The intersection of finance and technology offers an opportunity to reimagine and reshape the structure of the current financial sector. With the advent of blockchain-enabled decentralised finance (DeFi) giving rise to Web 3.0, a worldwide shift towards transformation in the global financial sector and potential reshaping of socioeconomic systems is on the cards.
Cryptocurrencies began as a peer-to-peer payments system without involving traditional financial systems. The sector has evolved since then, offering more comprehensive financial tools in the form of DeFi. As of today, approximately US$ 82.35 billion worth of cryptocurrencies are tied to DeFi contracts, four times more than that of a year ago. Traditional financial institutions have taken note of these tools and are poised to engage with the sector sooner or later.
As of 2017, 1.7 billion adults around the world remained unbanked, mostly in the developing world with nearly half living in seven developing economies: Bangladesh, China, India, Indonesia, Mexico, Nigeria, and Pakistan. About 56% of those who remain unbanked are women, according to the World Bank report.
Understanding the Challenges in Financial Inclusion
The lack of financial literacy and identification documents among populations in developing countries pose challenges in achieving a higher rate of financial inclusion. These challenges are exacerbated by historical gender inequality and the lack of access to credit for the rural poor. Often, financial inclusion is limited to the opening of a bank account. However, it does not truly translate into inclusive finance.
Take, for instance, the Pradhan Mantri Jan-Dhan Yojana (PMJDY) of the Indian government, which enables the direct transfer of subsidies and social benefits to a person’s transaction account. While the scheme has banked 44.95 crore beneficiaries since its launch in 2014, it still has over 5.82 crore accounts that remain inoperative as of 2021.
Often, financial inclusion is limited to the opening of a bank account. However, it does not truly translate into inclusive finance
Opening these accounts has improved financial inclusion in India aided by the adoption of payment mechanisms, such as the Unified Payments Interface (UPI), which enable inter-bank peer-to-peer and person-to-merchant transactions. However, true financial inclusion is still a distant dream.
A composite Financial Inclusion Index (FI-Index) to capture the extent of financial inclusion across India by the Reserve Bank of India (RBI) indicates that the annual FI-Index for the period ending March 2021 is 53.9 as against 43.4 for the period ending March 2017. Lack of access to traditional lending channels is still a major problem for nearly 50.7 million enterprises accounting for 80% of the 63.4 million Micro, Small and Medium Enterprises (MSMEs) in India, claims the Association of Chartered Certified Accountants.
Creating an Inclusive & Accessible Future with DeFi
Providing financial services without relying on a centralised intermediary can be a gamechanger for both MSMEs and those left out of traditional banking. Applications such as payments, lending, and insurance through DeFi, operate on blockchain technology and deliver financial services based on specific rules and protocols through decentralised networks and digital tokens.
DeFi is an opportunity to come together to build an inclusive financial future. We can overcome many of the inequities and biases of traditional financial systems by leveraging today’s best financial practices, technology, and lessons learnt from previous experiences
DeFi is an opportunity to come together to build an inclusive financial future. We can overcome many of the inequities and biases of traditional financial systems by leveraging today’s best financial practices, technology, and lessons learnt from previous experiences.
Though this sounds idealistic, it is achievable, but only if the process of creating this new financial future is itself inclusive and representative. Extending opportunities to women and minority groups, including those who are historically overlooked, thus becomes vital. Bringing these demographics to the table to design and develop a shared global financial future will help facilitate a transformation that is truly inclusive and accessible.
Weeding Out Biases
As blockchain enables data to be stored and shared in a secure manner, it complements the increased adoption of Artificial Intelligence (AI) and Machine Learning (ML) in the financial sectors. AI/ML models can use the data stored in a blockchain network to make predictions or for data analysis to generate insights in real-time.
All stakeholders must continue and try to ensure that the financial systems of the future are representative and do not carry forward historical biases
However, AI is still an emerging space and there is room for improvement. There have been instances of algorithmic biases that often reinforce inequality and discrimination in advertising, hiring, insurance pricing, and lending.
Within the digital asset space, the Global Digital Asset and Cryptocurrency Association is bringing together diverse groups of industry representatives, businesses, and verticals to ensure sufficient representation from a variety of communities. The aim is to minimise some of the present algorithmic biases. It is an area where all stakeholders must continue and try to ensure that the financial systems of the future are representative and do not carry forward historical biases.
Forging Partnerships
The next leap in financial inclusion can be achieved by a blend of traditional financial institutions and DeFi institutions. It’s still in the early stages, but businesses in the traditional financial sector are already starting to understand the value of this blend.
For banking institutions, a decentralised approach helps optimise operation costs, through either crypto or tokenisation, a major focus area for banks
For banking institutions, a decentralised approach helps optimise operation costs, through either crypto or tokenisation, a major focus area for banks. Soon, we may see a migration into the space at first by leading businesses in the decentralised financial area, followed by traditional banking institutions.
It is essential to be pragmatic in regulating the sector so that both traditional finance and emerging DeFi startups can leverage the best of the technology. It’s also essential to find a balance between embracing innovation, enhancing opportunities, and protecting Indian consumers.
Kristin Boggiano
Gabriella Kusz
Guest contributors are Kristin Boggiano, President and Co-founder at CrossTower and Gabriella Kusz, Board of Directors at Global Digital Asset and Cryptocurrency Association. Any opinions expressed in this article are strictly that of the authors.
