Blockchain Technology Offers Multiple Pathways to Financial Inclusion for the Unbanked

Financial inclusion, accessible services, and the unbanked are standard talking points in many crypto conversations. But the details may remain somewhat hazy – the people talking about crypto are usually those who are already inside the financial system. There are people actively working to increase financial inclusion and access to services for the large number of people who are unbanked or underserved.

CBDC for people

Central bank digital currencies (CBDCs) will serve different purposes in different places. In economies where individuals have moved away from high levels of cash use, such as those in the US and UK, there will be relatively little retail demand for CBDCs, but there are places where species are rare and CBDCs can serve to increase fundamental opportunities for prosperity and economic growth.

nChain is working with central banks to facilitate the use of CBDC through its Digital Cash product. nChain Chief Commercial and Strategy Officer Simit Naik – who has worked in West Africa – told Cointelegraph that CBDCs in this region should “ensure continued access to an inclusive and stable form of central bank money for citizens, when the use of physical money decreases.”

Only having access to physical money limits people to the most basic forms of transaction. A CBDC would open up access to the digital economy and introduce new business models by supporting micro- and nano-payments. Broadband access to participate in the digital economy would be rare, but mobile phone penetration and connectivity is “much greater” than one might expect, Naik said. According to the GMSA – a mobile communications association – there were 5.3 billion unique mobile subscribers worldwide in the second quarter of 2022.

A CBDC can save central banks money and time by providing real-time access to data to inform monetary policy. A typical implementation of the nChain Digital Cash product would be for the central bank to dedicate a portion of its reserves as collateral for digital cash. Next, nChain would support the central bank as it minted and distributed digital money tokens on a one-to-one basis with the guaranteed reserve money. It is important that the CBDC is intermediary-free, as it can be used in places where no financial infrastructure exists.

The salary of civil servants would be paid in CBDC at first, then it would be distributed to traders. The central bank could also use it to make payments, such as welfare and stimulus payments, directly to the public.

Related: Here’s what’s happening in Web3 across Africa

Like Digital Cash, the goal of nChain’s Digital Money solution is to provide access to financial services to people who have traditionally not had access to these services. However, the Digital Money product is account-based, which allows it to model more traditional forms of money. Commercial banks and fintechs can use it to introduce new financial products. It can be used for microlending and for tokenization of assets and commodities, allowing people to become investors, as brokerage services are regulated but do not necessarily require a broker.

The benefits of a credit score

Another approach to expanding access to financial services is to create visibility for the billions of people who do not have a credit score. According to Brendan Playford, founder of Pngme and Masa Finance, 1.5 billion people worldwide have credit scores and 3.3 billion people are “credit invisible”. This means that they are creditworthy, but their credit history is not associated with them in the traditional banking system. An accessible credit score is a prerequisite for many financial services, especially credit, and it can impact identity verification and access to insurance.

Targeting a billion people, the mobile money economy, and the processing of data from peer-to-peer micropayments made through established providers can enable the scoring of people previously invisible to credit. In Africa, only 20-30% of the population have a credit score. Pngme has partnered with credit reporting service TransUnion to use mobile money data to increase that level to 60-70%. According to the GSMA, mobile money transactions in sub-Saharan Africa were worth $697.7 billion, out of a global total of $1 trillion, in 2021.

Banks in Africa “struggle to serve underserved markets, so Pngme privately provides an infrastructure for an end user to build a credit score where they otherwise couldn’t,” Playford said.

Data captured by Pngme is one of the data sources used to generate on-chain loans through Masa Finance. Masa Finance is a decentralized credit protocol that connects off-chain credit data to decentralized finance (DeFi), creating a “soul-bound” credit profile non-fungible token (NFT). Masa uses the mobile-friendly and scalable Celo blockchain to lend small amounts using anonymized data for underwriting and stablecoins as settlement currency that can be converted to fiat or cryptocurrency. Playford told Cointelegraph:

“Inclusion is really about choice. If you’re underserved and need funding, you can find it, but your terms are incredibly unfavorable. This technology creates a fairer ecosystem, where more people can offer products in an open setting.”

Masa Finance recently announced the completion of pre-seed financing and expects a full-scale launch in three to six months. A testnet has been launched and its mobile app is in beta and has around 40,000 users. The app will include 10,000 data sources in 78 countries when fully operational in the coming weeks.

“The reality is that all the work I do disrupts the way banks have a monopoly on lending. We are building an ecosystem that serves the top to the bottom of the pyramid,” Playford said.

Accessible banking services

DeFi can combine with traditional banking services to offer the best of both, providing services to the unbanked and enhancing the services available to those already inside the system. EQIFi, a decentralized financial platform, is backed by EQIBank, a fully regulated digital bank licensed in Dominica. EQIFi provides a platform for DeFi products while working with EQUIBank accounts, loan custody, OTC, and wealth management. It also offers peer-to-peer transfers and microloans.

“Not everyone needs a loan that requires a credit score,” EQIFi founder and CEO Brad Yasar told Cointelegraph.

The cost savings associated with decentralized finance allow EQIBank and EQIFi to operate in parts of the world where a large corporate bank would find it prohibitively expensive to do business. yasar said:

“We wanted to create a platform that combines decentralized finance with traditional finance in a way that opens doors for everyone.”

Due to its link with EQIBank, EQIFi is also subject to regulatory requirements and is registered in the British Virgin Islands and Dubai. Yasar is a strong advocate for regulation and transparency in the crypto space.

EQIFi products also offer financial inclusion in the form of “the kind of rates and returns that were previously only available to institutional investors and the wealthy elite,” according to promotional materials. Yasar described the platform’s yield aggregator as its “crown jewel”.

“Licensed and regulated projects like EQIFi are paving the way for a transition from high-risk, anonymous DeFi platforms to safer and more transparent versions,” Yasar told Cointelegraph earlier. “With DeFi, we can offer more cheaper products to a much larger portion of the world’s population.”

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