Why Bitcoin Won’t End Extreme Poverty

“Financial inclusion” is the new buzzword in the financial technology space. With the rise of services like Abra, MPesa, etc., we firmly believe that Bitcoin will provide financial services to those who don’t have bank accounts. We all say that with Bitcoin, cleaners working in Dubai can transfer money back home, and refugees can transfer money to safer places abroad.

Even I wax poetic on this topic. And rightly so. Optimism is a delicious tonic for the soul. But the buzzword surrounding this cryptocurrency has blown its bubble, and it’s worth assessing how it will fare in the coming years. Simply put, the current Bitcoin infrastructure is not adequate to support the unbanked. That must and will change.

Before I get into the main text, I want to disclose a little bit about myself: I have been researching this issue for my own company Freemit, and I have been talking to startups in this space. People have different opinions on this issue, and I personally really want those who do not have bank accounts to get the help they deserve, but it will take an industry-wide change of approach to help those who need it most.

Let’s start by talking about the unbanked in the United States. Mehrsa Baradaran’s brilliant book How the Other Half Banks tells the story of the decline of village banks and the rise of predatory, harmful banks. In the early days of banking, the United States was an agricultural society, and every town or community had its own bank.

These numerous micro-banks served the community directly, often being the only place farmers would get their money before the next year's harvest. When we imagine evil landlords and bankers arriving in small towns across America, whose whims could make or break a farm, it's these small banks we miss. In fact, these small banks were the lifeblood of early American development.

Regulatory changes allowed the growth of large national banks, which gradually swallowed up smaller banks. These micro-banks either failed or were acquired by the big banks, and as a result, bank deserts further engulfed agricultural towns, leading to the industrialization of the United States and all the resentment it caused. Now you could sell your soul to a company store and even deal with a bank that looked the same and had no connection to your community. You could also get a big mortgage and buy a house in the suburbs, which was supposedly good for all of us, except for the occasional terrible car accident.

Now, as bank branches hollow out, the cost of a $600 payday loan in the U.S. has ballooned to $2,000, and the only ATMs that work charge another $3. It wasn’t always this way, and this core view of the banking industry is a bit pessimistic, but it’s happening from New York to Jakarta.

So how do you solve this problem? Bitcoin is a solution, but only after the big monopolistic banks open up connections to the entire blockchain network - obviously, this goes against the big banks' efforts to build special "internal blockchains". The big banks still believe that blockchains, like the Internet, must be "secured" by building a private network that is only used by them. This is reminiscent of the time around 1999 when some companies bought private VPNs to prevent the evil Internet - the catalyst for change that reshaped the world - from interfering with their test program specification (TPS) reports.

What the big banks are really saying is that they want the blockchain as the jet engine on their 747, but they don’t want to deal with all the dirty passengers and wayward pilots. This folly will soon be corrected.

But that still doesn’t solve the problem of the unbanked. Here are some of the more pressing issues.

The unbanked want to remain anonymous. The bank owners I spoke to pointed out that the number one problem with serving the unbanked is that they are in a cash economy. For a variety of reasons, such as their immigration status, fear, or distrust of banks, they want to remain anonymous. The only way to solve this problem is to rewrite the system like Western Union.

The onerous rules associated with closed networks like remittances allow the unbanked to use a completely transparent network.

However, many developers of remittance services are scared off by regulations that were written for an uncivilized era. Only if the industry works to change the perception that sending anonymous money is a tool in the hands of terrorists and drug dealers can the regulations be rewritten. Allowing $100 in cash to be transferred anonymously helps poor workers, not gangsters. Gangsters have their own ways to transfer money, and $100 is just a small salary.

People without bank accounts often live in places where predatory banking is more accessible. “The desire to get money quickly is a big reason low-income people don’t use traditional banks,” New School professor Lisa Servon said in a PBS report.

"In the South Bronx, there's only one bank for every 20,000 residents," she said. That means they go to check-cashing and currency-exchange places for transactions, and high-fee remittance kiosks are frequented. New ideas like human-operated ATMs are interesting and well suited to places like Hong Kong, where maids can go to shopping malls to send money home and small-amount Bitcoin remittance services are booming.

But these are small markets that big banks or big investors aren’t interested in. These services are like the Netscape browser, small outliers that will eventually grow into big companies.

The unbanked are hard to reach. It’s hard to get unbanked customers who will trust your brand. So tools related to Internet banking must first solve problems for its first adopters. The first mobile phone users were mainly those who drove luxury cars. Now, everyone in the world has a mobile phone in their pocket. This means that the phone has gone from a tool for the rich (like Bitcoin is now) to a tool for the masses.

The first internet stores required hedge fund connections to open and required hundreds of engineers to understand (like Bitcoin now). Now, anyone can use the tools created by that company to build anything they want. The barrier to building an internet startup was basically understanding a little bit of code. The same is true for banking. When these apps get better, banking deserts will cease to exist because we will soon have a fully functional bank in our pockets.

Smaller countries don’t have Bitcoin liquidity. While exploring for my own company, I heard time and again about startups failing because of Bitcoin’s lack of liquidity in the poorest countries. It’s for this reason that the most successful startups are either sending airtime abroad or issuing debit cards that can hold money remotely.

These are alternative forms of transferring money and helping people instantly in countries that lack the proper infrastructure or cannot use cryptocurrencies. It will take a long time for the truly poor to understand Bitcoin, and even then, we don’t need to discuss it at all. Instead, it should be the sharpest sword in the hand of universal banking services, and the financial technology industry should work to ensure that policies are made now to help everyone, not just the rich.

In theory, the infrastructure for Bitcoin is great, secure, and powerful. In practice, it's worthless, but that won't last long. This year, Bitcoin becoming legal tender will become a reality, and hundreds of thousands of people are working on it, but focusing on the unbanked won't interest the big banks. They have been very successful in ignoring this part of the world. I predict that in the next year, there will be a lot of exciting changes in this space, but it will take some time for Bitcoin to realize its true power. When it does, we will see an engine of change that will rival the Internet in power and reach.