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At the beginning of this year, the president of the World Bank group Jim Yong Kim spoke in Washington, comparing the cryptocurrencies with "Ponzi schemes". Yet, cryptocurrencies and their most respectable cousin, blockchain, are already taking a leading role in the international development sector. Blockchain technology is currently used to distribute aid to 100,000 Syrian refugees from the World Food Program. And plans for future blockchain initiatives within the U.N. they range from the cessation of trafficking in children to the provision of services for women and girls in humanitarian settings.
Blockchain is the technology behind cryptocurrencies like Bitcoin. It consists of distributed databases that are constantly updated and verified by their users, rather than by a central authority. They allow to exchange and transfer digital assets, such as cryptocurrencies, without going through an institution like a bank. In the development sector, many are hoping that blockchain can offer solutions for the 1.7 billion non-subscribing adults in the world.
This figure represents almost a third of the world's population, mainly low-income people and women, who are unable to access financial services. The problem persists in developed countries: 15% of Americans over the age of 15 are not hired, but are particularly acute in developing countries. Without access to financial services, people are forced to take informal loans at very high interest rates, to save money incautiously, and to make long and risky journeys to deliver money to family members or people with whom they do business. Don Tapscott, executive president of the Blockchain Research Institute, supports in his book, Blockchain Revolution, that "blockchain could be the solution." By lowering the barriers to financial inclusion and enabling new models of entrepreneurship, the market tonic could be brought to fulfill dreams and ideas of billions of unbanked ".
Indeed, financial inclusion efforts have been previously revolutionized by technology, particularly mobile money. The most famous scheme, Kenya's M-Pesa, deals with 6 billion transactions a year and has been adopted by the overwhelming majority of Kenyan families. The service allows you to deposit money in an account linked to the customer's phone number, then used to make payments or send it to other users via SMS and converted into money. It has had a transformative impact on the country. A study conducted by MIT and Georgetown University economists found that M-Pesa raised 2% of Kenya's families from poverty.
Some see the blockchain as the next frontier for financial inclusion. A leading study by researchers from Georgetown University and the IFC, among others, said that the blockchain could lead to a transformation of financial inclusion as important as that achieved by M-Pesa. However, unlike M-Pesa, the blockchain was not designed with low-income customers in mind and does not address the barriers they face. At the moment, Blockchain has little to offer to those who are paid out of the world or to the institutions that serve them.
In order for inclusive financial services to be sustainable, suppliers need to reach a huge number of people, through reliable, low-cost transactions. Blockchain and cryptocurrencies can not offer this because they simply were not built to be scaled. While it is estimated that Bitcoin can process only three to seven transactions per second, Visa can process 24,000 transactions in a second. Furthermore, cryptocurrencies have proved highly volatile. At the end of last year, Bitcoin has reached its highest price to date. While I'm writing this, it's worth less than a third of that. Although attractive to investors, this volatility makes cryptocurrencies completely inappropriate for transactions required by low-income individuals, such as money transfers, payments, savings and loans.
But even if they do not use cryptocurrencies, blockchain systems are expensive and inefficient. In most cases, their proposed uses could be met (and more economically) from a regular database. It is noteworthy that the most effective use of blockchain in a humanitarian context, the initiative of the World Food Program to provide aid to Syrian refugees, is in fact a private blockchain managed by a single entity: the World Food Program . In other words, the system is not distributed or decentralized, and critics have argued that it could also be performed through a standard database.
However, it is the risk for vulnerable customers who should worry more. To make sure that any financial service benefits the poor, consumers must understand it and must be protected from abuse. This is particularly important in many developing countries where trust in financial institutions has been severely damaged. Blockchain seems to have something to offer here. First of all, the system is presumably immutable. The transactions are recorded permanently on a blockchain ledger, so that, in theory, no one can later circumvent the accounts. Secondly, the blockchain uses smart contracts, which automatically execute transactions established when certain conditions are met. Smart contracts could improve trust among customers who know that financial institutions will be kept to promises. They have already been used for a small number of financial products designed for high-income customers. AXA, for example, offers flight delay insurance that automatically pays insurance customers if their flight is delayed.
Indeed, this immutability poses serious problems for financial inclusion. Financial services designed for people living the financial system for the first time must be able to solve problems and misunderstandings. Banks must be able to reverse the transactions made to the wrong recipient by those who are still struggling with banking services and the authorities should be able to intervene when customers are treated unfairly. Smart contracts are designed to make this type of intervention impossible. They proved to be surprisingly vulnerable, nonetheless, to hacking and coding errors. Several high profile hacks have already caused huge losses. A scheme, set up to finance startups chosen through members' votes, lost $ 50 million to a hacker in 2016. A recent study, analyzing one million smart contracts, found that about 34,000 were vulnerable to this type of hacks.
Moreover, blockchain is almost impossible to explain to an average consumer, not to mention the new ones in the financial system. It is so confusing, in fact, that some start-ups have simply chosen not to mention it at all to their customers. A noteworthy service in the Philippines, Coins.ph, has decided to hide its bitcoin wallet in the app as a default. Users only see the details of their cross-border transfers according to the legal currencies, to avoid the confusion and anxiety caused when the bitcoin conversions behind the scenes were visible.
As organizations rush to the latest "silver bullet" of technology, attention and funds are diverted from proven ways to expand financial inclusion. Mobile money services, which take advantage of mobile ownership levels of over 100% in many developing countries, are accelerating financial inclusion. In Sub-Saharan Africa, Findex, the World Bank Group's global financial inclusion survey, revealed that 21 percent of adults have a mobile money account, nearly twice the percentage recorded in 2014. And access to mobile money can have significant effects on households' well-being. A study conducted in Kenya found that access to M-Pesa allowed women's families to increase their savings by more than one-fifth and start small businesses, reducing extreme poverty by 22% among households. M-Pesa did not achieve this result by using state-of-the-art technology. Rather, in an attempt to include as many Kenyans as possible, he has used a basic and widely accessible technology that does not even require access to the Internet: feature phone.
The networks of bank correspondents have also proved to be extraordinarily effective in expanding access to financial services beyond bank branches. The corresponding banks are neighborhood kiosks and small businesses with simple technology to carry out basic transactions on behalf of banks. In India, for example, the corresponding banks were introduced in 2006. By 2013, the Reserve Bank of India reported that there were more banking counterparts in the country than physical bank branches and ATMs combined. In 2017, the Reserve Bank of India reported that the corresponding banks represented over 90% of the bank outlets in the villages.
The financial inclusion of women has proven to be one of the most difficult problems faced by the industry. In developing countries, men are nine percentage points more likely to have a bank account than women – a gap that remains unchanged since it was first measured in 2011. Nevertheless, the progress made by individual countries varies enormously. The specialized financial institutions of women in many countries have worked slowly to shift the balance, changing the lives and prospects of the women they serve. Where government support and the right technology have been put in place, the financial inclusion of women has accelerated. In India, where the government has put significant resources behind women's subscription to basic bank accounts, Findex's data show that the gender gap has shrunk from 20 to 6 percentage points in just three years. And in Indonesia, women are more likely to access an account than men.
At the heart of the successful financial inclusion initiatives there is a careful design to meet the needs and lifestyles of the unassigned. Considerable progress has been achieved with locally designed solutions, limited budgets, simple technology and years of iteration. This is exactly the opposite of the blockchain: an expensive and unwieldy technology that advocates seek to adapt to problems that have never been designed to solve. The most vulnerable should not be guinea pigs for their experiments.
