Debunking the narratives about cryptocurrency and financial inclusion – Brookings Institution
On September 16, the U.S. Department of the Treasury issued two reports in response to President Joe Biden’s Executive Order (EO) on Ensuring Responsible Development of Digital Assets, which requires government agencies to develop frameworks and policy recommendations that advance six priorities, one of which being financial inclusion. Among the Treasury reports was Crypto-Assets: Implications for Consumers, Investors, and Businesses, which highlighted a number of risks associated with cryptocurrencies.1 Two important points were raised: First, that “the potential financial inclusion benefits of crypto-assets largely have yet to materialize.” And second, “while the data for populations vulnerable to disparate impacts remains limited, available evidence suggests that crypto-asset products may present heightened risks to these groups.”2
With these two points in mind, it is crucial to emphasize that crypto’s current state and its potential are very different, including when it comes to financial inclusion claims. Moreover, exploring a technology’s potential should go beyond its upsides, since there are both existing risks and drawbacks as well as future ones if the sector continues to grow. Until more evidence is available regarding the technology’s progress or adequate consumer protections, policymakers should be wary of claims that crypto will bolster financial inclusion.
Numerous narratives exist regarding crypto and financial inclusion, each addressing a different set of needs or group of individuals. But a closer examination of these narratives reveals a mismatch between what crypto can actually provide and the needs of the groups it purports to serve. This piece will explore crypto’s potential to exacerbate unequal financial services to historically excluded groups, and how policymakers and regulators can protect retail investors and consumers while addressing financial inclusion in ways that do not require crypto.
Analyzing the narratives regarding crypto and financial inclusion
When it comes to cryptocurrencies and financial inclusion, the unbanked, underbanked, Black, and Latino or Hispanic communities often get lumped together in reporting, survey results, or even the crypto industry’s marketing.3 Often, this is done without acknowledging that while some of these groups may occasionally overlap, they may also have entirely different crypto usage rates and, more importantly, markedly distinct financial needs and objectives.
According to a recent survey by NORC at the University of Chicago, nearly 44% of Americans who own and are trading crypto are people of color.4 A recent Federal Reserve report also noted that a small but growing number of underbanked individuals were trying their hand at crypto.5
Additionally, the 2022 Ariel-Schwab Black Investor Survey found that 25% of Black Americans surveyed owned cryptocurrencies; that number jumps to 38% for Black investors under 40. Black survey respondents were also less trusting of the stock market and financial institutions, perceive the stock market as more risky and less fair, and have less trust in people and more trust in technology than white survey respondents. It is important to note that this survey compares Black and white survey respondents with average household incomes of $99,000 and $106,000, respectively, which is a far different level of income than a typical unbanked or underbanked household.6
What these groups—the unbanked, underbanked, and Black and Latino or Hispanic communities—may have in common is that historically, they, their families, and their communities have been denied access to traditional financial institutions and their services.7 Therefore, it is understandable that they seek alternative financial service providers for making transactions and generating wealth.8 Nevertheless, it is important to clarify what groups, problems, or pain points crypto is striving to address, particularly if we aim to examine the industry’s claims and narratives pertaining to financial inclusion.
There are many narratives about financial inclusion related to crypto, but two stand out:
When we examine the two narratives together, we can see that they have two competing objectives in direct conflict with each other. Thus, when it comes to crypto and financial inclusion claims, it is not entirely clear which problem we are trying to solve.
The stated objectives and implied use cases in the above narratives do not seem to align with the actual needs of the groups crypto proponents claim to serve. The recent collapse in cryptocurrency markets have only heightened the need to scrutinize crypto’s risks and drawbacks.12
Many crypto platforms (such as exchanges) typically require a bank account to use cryptocurrencies, so this defeats the purpose of serving the unbanked.13 In this context, some crypto proponents may argue that discussions about financial inclusion are only relevant to peer-to-peer transactions made directly on a blockchain, or crypto network, without the need for crypto platforms. However, crypto networks also have their own drawbacks and don’t necessarily address the needs of the unbanked.
