Could Digital Currencies Make Being Poor Less Costly?
By definition, blockchain technology cuts out middlemen. In relying on networks of users and collective trust, it reduces the need for centralized networks and data storage. This trait made blockchain-powered currencies popular on shadowy parts of the internet, but it has the potential to do something more revolutionary than obscure how money is changing hands: Blockchain-based payment systems can bring the more than 1.7 billion people who are unbanked or underbanked (including 25% of U.S. households), into the formal economy. And in doing so, they can render obsolete the expensive, usurious payment and informal financial services those people use to make ends meet. A generational pandemic makes this challenge all the more urgent, as decades of (admittedly uneven) economic progress are erased.
Right now, more than 70% of the world’s central banks are exploring the merits of central bank digital currencies (CBDCs) — electronic versions of their national fiat. This is a bigger deal than you might think: A national digital currency could reduce reliance on commercial banks as the principal interface for money management and increase optionality for consumers, many of whom are beyond the reach of physical bank branches or excluded from the financial system due to poor credit or lack of funds. Because of the decentralized way that blockchain-based payment systems work, they empower people with the 4S’s of payments, namely how they spend, save, send, and secure their money.
However, for this to work we will need open and interoperable payment rails — universal, open, and user-directed payment networks. Extending the perimeter of the formal economy while lowering the costs of service is not only altruistic, it’s a means to market expansion and lowering risk from the reliance on opaque financial networks.