January 18, 2022
November 18, 2021

Crypto, DeFi, and the opportunity for real financial inclusion

Bitcoin and other cryptocurrencies are disrupting how we view digital assets and are steadily interfering with the way the traditional financial system works. In Latin America we are seeing Bitcoin being used as legal tender in El Salvador, for example. 

At the same time, the crypto industry has become more attuned to and engaged with government policies. Innovators are pushing the boundaries of what is considered money, currency, or investments, and regulators are scrambling to adapt, and take a look at the United State’s report on stablecoins this month. 

Our view at Conduit is that it’s time to take a proactive stance and put regulation in place that will help crypto and DeFi become more mainstream while protecting consumers.

Consumer demand for better integration of crypto into their everyday financial lives is evident. According to a Forbes article, 60% of crypto owners would use their bank to invest in cryptocurrencies. Among consumers who already hold cryptocurrencies, 60% said they'd definitely use their bank if it offered them the opportunity to invest in cryptocurrencies—and another 32% said they might do so.

The world’s two largest cryptocurrencies continue to grow the market. Bitcoin (BTC) prices rallied to an all-time high, surpassing $68,000 this month. And  the market capitalization for all cryptocurrencies pushed to a new record of $2.9 trillion, according to data from CoinGecko. Ether (ETH), the native cryptocurrency of the Ethereum network, has also been climbing. In the world of decentralized finance (DeFi), the total value of assets locked in protocols has grown to $105.49B, according to DefiPulse.

Here are a few examples of how decentralized finance can provide an opportunity for  real financial inclusion:

Connecting a global village

It may be a little cliché, but it does take a village to make things happen. Cryptocurrency and the DeFi industries truly want to modify the traditional financial system and create a global village – making the world a better place for everyone. The crypto industry has the power to drive real change and create an opportunity to provide global financial inclusion to all. In the world of cross-border remittances and savings, consumers in developing countries are taking advantage of apps like sendwave or Leaf Global and using borderless digital wallets like BRD, Ledger, or Abra to hold value in US dollar stablecoins. For example, an app called Vibrant allows consumers in Argentina to buy USDC stablecoins and hold value in US dollars as a hedge against inflation.

Understanding the access gap

For those who live in highly developed western countries like the U.S., access to financial systems is mostly taken for granted. According to the World Bank, close to one-third of the world’s adults are “unbanked,” meaning they don’t use formal financial services. That’s nearly 2 billion people lacking access to the traditional financial systems. They can’t protect their money, gain access to wealth-building tools and services, or effectively plan for their future.

Take for example an agricultural worker from Fez, Morocco who picks fruits seasonally in Andalusia, Spain. But they need to send money home to family while away for long periods. They could use a money transfer service like Western Union, but to pay in cash at an office and have the recipient travel to the nearest payout location to get the money would carry very high fees and take days to complete. Instead, they could use a cash-in Bitcoin ATM like BitBase and a mobile app like BRD to send Bitcoin, although Bitcoin could change in value along the way. Because of the faster send times and availability of crypto services, more migrant workers are choosing this option, especially if they do not have a local bank account. Value can land in the receiver’s mobile wallet within minutes or seconds, instead of days.

Better access, lower fees

Many people don’t realize that opening a bank account is a luxury that we take for granted in the developing world. With crypto, a refugee could send money to their family overseas without using a bank or money exchange, who would take a large chunk of the money as fees. Oftentimes, the know-your-customer (KYC) process of setting up a bank account requires a residential address. In the case of refugees or displaced persons, they simply don’t have an address. And this can prevent them from having a bank account as they move to live in a safer location.

One app that specifically addresses this need is Leaf Global, a financial services app that allows refugees to receive, send, hold, and spend money directly from their mobile phone, even a low-feature phone. This application is literally a lifeline for people who are at risk of losing cash money to theft and also gives them a way of receiving financial help when they need it most. 

A new normal for digital assets

Digital assets and crypto have now moved into the areas of traditional financial services and banking. In a little over a decade, cryptocurrencies have changed the definition of money, and the way it moves. Neobanks, fintechs, and challenger banks are allowing crypto-based services to operate in this new banking space, which was typically dominated by traditional brick-and-mortar banks. 

For the crypto industry to grow and become a solid, stable resource within our global economy, there must be compliance layered into DeFi. Even though DeFi breaks the rules of traditional 1:1 transaction pathways, KYC can be a requirement for all participants in a protocol. For example, protocols like Aave Arc have permissioned, segregated liquidity pools where every single participant is AML/KYC’d and whitelisted for participation. This is attractive to institutions who want to minimize risk of unknown counterparties in their transactions.

DeFi and Crypto industry stakeholders must be proactive

It’s important that a regulatory framework be established so that all players can be licensed and regulated. Compliance can be built into DeFi protocols. Only through a coordinated compliance approach will DeFi protocols be accessible for global participation. 

We need to be proactive about suggesting workable solutions before government entities and other regulators create their own, potentially unsuitable guidelines. There’s an education gap for many policymakers who simply don’t understand how decentralized systems work, and it’s up to our industry to provide clear information.

With a standardized and layered compliance approach, DeFi protocols will remain accessible for global financial inclusion. For all of us in the crypto industry, we need real solutions and legitimacy to unite everyone under a common goal. And that goal should be DeFi for all.