For instance, scholars have noted that what unbanked populations really need are simple, safe, and inexpensive ways to save their money, as well as convenience.14 According to a 2019 Federal Deposit Insurance Corporation survey, 29% of respondents cited not having enough money to meet the minimum balance requirements as the main reason for not having a bank account. Another 7.3% cited high bank account fees as their main reason, while 16.1% cited distrust of banks. The survey also indicated that unbanked populations already use products such as prepaid debit cards to make financial transactions, including paying bills, making purchases, depositing checks, and withdrawing cash at ATMs.15
Moreover, many low-income Americans struggle with the cumbersome and outdated U.S. payment system.16 Delays in financial transactions can pose significant obstacles for families and individuals who live paycheck to paycheck and need their checks to clear so they can pay for basic things like rent, food, bills, and child care.17
Unfortunately, cryptocurrencies are notoriously volatile, and their dramatic price fluctuations make them unsuitable and unreliable as a means for payment.18 Other scholars and technologists have also pointed out that blockchain and decentralized systems do not scale well.19 Depending on a crypto network’s volume at a given day or time, conducting transactions using cryptocurrencies can be slow, costly, and inefficient.20 Crypto also has many hidden fees that few people know about, as there is a difference between a cryptocurrency’s network fees and the fees of crypto platforms such as exchanges, trading apps, and ATMs—which, when combined with network fees, can be quite expensive. Thus, crypto does not necessarily address some of the main barriers for the unbanked to acquiring a bank account, including concerns about costs and high fees.21
Due to the tremendous volatility of cryptocurrencies, some proponents argue that stablecoins—a subcategory of cryptocurrencies—are better suited for making payments because they are meant to be pegged to the U.S. dollar or another fiat currency. However, presently, stablecoins are primarily used to facilitate the trading, lending, and borrowing of other digital assets within the crypto ecosystem—not outside of it.22 Thus, this discussion regarding stablecoins’ use for payments purposes is still primarily in regard to the technology’s potential rather than its present use.
While conversations at the national level make the distinction between stablecoins and other cryptocurrencies clear, at the state and local levels, elected officials still discuss the broader category of cryptocurrencies as a means for making payments. For example, the state of Colorado recently announced that taxpayers could use PayPal to convert their cryptocurrencies into U.S. dollars and pay their taxes in bitcoin, bitcoin cash, ether, and litecoin—none of which are stablecoins.23
That said, stablecoins also come with their own drawbacks for unbanked individuals. A report by the World Economic Forum found that there are not many financial inclusion benefits to the use of stablecoins, as they do not address some of the main infrastructure or bank account barriers that excluded groups face.24 As previously mentioned, many exchanges require a bank account. And because stablecoins are not widely accepted for purchase on everyday goods and services (such as paying your rent, bills, or purchases at the grocery store), stablecoin holders not only need a bank account, but also a cryptocurrency exchange in order to buy stablecoins in the first place.
It is also critical to note that cryptocurrencies—including stablecoins—are rife with operational risks due to the features of the technology itself, such as its open-source software and blockchain’s distributed ledgers. For example, because cryptocurrencies operate as a software, they are susceptible to bugs and hacks.25 A number of crypto platforms, including exchanges and wallets, have also been hacked.26
Additionally, there are developers in these public blockchain spaces who maintain a considerable amount of decisionmaking power. A small group of developers, some of whom are likened to fiduciaries, have, on occasion, made a call on behalf of the larger group to address bugs or theft and altered the underlying code.27 These arrangements raise concerns, as code maintenance and repair may be delayed if the larger group of developers is not incentivized to make significant changes to the code. It is also possible that users of the network and the core group of software developers will experience conflicts of interest; for example, if private companies are paying these developers.28 These operational risks compromise the security of crypto networks and related platforms for users, which in turn undermine the use of crypto for financial transactions and wealth-building.
