The cryptocurrency industry has recently grown increasingly bolder in selling its products to the public. Flashy TV ads, major celebrity endorsements, and renamed sports arenas provide just some examples of the industry’s growing clout. One particularly noteworthy element of this advocacy has been claims by industry leaders that the growth of crypto assets will bolster financial inclusion by providing low-income individuals easier and cheaper access to financial services—such as accumulating savings, building credit, and making payments—than those offered by the traditional financial services industry.
Increasing financial inclusion is a commendable goal. But the idea that crypto can significantly expand financial inclusion in the United States does not hold up to scrutiny. There is no systematic evidence that crypto transactions are less expensive than traditional financial transactions, and crypto assets are still primarily used for speculation instead of payments. The fundamental purpose of financial inclusion is to improve the overall economic well-being of low-income individuals, and encouraging people to use their hard-earned paychecks or savings to buy highly risky assets could do just the opposite.
The trading of crypto assets uses new technology that may improve on outdated systems and have a positive effect on the economy if properly regulated. Yet there are significant concerns regarding financial stability, volatility, market manipulation, fraud, and illicit finance. These risks must be considered in any discussion of whether crypto assets can foster the goal of financial inclusion.
While the claim that crypto supports financial inclusion may be true in certain instances—indeed, some crypto transactions may be cheap, much as how some traditional money transfers may be outrageously expensive—it does not necessarily hold for the entire industry. Advocates should stop using these talking points unless and until crypto transactions demonstrably achieve financial inclusion goals.
Defining and addressing financial inclusion
Financial inclusion is defined as access to financial products and services, such as payments, savings, and credit, that are “delivered in a responsible and sustainable way.” Financial inclusion is typically measured by the percentage of a community’s population that has access to a bank account. Individuals who lack access to any financial services are considered “unbanked,” accounting for about 6 percent of the U.S. population and disproportionately consisting of people of color. Meanwhile, individuals who have a bank account but rely on alternative financial services such as payday lending are considered “underbanked”—and comprise about 16 percent of the U.S. population.
The primary obstacle for these individuals is cost: Bank account fees, particularly overdraft fees, can be prohibitive for low-income individuals. Moreover, the cumbersome nature of the U.S. payments system, in which transactions usually take a couple of days to clear and checks can take as many as six days to clear, is a significant obstacle for individuals who live paycheck to paycheck and need access to cash quickly to cover basic living expenses.
Financial inclusion typically refers to reducing the unbanked and underbanked populations by expanding access to safe financial services. But it also has a broader goal beyond just access to a bank account: Expanding access to financial services should help reduce poverty and improve the overall economic well-being of the unbanked by enabling individuals to build savings, make financial transactions at lower costs, and better prepare for future financial risks.
Rebutting claims that crypto bolsters financial inclusion
Advocates’ claims that crypto assets can bolster financial inclusion typically include several points, including that crypto is easier to access than traditional financial services because it only requires having internet and a device; that crypto assets can help the unbanked accumulate savings without needing a bank account; that crypto assets can help the unbanked make payments more easily than using existing financial services; and that crypto assets can help the unbanked invest their money without the need for traditional intermediaries such as banks.
These claims have become more prominent as Congress has grown increasingly interested in drafting new legislation to address crypto assets and as federal regulators have ramped up efforts to use existing authorities to crack down on illegal activities and protect investors. In recent congressional hearings and elsewhere, industry leaders and lawmakers have used many of these talking points. The subtext of these claims seems to be the implication that stronger regulation would reduce the potential for financial inclusion.
This rhetoric is illogical on several counts.
First, even though fees for money transfers and bank accounts can be high, crypto asset fees are often even higher. Crypto networks charge transaction fees, often at a steep rate. Notably, so-called gas fees on the widely used Ethereum blockchain can be extremely high, even for small transactions. Recent investment enterprises such as ConstitutionDAO—in which organizers crowdfunded millions of dollars in an unsuccessful effort to purchase a copy of the Constitution but then struggled to return funds to investors and accumulated high fees while doing so—have demonstrated both how quickly fees can pile up and that such fees are most likely to hurt the smallest investors.
Second, the inherently speculative nature of crypto assets is at odds with the purpose of financial inclusion. Crypto assets are still an especially risky form of investment, and consumer protections are lax. Well-documented problems in crypto markets, such as price volatility, crashes, fraud, market manipulation, “rug pulls,” and outright theft, cast doubt on advocates’ claims that crypto assets can help the unbanked safely invest their money, especially since low-income individuals could be most at risk of losing their money in the event of a crypto-related financial crisis. All investing entails some risk, but the risks involved in crypto markets are particularly high. Even stablecoins—assets that are technically designed to maintain a stable value—currently pose significant systemic risks, are utterly lacking in consumer protection beyond the promises made by issuers, and are scarcely, if at all, used for normal payments at present.
The inherently speculative nature of crypto assets is at odds with the purpose of financial inclusion.
Third, individuals still typically require a bank account to use crypto assets. In order to purchase crypto on a reputable exchange, customers must deposit funds in an online account from a debit card or bank account. Likewise, since crypto assets cannot be used widely for payments, when holders need to sell their crypto for cash, they usually require a bank account to deposit the cash they received from the sale. While it is true that trading crypto assets technically only requires internet access and a device, the same can be said about having a bank account—and research has shown that lack of internet access itself increases one’s probability of being unbanked and outside the financial system.
Finally, crypto assets do not fundamentally fix the problem that financial inclusion seeks to solve. The goal of financial inclusion is more than just easier and more accessible financial transactions; it is making sure individuals and households have better financial stability and economic well-being. Crypto assets use a new technology that can make old processes more efficient, but there’s no proof they reduce income inequality or put more money into people’s pockets. Crypto simply offers a new way for individuals to transact and speculate with the money they already have.
As Sen. Sherrod Brown (D-OH) recently put it: “Allowing more people to trap their money in risky, speculative investments isn’t the kind of financial inclusion we need. It’s not going to do anything to help Americans working hourly jobs who don’t put their paychecks in the bank because of abusive fees.”
Couching crypto assets in the language of financial inclusion is, at least today, wishful thinking. While crypto may have potential as an easier and cheaper method of making international money transfers and supporting financial inclusion abroad, that does not necessarily mean it bolsters financial inclusion at home. Lawmakers—especially those genuinely interested in the goals behind financial inclusion—should be careful to use this rhetoric until the industry can prove that it is actually helping the unbanked better than the traditional financial services industry.
Allowing more people to trap their money in risky, speculative investments isn’t the kind of financial inclusion we need.
Sen. Sherrod Brown (D-OH)
In the meantime, there are other ways in which policymakers could meaningfully increase financial inclusion. Congress could pass legislation scaling back banks’ ability to charge overdraft fees and amend existing legislation to require more money in deposits to become instantly available, reducing two of the main barriers to the unbanked and underbanked populations. Congress could also establish a system of low-cost banking through the U.S. Postal Service. Finally, large banks should be encouraged to offer basic low-cost accounts—which many already do.
These policy changes would likely have a more tangible effect on increasing financial inclusion than simply letting crypto markets expand unabated.