Brookings Institution, the influential Washington DC-based think tank, has challenged promises regarding crypto’s oft-heralded claim to improve financial inclusion. In his report on behalf of Brookings, Tonantzin Carmona challenged the potential of digital assets to improve everyday access to financial services.
Carmona cited US Treasury reports that responded to President Biden’s executive order asking government agencies to come up with regulatory frameworks for digital assets. The Treasury has described digital assets as risky for disadvantaged populations in its report “Crypto-Assets: Implications for Consumers, Investors, and Businesses.” He concluded that digital assets have failed to live up to their promised potential for include traditionally excluded populations.
Portions of disadvantaged populations use digital assets. A survey conducted at the University of Chicago showed that 44% of American digital asset traders are African American and Latino. The Federal Reserve also admits that a growing number of underbanked individuals are using digital assets.
However, Brookings notes that the groups that could benefit from greater financial inclusion do not overlap with digital assets as much as crypto proponents seem to think.
Brookings identifies the crypto problem of competing narratives
According to the Brookings Institution report, digital asset marketers are using two narratives that may complement each other on the surface, but compete on deeper levels.
The first story posits that digital assets can provide an alternative method of conducting transactions. People who don’t find it easy to visit banks or use digital banking apps could, for example, download a Bitcoin wallet instead. Unlike banks, digital assets can process transactions around the clock.
The second story suggests that digital assets are a way to create wealth. Proponents of this narrative will typically use the slang term “HODL” and suggest that their favorite crypto will retain or increase the value. A few in this camp support DeFi applications for depositing digital assets to earn interest. This narrative discourages the use of digital assets for day-to-day transactions, instead emphasizing their investment attributes.
Naturally, those interested in greater financial inclusion might ask which option would-be users of digital assets would prefer, if proponents could come up with methods as convenient as swiping a debit card. Can users use digital assets to transact or create wealth? How can the crypto community solve problems if they can’t even agree on a goal?
In the first place, buying crypto almost always requires a bank account. While some exchanges may allow customers to purchase digital assets with a prepaid debit card, many top exchanges, like Coinbase, require customers to log into a bank account.
Many underbanked or unbanked people cite factors such as their inability to maintain a minimum balance, high bank fees, or distrust of banks. These people can already find alternatives like prepaid debit cards that are convenient and easy to use for daily transactions ⏤ without the need for a bank account.
Blockchains of digital assets generally cannot handle high transaction throughput. Any blockchain with transactions per second on par with Visa or Mastercard generally sacrifices decentralization almost entirely, opting for an oligopoly that agrees to pay for large data center infrastructures.
Developers are trying different scaling solutions, but none of them can scale a decentralized blockchain like Bitcoin to the level of Visa. This limitation can slow or even prevent digital assets from replacing banks and credit cards.
Crypto as a wealth-building tool shows little promise
Second, digital assets are not a tool for creating wealth for billions of people who don’t have money to invest in the first place. Strong price fluctuations make digital assets an uncertain way to build wealth. Many people are in debt or have no funds to invest.
Brookings also mentions other historical ways in which digital assets cannot overcome barriers for traditionally disadvantaged populations in the United States. Past efforts to give families an economic advantage included the Homestead Act of 1862, which promised acres of land to people willing to resettle, and the GI Bill of 1944, which promised free education and help to start a business or purchase a home for eligible veterans. However, most of the benefits went to white men and excluded minorities and indebted populations.
This caused the problem of unequal generational wealth. White families have a median wealth level of $188,200 – largely attributable to owning real estate. Hispanic families have a median of $36,100. African American families have an average wealth level of $24,100.
People who grew up in poorer families have more obstacles in obtaining favorable credit terms to start a business or access higher education. Digital assets would be need to fix these issues improve their image as a tool for improving financial inclusion.
Brookings outlines the many hidden fees in crypto
Third, Brookings recommends digital asset advocates build much better on- and off-ramps for international currencies. Proponents have promoted digital assets as a quick and inexpensive way to manage international remittances.
They announced that a sender using digital assets could send thousands of dollars across national borders for mere pennies instead of losing a percentage of the money sent to money transfer services like Western Union. The recipient could receive local currency in minutes instead of days.
However, like money transfer services, fees and banking rules still apply. Some users in countries whose banking system prohibits connections to crypto exchanges have to seek out rare and expensive crypto ATMs to convert digital assets into cash.
If recipients preferred to keep their crypto balance without converting to fiat, they would need to source rare providers to spend a digital asset within their local community. International remittances of digital assets still face fiat on and off rampsplus exchange and transaction fees.
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Consumer protection is still lacking
Fourth, the lack of consumer protection can be a problem. In June 2022, Fortune magazine warned that Celsius Network customers may not have the usual consumer protections in the event of bankruptcy.
On July 28, 2022, the Federal Reserve announced that it and the FDIC had co-signed a letter demanding that Voyager Digital cease advertising that it had deposit insurance with the FDIC. The subsequent collapse of Voyager highlighted the lack of consumer protections in the digital asset space.
Brookings has warned that future pushes for financial inclusion could lead to the same predatory practices such as subprime mortgages, payday loans, and check cashing services that tend to replace closed bank branches in inner city neighborhoods. Similarly, crypto ATMs are starting to appear in convenience stores in low-income communities, and they can extort fees of up to 20%.
In light of these issues, Brookings suggested that there are already better ways to improve financial inclusion ⏤ and they does not require crypto. An obvious tactic might, for example, remove systemic barriers to opening a bank account through legislation.
The Federal Reserve is also working on an instant payment service called FedNow, which it plans to launch in mid-2023. Carmona also hinted that the Federal Reserve could offer central bank accounts directly to individuals and businesses, instead of limiting it to primary account-approved financial institutions.
All in all, the Brookings Institution recommends that policymakers take a closer look at promoting greater financial inclusion without the use of crypto.
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