As for other barriers to acquiring bank accounts for the unbanked (such as distrust of banks), cryptocurrencies are not necessarily the solution. Though crypto proponents often argue that the “trustless” environment created by blockchain technology has removed many intermediaries (such as governments and banks), interactions with traditional financial institutions are often required to do things like convert cryptocurrencies into fiat currency. Many have also pointed out that cryptocurrencies as well as crypto-products and companies come with their own set of intermediaries, including software developers, miners, venture capitalists, and even centralized intermediaries and platforms such as exchanges and crypto-lending products.29
The way crypto proponents understand “trust” may also differ from the way consumers understand it. The concept of trust in crypto may be viewed as implying that if rules are transparent and followed (which is possible because of the underlying code), then users of a crypto network can have complete confidence in the system and not have to rely on any single actor. But consumers may have a different perspective on trust when it comes to their financial lives—one that places a greater emphasis on outcomes being fair and just. That is, if their wallet or network is hacked or their money is deposited with a crypto lender, they care that they can have their money returned to them, and are likely to have greater confidence in a system that can ensure this.30 Market volatility, fraud, scams, and hacks may also undermine consumer confidence in cryptocurrencies and their related products.31
Before considering crypto as a wealth-building mechanism, it is important to understand how we arrived at the U.S. racial wealth gap, as well as the barriers historically excluded groups still face when building wealth. Research shows that wealth gaps between Black and white households are not explained by individual choices, but rather by history and inheritance that reflect accumulating inequality and discrimination. Throughout this country’s history, many white households benefited from major national wealth-building policies while Black households were largely excluded; examples include the discriminatory application of the 1862 Homestead Act (which provided primarily white families with acres of land), and the 1944 G.I. Bill (which predominantly assisted white soldiers with attending college, starting a business, or buying a home).32 Meanwhile, redlining practices largely excluded Black neighborhoods from government-backed mortgages.
This legacy has been passed from generation to generation via unequal monetary inheritances, which account for a great deal of current wealth gaps.33 For example, “good debt” such as credit functions as a lever to build wealth. But research shows that communities of color are unable to build lasting wealth due to unequal access to credit.34 As some scholars have noted, “wealth begets wealth”—meaning that wealth allows access to cheaper credit terms, which can be used to buy a home, start a business, or pay for higher education. As a result, if an individual lacks wealth in the first place, obtaining credit becomes harder, which hinders their ability to build wealth.35 In the absence of credit, historically excluded communities contend with wealth-stripping products such as check cashers.36
Crypto would need to address barriers to asset-building activities and products in order to serve the needs of historically excluded groups and account for the fact that people will enter the crypto ecosystem at different wealth levels. According to the 2019 Survey of Consumer Finances, white families have the highest level of median wealth, at $188,200. Latino or Hispanic and Black families have considerably less, with median wealth levels of $36,100 and $24,100, respectively.37 Thus, while the access to and risks of cryptocurrencies may be the same for all individuals, the impacts of those risks would be felt differently. That is, should Black and Latino or Hispanic crypto-holders incur losses, their financial well-being would feel an outsized negative impact compared to white crypto-holders.38 Yet crypto narratives do not consider the discriminatory impact of historical policies and practices on present disparities, instead focusing on a surface-level understanding of wealth-building barriers for Black and Latino or Hispanic communities.
Despite the vast amount of money poured into crypto and related products over the years, crypto has not developed past the use case as a speculative asset.39 Thus, the narrative of using crypto for wealth-building for Black and Latino or Hispanic communities assumes that it can serve as an appreciative asset that can generate wealth. Here too, cryptocurrencies are a vulnerable option, because they have no intrinsic value and are not backed by anything; they are simply grounded in speculation. Cryptocurrencies derive their value from other people believing they are good investments, but if that changes, the value can quickly drop to nothing, which can be particularly risky for populations that do not have existing or inherited wealth to fall back on.40
Furthermore, while some may say that crypto’s decentralization is what makes it accessible to all and thus suitable for Black and Latino or Hispanic communities aiming to generate wealth, the growing concentration of the wealthy in these spaces demonstrates that not all cryptocurrency holders are created equal.41 For example, ownership of bitcoin is becoming increasingly concentrated in a small group of investors, with 0.01% of holders controlling 27% of the currency in circulation.42 In addition, cryptocurrency mining has become so expensive that only a small group of companies and people can afford to do it, with approximately 10% of miners controlling 90% of bitcoin mining capacity.43 And, in the wake of ethereum’s “Merge,” recent reporting indicates that the new method for approving transactions—proof of stake—may already be concentrating wealth and power, with only two IP addresses seemingly approving 46% of transactions.44 Given the concentration of wealthy investors and miners, new entrants and retail investors cannot be confident the crypto market will not be manipulated to benefit only a few.
