This is the second of three posts exploring the current debate on digital dollars. This post will offer a deep dive into the potential for digital dollar stablecoins and other cryptocurrencies to promote broad financial inclusion for underserved communities. Our third and final post will contextualize the digital dollar debate in terms of the global struggle between the United States and China for hegemony in the worldwide financial system.
A strong and robust financial system is the foundation of a vibrant economy. And while the US financial system has enabled many to seek an education, buy a home, or build a business, there is still a large segment of the US population that doesn’t have access to the basic banking or payments services that serve as an entry point to the broader financial services ecosystem. The COVID-19 crisis and the CARES Act response have shown in stark relief the inherent shortage of banking services and inefficiencies in payment disbursement. Relief checks moved slowly and unemployment services were overwhelmed. Additionally, the nationwide protests following the death of George Floyd have metastasized from a focus on policing practices to a society-wide analysis of inequities through our shared systems. What is clear is that these two crises have brought to the fore long-standing problems. Our view holds that there are existing technologies and tools that, while not a cure-all, can create a more open, more equitable financial system.
The 2017 FDIC National Survey of Unbanked and Underbanked Households reported that 6.5% of households are unbanked and 18.7% of U.S. households are underbanked. Together, the unbanked and underbanked represent 63 million adults. According to the survey, the most common challenges these individuals face are not having enough money to open or maintain a bank account, a lack of trust in the banking system, privacy concerns with banks, and high fees when using a bank account. Let’s take a closer look at some of the responses from this survey, and how stablecoins, particularly reserve-backed stablecoins, can address those issues.
Lack of funds
52.7% of the FDIC report respondents cited not having enough money to keep an account as a reason for not having a checking or savings account, and 34% of the respondents listed this as the main reason. Stablecoin wallets do not require a minimum balance. Those who use stablecoin wallets can keep as much or as little money in their digital wallets as they want. These wallets provide places for individuals to securely store money like traditional bank accounts, and they offer this service without any restrictions on how much money must be kept in the account at any given time. We have yet to see most merchants adopt stablecoins as a form of payment for everyday goods and services, but we anticipate that this will quickly change.
Lack of trust
In the FDIC report, 30.2% of unbanked or underbanked respondents cited not trusting banks as a reason to not have a bank account, and 12.6% listed it as the main reason. Stablecoins, as well as other cryptocurrencies, are uniquely suited to create more trust for individual users since they allow individuals to own and control their money by giving users the option to self-custody their funds. In a way, stablecoins function like cash because users keep their stablecoins in digital wallets. Digital wallets allow individuals to manage their own money or opt for another crypto institution to oversee their funds. If individuals choose to have personal custody of their funds, they do not cede control of where their deposited funds are stored, loaned out, or used as they do when using traditional bank accounts. Additionally, this means that all of an individual’s funds are in the user’s account, so stablecoin users can withdraw their entire account holdings at any time without advance notice. Stablecoins challenge traditional banks because they are more transparent about where exactly a user’s money is stored as well as providing users a choice to control their money.
Lack of privacy
Another reason that unbanked and underbanked individuals avoid bank accounts is concern for privacy. 28.2% cited this as a reason, while 3.0% listed it as the main reason. Stablecoins offer users more privacy than traditional banks because they offer self-custody and rely on peer-to-peer (P2P) payment systems to process transactions. If individuals choose to self-custody their money, the ways in which they spend and move money remain private since there is no third party overseeing their accounts. The second source of privacy, P2P payment systems, allow users to transfer money directly between two individuals, circumventing the traditional banking system.
More fees more problems
Finally, 24.7% of individuals in the FDIC report cited high account fees as a deterrent to using a checking or savings account. Of these individuals, 8.6% cited this as the main reason. The CFPB’s Consumer Guide to Managing a Checking Account lists different fees that individuals could be charged when using a checking account, including overdraft fees, monthly service fees, ATM fees, and non-sufficient funds fees. In 2015, overdraft and non-sufficient funds fees accounted for approximately 65% of consumer deposit revenues for banks with more than $1 billion in assets. Stablecoins have far fewer fees than traditional banks due to the inherent cost savings offered by blockchain technology. There are no intermediaries or governments involved in processing cryptocurrency transactions, which reduces the cost of validating and processing transactions.
Bye bye brick and mortar banks
The growth of cryptocurrency use is supported by the general increase in the amount of basic services that can be conducted online. The general population is more online than ever; more than 90% of adults in the U.S. use the internet at least some of the time. This shift to bringing core services online has coincided with the loss of physical space to conduct those same services. Since the end of the last financial crisis, more than 10,000 bank branches have closed. Many Americans live farther and farther from proper banking services or live in an outright banking desert. However, as our lives have grown online, the loss of physical banking outposts can effectively be replaced by digital, blockchain-native services.
The problems with the current banking paradigm are not confined to the U.S. Another example of a service in which cryptocurrencies have challenged entrenched traditional banking and financial services is remittances. For legacy services, the World Bank found that the global average cost of sending $200 to a friend or family member abroad in the first quarter of 2020 was 6.8%, or $13.60, and international wire transfers typically take 2–5 days to clear. Not only do individuals in legacy systems face high fees and wait times, but they are offered limited options of how and to whom they can send money internationally. Only those who are banked abroad or who are able to access transfer service groups like Western Union can receive money. However, individuals who send money in the form of cryptocurrencies or use cryptocurrencies as a bridge asset can make these transactions at a fraction of the cost of traditional systems, as the average fees associated with cryptocurrency use are less than $0.89 per transaction. Crypto transactions occur within a matter of minutes or even seconds, not days, and any person with an internet connection is able to send and receive money via crypto services. The World Bank estimates that more than $529B in remittances flowed to low and middle-income countries in 2019. This massive market could be greatly improved by adopting blockchain-based technology to speed transfers, lower fees, and make sending money as easy as texting a relative abroad.
Stablecoins provide benefits within the system too
Stablecoins not only provide help to unbanked or underbanked individuals, they also help individuals who are current participants in the financial system. The speed, low cost, and low barriers to entry that stablecoins offer give current bank users more options of how to interact with the financial system. The clear benefits that cryptocurrencies provide users will also put competitive pressure on legacy institutions to improve their offered services. In turn, this pressure will have secondary effects, as lower fees and barriers would make traditional services more accessible to minority and historically disadvantaged groups.
By design, stablecoins have the elements necessary to build a better financial system. The dual crises of a global pandemic and renewed focus on structural discrimination have exposed the deep flaws in our financial systems. Cryptocurrencies, while often dismissed as a fad or a speculative investment, offer real opportunities for those currently languishing outside the traditional banking system to make their own way to financial inclusion. The clear benefits of these tools will also put bottom-up pressure on big banks to listen to consumers, or risk being left behind as their customers and potential customers look elsewhere for improved services. In order for the financial system to realize its purpose as a utility of society at large, it should adopt these technologies before being swallowed by them.