Decrypt: DeFi: A lifebuoy for the unbanked


There are over 200 crore people in the world without a bank account. India itself has over 19 crore adults without a bank account despite the success of the ambitious Jan Dhan Yojana making it the world’s second largest unbanked population, after that of China, as per a World Bank Report (2019). In El Salvador, for example, 70% of citizens are unbaned and roughly one  quarter of the working population lives in the US, from where they send remittance paymetns to their families back home. One can only imagine the financial bottlenecks and steep restrictions they face. 

Even if the worker is able to obtain access to the banking system, often their intended recipients cannot. As such, many rely on wire services that are expensive, which leads to the poorest paying the most in fees. A challenge banks face when tryign to serve the unbanked is that many of them do not have a clear ID (no birth certificate or police registration) to satisfy the Know-Your-Customer (KYC) checks. With the endorsement of regulators, blockchain tech can help financial institutions to simplify their KYC practices by giving individuals their own digital identities to use for banking, property rights, etc. Thus, the unbanked can make and receive payments with blockchain, and remittances to foreign countries will also be painless and much more efficient. 

Traditionally, micro-transactions are incredibly costly for banks to handle, and these frequent payments would increase the transaction volumes enormously, presenting severe technical challenges to banks, not to mention the charges customers need to pay to banks are often very high. But decentralised finance (DeFi) is capable of substantially lowering operational costs for these financial institutions. With blockchain and crypto, micropayments are no longer a problem. Blockchain can handly the transactions for just a fraction of the cost, giving people the convenience and greater security for their money. With the volatility of Bitcoin reducing, it has slowly become a favourable alternative asset for mainstream finance. 

Now, the financial ecosystem built upon the blockchain continues to build itself out, and the burgeoning decentralised world of finance can offer further services to the unbanked. Companies like Aave and Compound currently provide decentralised borrowing and lending services that don’t require KYC or credit scores. The system is instead automated through the use of smart contracts and only requires certain collateralisation thresholds. Obtaining any kind of substantive loan in the poorest parts of the world is virtually unheard of, but the decentralised finance industry will make it possible in the very near future. 

Knowing that even the simplest tasks, such as building savings or receiving money can be difficult for those who don’t have access to a bank account, some blockchain companies have already started working towards a future without financial exclusion. 

India, with its unbanked population has a lot to gain from crypto and more importantly blockchian. Several start-ups have started identifying opportunities to tap this burgeoning market, which augurs well for the nation. The days of micro finance, microloans and micro insurance are not for and will benefit India’s unbanked for years to come. 

The writer is Founder, India Blockchain Alliance

Billionaire investor gives a thumbs down to crypto

Charlie Munger (97), the billionaire investor and executive at Berkshire Hathaway recently said that he still wasn’t a fan of cryptocurrency. Speaking at a conference in Sydney last week, he was quoted by a financial daily as saying, “I wish they’d never been invented.” He went on to voice his support for China adding that, “I admire the Chinese. They made the correct decision, which was to simply ban them.” In 2021, the global interest in digital assets has spiked, with the crypto market summarily surpassing a market value of $3 trillion in November. Top coins like bitcoin also hit record highs. 

Disclaimer: Cryptocurrency is an unregulated digital asset and is subject to market risks.