand settlement models offered feasible solutions and were considered for further experimentation. And on December 13th, 2022, Algorand announced that the Bank of Italy endorsed the launch of a national platform using the layer-1 blockchain to support a digital guarantees platform – marking a step toward blockchain and central bank integration  

As Federico Rajola, a professor with the research Centre on Technology, Innovation and Finance (CETIF), coordinating the platform, stated in a press release: “We selected Algorand because of its unparalleled level of innovation and security among permissionless DLTs, as well as because of its leadership in sustainability… We believe [platforms such as the Digital Sureties platform supported by Algorand] can and will dramatically contribute to the country’s competitive sustainability for the benefit of all.”

This approach represents an alternative central bank response to cryptocurrencies. Instead of responding with a CBDC designed to enforce strict censorship measures, they are collaborating with existing blockchain infrastructure to remain an integral part of the settlement process. This shows that permissionless blockchain cryptocurrencies don’t need to beat out CBDCs or replace central banks to succeed. This collaboration between Algorand, the Bank of Italy and other Italian public entities and institutions, signals a potential future where the ecosystems for crypto and central bank money can benefit from each other. 

The unbanked populations driving blockchain adoption

Most countries are not equipped to ban blockchain-based cryptocurrencies. For example, despite Nigeria’s Crypto ban in 2021, it still led the world in adoption in 2022. And a Bloomberg report states that fewer than 0.5% of Nigeria’s population of 217 million are using the government-issued digital currency one year after its launch. So as more people use crypto to preserve purchasing power and access financial services, they may force central bank hands to pursue interoperable solutions. 

But even crypto has its challenges in servicing the unbanked. The Taliban’s takeover of Afghanistan in August 2021 pushed the country’s banking system to the brink of collapse nearly immediately, and the system remains in a crisis state still today. For some, crypto and other blockchain-based solutions quickly became a safe alternative for vulnerable people to receive aid and safely pay for critical things like medical expenses and food.  

The challenge, though, was that many people had no access to smartphones or the technological literacy needed to send and receive crypto. Sanzar Kakar, the founder of a crypto payment system called HesabPay, started using QR code cards to meet this need. On the ‘Payment Revolution is Now’ Panel discussion at the Decipher conference, he stated, 

“Our niche is not someone that necessarily understands [how to send and receive crypto] or have a smartphone and internet access. So we use QR codes. We recently provided 7500 of these to widows in Afghanistan – where they can use them to pay for things without understanding how blockchain works or having access to a smartphone. They just went to the shop every month with their QR code card and showed the shopkeeper who scanned it to deduct donated funds from their Algorand wallet.”

These QR codes, linked to blockchain wallets, also protect against the security risks that exist in informal money transfer systems that are still common across the Middle East, South Asia, and other parts of the world. With HesabPay, anyone holding a QR code card wallet can receive outside donations and remittances even in the absence of traditional banks.  

These innovative efforts may offer a scalable model that can onboard even the most hard-to-reach people to the rails of blockchain payments. Therefore, as Nigeria’s CBDC and others like it fail to even reach its general population, governments may seek greater interoperability with the system that is working in the most remote regions.

This content is sponsored by Algorand.

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