Another common crypto narrative revolves around its ability to help individuals—in particular, immigrants—send cross-border remittances abroad. However, it is important to note that sending cross-border remittances is not necessarily about including people in systems and services they were previously excluded from, but rather about enhancing an existing system and related products. Therefore, access is not the gap being filled here, but rather cost—particularly, the high costs that come from using typical money service providers.45 Proponents claim that cryptocurrencies, and specifically stablecoins, offer a cheaper alternative to existing cross-border remittance systems by offering an option for peer-to-peer transactions, which cut out middlemen and fees.46
However, in light of the complexity of converting cryptocurrencies and stablecoins into and out of local currencies, many international crypto and stablecoin transfers are not presently a cost-effective, faster, or easier alternative to cash.47 There are costs related to exchanging cryptocurrencies into fiat currencies, and vice versa. As mentioned previously, crypto networks also come with fees, which serve as incentives to keep them running. For example, miners receive mining rewards or fees to validate transactions; these network fees can vary depending on network traffic. For users to convert their stablecoins back to U.S. dollars, they may need a bank account, since stablecoins cannot be exchanged outside the crypto ecosystem. Conversion would also still require the use of a money transfer provider if these providers are partners with crypto issuers and platforms.48 Thus, there may be on-ramp as well as off-ramp fees—that is, the fees necessary for moving fiat money onto an exchange, or fees for moving funds from the exchange into fiat money.49
Source: This was modeled on Table 2 of the WEF’s Digital Currency Governance Consortium White Paper Series’ paper on financial inclusion, “What is the Value Proposition of Stablecoins for Financial Inclusion?”50
It is also worth noting that these fees would vary across crypto exchanges, which have different fee models—from flat fees to percentage-based fees—for the various conversions of different stablecoins with fiat currencies and network transactions. For example, one estimation of total fees incurred for buying, sending, and cashing out $200 worth of tether across different exchanges varied from $5.98 to $9.58 at the lowest ranges to $80.24 to $86.44 at the highest. This was compared to $4.88 in total fees from Western Union, a money transfer provider, to send $200 from the U.S. to Europe.51
Given the technology’s risks, drawbacks, and overall limitations, we can think about cryptocurrencies as part of the legacy of “predatory inclusion.” Sociologists and other scholars, including Keeanga-Yamahtta Taylor, Louise Seamster, Raphaël Charron-Chénier, and Tressie McMillan Cottom, have examined the concept of predatory inclusion extensively in other areas.52 53 54 It refers to marginalized communities gaining access to goods, services, or opportunities that they were historically excluded from—but this access comes with conditions that undermine its long-term benefits and may reproduce insecurity for these same communities. Payday loans are an example, as they provide access to credit but come with high costs and risks.55 Subprime mortgages, which provide access to homeownership but come with high risks, are another.56 Similarly, crypto may offer access to financial services (according to the industry’s narratives), but with the caveats of high risks and insufficient consumer protections.
Similar to how proponents depict cryptocurrencies as a way to “democratize finance,” payday loans were once described as a way to promote the “democratization” of credit.57 58 Subprime mortgages were also heralded as “innovations” that would open doors for excluded communities, but ultimately decimated the wealth of Black and Latino or Hispanic communities during the 2008 financial crisis and its aftermath.59 60
Bank branch closures in low-income neighborhoods and communities of color over the years have correlated with the emergence and expansion of alternative financial services such as payday loans, title loans, and check-cashing services to meet the needs of the communities left out of traditional banking services and products.61 Crypto proponents also make claims about crypto products and services filling gaps left by traditional financial institutions’ exclusionary practices.62 Policymakers should therefore consider viewing crypto’s purported benefits as a parallel to those of alternative financial services.
Indeed, just as we see check cashing and payday lender storefronts concentrated in Black, Latino or Hispanic, and immigrant communities, we are soon likely to see bitcoin ATMs in Latino or Hispanic grocery stores, according to recent crypto industry announcements.63 64 In major metropolitan areas such as Miami, Dallas-Fort Worth, and Los Angeles, bitcoin ATMs are already clustering in Salvadoran, Colombian, and Mexican neighborhoods.65 These ATMs are notorious for charging high fees, ranging from 7% to 20% per transaction.66
Thus, in addition to prioritizing the establishment of basic consumer protections, policymakers should also ask whether, in their efforts to boost financial inclusion, they may unintentionally offer more of the same exclusionary banking practices by supporting crypto as a substitute. That is, instead of providing banking products and services for historically excluded groups the way we do for the wealthy, we are offering crypto as an alternative to what we know already works. By doing so, we may well be incentivizing the perpetuation of exclusionary and stratified banking services by monetizing the inequities and failing to address their root causes.67
Given the challenges in the crypto ecosystem, policymakers and regulators should establish a robust regulatory framework to protect consumers. With scams, fraud, and misleading information and marketing already hurting many consumers, substantial measures are necessary to address unfair and deceptive practices.
