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Digital assets: Banking the unbanked and solving hyperinflation
- Hyperinflation is a growing problem for countries across the globe, such as Lebanon, Venezuela, and Argentina
- In many countries, like Morocco, Vietnam, and Egypt, high proportions of the population remain entirely unbanked
- The cost of sending money abroad can be extremely high
- Digital assets have the potential to solve these problems and make financial services available to everyone
A functioning financial system is a cornerstone of any economy. Yet in many countries, the devaluation of national currencies, high remittance costs, and a lack of access to financial services mean the financial system is not functioning as well as it could for millions of people. Can digital assets solve these problems and help those living in the world’s most challenging financial environments?
The burden of hyperinflation
Much of the world is currently suffering from high inflation. However, while inflation in the UK, the US, and the Eurozone has reached high single-digits, it is dwarfed by the figures in countries such as Sudan, Venezuela, Syria, Turkey, Zimbabwe, Argentina, and Lebanon, where the inflation rates exceed 50%.
For example, inflation in Lebanon reached 208% in March 2022. For Lebanon's residents, the simplest things, like saving for retirement in their local currency, are becoming an impossibility. If a Lebanese resident saved for a 20-year pension in March 2021, their savings would only last for 6.5 years one year later.
This hyperinflation is also leading to a situation where the exchange rate of the Lebanese pound to other world currencies is no longer clearly defined. For example, a meal at a restaurant could easily cost $50 if paid in cash or with a Lebanese card, but $1,000 if a foreign bank card is used. While officially, $1 is equal to around 1,500 LBP, in the real economy $1 could be worth more than 25,000 LBP. In short, it is difficult to know what the currency is really worth.
The government’s intervention is not helping the situation, as it looks to introduce extreme measures to tackle the debt crisis engulfing the country. Banks have reportedly locked savers out of their accounts, while a government “blueprint plan" aims to convert 75% of hard currency deposits into local currency, according to Reuters. This would result in a huge loss of purchasing power due to the official exchange rate not reflecting the currency’s value on the open market.
Hyperinflation is only part of the problem. In many parts of the world, few have access to any financial services. For example, large swaths of the global population remain unbanked, particularly in some parts of Africa, South America, and Asia. According to a 2021 report by British research platform Merchant Machine, Morocco, Vietnam, Egypt, Philippines, and Mexico have the largest percentage of unbanked populations worldwide.
Meanwhile, those that do use financial services are often crippled by high fees. This is the case for migrant workers from developing nations going abroad to support their families back home. According to the World Bank, the average cost of sending money across international borders is 6.4%, costing these families a significant portion of their monthly income.
One of the largest markets for remittances from the US is El Salvador. In 2020, the country received nearly $6 billion in remittances, with an estimated $180 million of this lost in fees. The most commonly used service was Western Union, which charges up to 30% to send money abroad, depending on the transaction amount.
The promise of digital money
These challenges to financial systems are still significant and have remained unsolved for decades. With the advent of numerous fintech platforms over the last few years and a general reduction of costs through the adoption of digital payment services, we have seen some improvement. However, the lack of a standardized solution, coupled with applying the same identity restrictions that have contributed to the original issue, merely seems to be compounding the problem. Digital asset solutions and DLT have the potential to tackle these issues, helping many of the poorest populations across the world to hold onto, and even grow their wealth.
El Salvador was the first country to introduce Bitcoin as legal tender, which is expected to potentially save the country and its residents $400 million in international remittance fees. It is also conceivable that in the future, stablecoins could help nations like Lebanon to escape the devaluation of their national currencies. At the same time, self-storage wallets could protect them from the confiscation of their hard currency deposits.
Furthermore, the permissionless nature of public blockchains could help bank the unbanked populations across the globe. The high degree of accessibility means that any person with internet access can use decentralized financial applications. The research from Merchant Machine shows that internet penetration in many of the countries with the highest proportions of the unbanked population is, in fact, relatively high.
Finally, the high level of security within blockchain networks means that peer-to-peer payments can be made instantly, efficiently, and across borders without the need for intermediaries and at almost no cost. As such, blockchain technology has the potential to bring equal financial opportunities to everyone, wherever they may be in the world.