Financial inclusion in the age of mobile money and cryptocurrency
This article is a part of the Tech in Policy publication. TiP focuses on technology being used for good and shines a light on its more malicious or neglectful implementations. To read more, visit this link.
Even though 2020 has made last year feel like 10 years ago, you may remember that Facebook announced the development of “Project Libra” in May 2019. At the time, I was taking a Business and Public Policy course at CUNY Baruch. Although the announcement spurred a spirited class discussion on the topic of cryptocurrency in government finance, it mostly confused my classmates and professor. Some struggled with the idea that digital money could be pinned to assets, while another person asked “can’t you already make payments on Facebook? How is Libra different from that?”
One of the ostensible goals of Libra was to improve financial inclusion among the “unbanked” or “underbanked” populations of the world, though there was plenty of skepticism about the true nature of Facebook’s motivations.
An unbanked household is one in which no member of the household has a checking or savings account, whereas an underbanked household has an account, but must rely on financial services such as money orders, check cashing, payday loans, etc.
Cleve Mesidor is the head of the National Policy Network of Women of Color in Blockchain and served in the Obama administration as Director of Public Affairs for the U.S. Department of Commerce’s Economic Development Administration. She notes that the global pandemic has highlighted how communities of color are often disproportionately impacted, with white Americans receiving stimulus payments faster than communities of color, according to a study by the Urban Institute. The report cites larger unbanked numbers in communities of color as a major cause.
Unbanked and underbanked people often live in what are known as “banking deserts”, which are areas that lack access to traditional financial institutions and services. Globally, underbanked populations are most concentrated in developing economies. In the United States, banking deserts sometimes occur in rural areas where banks are reluctant to open up a branch that could be more lucrative in a more populated area. Unfortunately they can also be found in densely populated communities of color, like Queens, New York. Research has shown that growing up in a banking desert can disadvantage someone for life, decreasing the likelihood that they will trust financial institutions or even become as financially literate as their peers. It is important, though, to draw a distinction between mobile banking and mobile money.
Mobile banking is simply the ability to access and execute transactions linked to a bank account or other financial instrument via mobile phone. Per the Financial Access Service (FAS) report linked above, mobile money is “a pay-as-you-go digital medium of exchange and store of value using mobile money accounts.” Mobile money accounts do not have to be associated with a bank or bank account, and are typically offered by mobile network operators and/or their partners. This is the answer to my classmate’s question above. Facebook currently offers mobile payment through its Messenger app, but only if you have a US bank-issued Visa or MasterCard, or a PayPal account and both you and your recipient are located in the US.
A World Bank press release from 2018 breaks down developing regions around the globe and focuses on which measures have proven to be most effective in improving financial inclusion. It focuses on the fact that although 1.7 billion people worldwide are unbanked or underbanked, two thirds of this group have a phone and access to the internet. This could enable them to engage with mobile payment methods, one of the report’s most common success stories across regions.
Mobile money and cryptocurrency
Although traditional financial institutions, mobile money, and cryptocurrency are distinct, there are ways in which they can intersect to promote financial inclusion. Cryptocurrency transactions must take place electronically, often over exchanges or apps that increasingly marry the abilities to purchase traditional financial instruments alongside popular cryptocurrencies like bitcoin and ether.
Many people are familiar with (and maybe even own some of) these cryptocurrencies. They are digital currencies built with blockchain technology (for a little more information on blockchain, see Nora’s piece on voter tech). The cryptographic principles underpinning the technology date back to the 1990s. The bitcoin white paper, a seminal influence on modern cryptocurrency, was published in 2008. Commonly cited issues with these cryptocurrencies are that they are poorly regulated and understood. They are also very volatile.
Libra aimed to address volatility by issuing stablecoins backed by a basket of currencies, which initially included the US dollar, euro, Japanese yen, British pound sterling, and the Singapore dollar. As a concession to regulators, it modified its strategy earlier this year and announced that it would release a series of stablecoins, each backed by a sovereign currency.
Still, since its announcement Libra has been mired in regulatory issues in several countries. Many regulators are concerned that Libra would compete with their own sovereign currencies, since Facebook is influential and ubiquitous. Additionally, several original participants of the project dropped out in response to the overwhelming amount of scrutiny it faced in the latter part of 2019, including MasterCard, Visa, and eBay. Facebook even conceded at one point that Libra might never launch.
What it has done successfully, however, is spurred global action by several central banks to explore the concept of decentralized finance, and creating their own digital currencies known as Central Bank Digital Currencies (CBDC). Many believe CBDCs have the power to cut out intermediary parties from financial transactions, thereby reducing barriers to entry for those who have been traditionally excluded from the financial system. The US CARES Act passed in March initially included provisions for a “Digital Dollar”, and though the language was dropped from the bill’s final iteration, a subsequent bill was introduced the following day called the “Banking for All Act”.
This piece of legislation contains language for a “pass-through digital wallet”, and specifies that these wallets cannot be subject to fees, minimum or maximum balances, and would even pay interest. There are additional provisions specifying that where bank branches are not geographically accessible, transactions could be made at postal facilities, which would help in eliminating banking deserts around the country.
Although many people are cautiously optimistic, a common refrain among CBDC proponents is that governments need to take development slowly and get regulation right. For her part, Mesidor believes cryptocurrency ultimately represents an opportunity to shift financial control away from central powers and to communities. As CBDCs are concerned, she believes a very strategic approach is necessary, and that the world’s governments should not rush to implement them without understanding the full scope of their impact.
The use of digital payments is here to stay, but it’s increasingly clear that digital currency is also the way of the near-future. As they are being implemented, it’s important that governments and society keep the focus on providing greater access to financial services to communities which have been historically underserved.