One approach to developing baseline consumer protections is to not only incorporate the same level of protections that banked individuals receive, but also to examine the consumer protections of industries that—like crypto—claim to fill gaps in financial services for low-income consumers and those excluded from traditional banking services. As already mentioned, these industries include payday lending and check-cashing services as well as money service providers and their remittances services.
In reviewing these industries, policymakers can identify not only consumer protections and whether they are working, but also the challenges regulators have faced in ensuring communities at the margins are not exploited and how to address those issues early on. For example, when Congress amended the Electronic Fund Transfer Act in 2010 and the Consumer Financial Protection Bureau (CFPB) promulgated the original Remittance Rule in 2011, a comprehensive consumer protection system for international remittances was created. However, over the past few years, market developments and a series of changes to the CFPB’s regulations have significantly reduced the efficacy of the original rule. For these reasons, consumer advocates have requested the CFPB require clearer disclosures to ensure consumers can determine the full price of remittances, limit the use of estimates in remittance disclosures as required by Congress, and reverse the expansion of institutions considered exempt from regulation. These advocates aim to ensure that companies transparently disclose hidden remittance fees so consumers have an understanding of the real costs of their payments.68
Using this framework and the lessons learned, consumer protections for crypto could require clear disclosures, including prominently displaying all network fees, platform fees, and exchange rate fees into a single total cost. This single total cost of all fees should also be displayed to consumers before a payment is made and as part of the receipt—ensuring that consumers can determine the full price of cryptocurrencies.
There are other recommendations to consider, including:
There are more direct and impactful ways that we can address financial inclusion concerns rather than use cryptocurrencies. To address the needs of low-income households, for instance, the U.S. government could offer and encourage the use of a robust, real-time payments solution, as other countries have done.76 (In fact, the Federal Reserve plans to launch the FedNow Service, an instant payment system, in mid-2023.) The U.S. government should also ensure that outreach efforts related to this instant payment system are focused on engaging underserved communities.77
Additionally, a number of proposals are available to address the needs of the unbanked—specifically, in providing access to bank accounts. The federal government could provide a direct checking account and simple transaction services to all communities through the post office, which is something that has been done before in the United States.78 Or, the Federal Reserve could authorize “Fed Accounts,” which would be accounts given directly to individuals, businesses, and institutions from the central bank.79 Another option could be to require all existing financial institutions to offer basic, no- or low-cost bank accounts and services.80
In order to support wealth-building endeavors for historically excluded communities, policymakers can prioritize public policies that seek to remedy past injustices, eliminate discrimination in employment and banking products, and create more avenues for accumulating wealth without high risks. Some examples include reparations programs, baby bonds, subsidized college tuition, and ending the devaluation of Black homeownership.81 82 83 84 Others could involve supporting credit-scoring practices with fewer discriminatory effects and providing credit and down payment assistance to borrowers affected by discriminatory housing and lending practices.85
Even though this task may seem overwhelming, this country has experience in successful wealth-building policies. The New Deal, mortgage innovations, and government redistribution programs once built the middle class in America. These policies and programs can be emulated today in a more inclusive way.86
Before embracing cryptocurrencies or overstating their potential, policymakers should first clarify the problems they are trying to solve, and more importantly, why they are trying to solve them.87 When it comes to crypto and financial inclusion, there are fluctuating and contested terms and narratives. Thus, it may be difficult to discern what groups, problems, or pain points we are striving to address.
When examined closely, crypto’s current capabilities do not match the needs of the groups it purports to serve, and it carries a host of risks and drawbacks that undermine its benefits. More alarming, we can observe parallels between crypto and other predatory products, which highlights crypto’s potential to exacerbate unequal financial services to historically excluded groups.
Considering this reality, we can either encourage inequitable and exclusionary banking systems to persist by enabling others to profit from the inequities, or we can develop the courage to ensure that banking is truly inclusive. For these reasons, rather than endorse crypto as a tool for equity, we should instead promote and explore policy solutions that can more directly and impactfully achieve and bolster financial inclusion.