Crypto and financial inclusion: a step forward for DeFi

Crypto and financial inclusion
Crypto and financial inclusion

Cryptocurrency was created for the sole purpose of being a better alternative to traditional finance. That’s because a centralized financial system requires a lot of customer information and is usually sluggish due to severe bureaucracy. However, with crypto, things are different. If you want to buy Bitcoin, there are no requirements on your credit score, and you won’t have to provide evidence on your personal documents. You only need money in your account and a digital wallet to store your bitcoins. 

With that being said, it’s safe to say that the crypto sector can allow regular customers to control their finances better and build a stable future. Still, as the crypto market is known as volatile, beginners have fewer chances to create a long-term portfolio since Bitcoin, at least, is more difficult to mine, and investing can be challenging.

Despite these challenges, the crypto sector can help with financial inclusion through blockchain technology and DeFi applications. Here’s how.

Financial inclusion and its limitations

Financial inclusion means ensuring everyone can access financial products, from individuals to companies, such as transactions, payments, savings, credit and insurance. Financial inclusion aims to facilitate daily living and business plans to prepare people for unexpected emergencies.

The pandemic brought the most significant shift from fiat money to wireless payments and online shopping, which improved the digital financial sector. The need for digital financial inclusion increased as people were in need of products delivered to their own houses, and companies had to adapt to current situation challenges and customer demands. 

But above all, financial inclusion mitigates the adoption of financial inclusion in under-developed and developing countries whose existing financial institutions can’t handle the difficulties and economic struggles.

However, financial inclusion presents some limitations, such as the following:

  • Financial literacy is at low levels in many countries, which is what prevents individuals and some businesses from being able to save up money;
  • The formal identification requirements can be either too strict or difficult to provide for all people;
  • The security and reliability of financial products are questioned heavily as these institutions don’t always invest in these sectors;

How can crypto improve financial inclusion?

When it was created in 2009, after a disastrous economic crisis, Bitcoin’s purpose was to allow people to send money over the Internet. Still, it would be used without the central control of traditional institutions. After Bitcoin, more cryptocurrencies were released to the market. Besides buying and selling, people also had the possibility to invest and trade with these coins in order to preserve their value and make more money.

Unlike official financial services, cryptocurrencies ensure transparency and can reduce corruption thanks to a decentralized ledger that supports the use of crypto. Blockchain technology creates an ecosystem where anyone, from anywhere, can make crypto transactions.

The role of cryptocurrencies in advancing financial inclusion approaches the following aspects:

  • Leveraging instant settlements that can take only up to a few minutes or seconds instead of weeks;
  • Improving capital optimization through lack of control from custodian banks and intermediaries, reducing risks;
  • Increasing financial solutions in times of crisis that can help customers avoid losing their funds and companies going bankrupt;
  • Reducing human errors in handling customer information since blockchain data is immutable, so it’s recorded in real-time;

Why is decentralized finance the solution for crypto and financial inclusion

DeFi (decentralized finance) platforms are built on blockchains and offer customers the opportunity to choose between various financial services they can use without the involvement of an intermediary. DeFi means empowerment, as people and businesses can benefit from peer-to-peer digital exchanges without dealing with fees that regular banks include.

Decentralized finance approaches the following:

  • Accessibility to DeFi platforms and transactions through internet connection;
  • Low fees and high-interest rates with the help of DeFi networks;
  • Security and transparency with the use of smart contracts;
  • Autonomy, as DeFi platforms mitigate risks and are not subject to bankruptcy;

Of course, being a relatively new sector, using DeFi presents challenges, such as a high level of volatility, which is present in any cryptocurrency-related product or service. Unfortunately, as blockchains are more populated, the effects on cryptocurrency are diverse, meaning their price can be affected by supply and demand and media coverage.

At the same time, participating in DeFi is complex to understand, considering all the technical requirements and terms that must be studied thoroughly. Luckily, there’s a considerable effort to make cryptocurrency get into the mainstream and be adopted by worldwide economies.

Finally, despite its protection against bankruptcy and adversity, it can still be at risk of fraud and scamming. Blockchains are mostly safe, but when it comes to users protecting their private and public keys, things are similar to regular scamming forms.

Few DeFi use cases in real-world financial inclusion

DeFi, although not that popular among individuals, has already been approached by companies to ease some of their financial activities. Here are some examples of how can DeFi applications make financial inclusion more efficient:

  • Data analytics can be improved with the help of transparency and decentralization by mitigating risk management and finding new financial opportunities with access to data;
  • Infrastructure tooling can be introduced within DeFi protocols, leveraging security integrations with the help of smart contracts;
  • Insurance companies can develop novel insurance options to obtain coverage for protecting their crypto assets;
  • Blockchain-based petition markets can be used for crowdsourcing, but also election results, sporting events and similar events that need voting and exchanging value;
  • Compliance and KYC protocols can be improved through the KYT method (Know-Your-Transaction), through which DeFi applications are concerned with transaction behaviors and digital addresses, but not users’ identities;

Final considerations

Cryptocurrencies are only at the beginning of the road, headed for worldwide adoption. Although they lack proper regulation due to their newness on the markets, they can pave the way towards financial inclusion and freedom. With the help of DeFi applications, customers can better use their financial resources and avoid centralized banks interfering. At the same time, companies can access the resources to provide more transparency, security and decentralization.