Cryptocurrencies and Financial Inclusion – Why I Am a Skeptic… For Now at Least

> Posted by Adriana Magdas, Specialist, CFI

The Financial Inclusion 2020 campaign at the Center for Financial Inclusion at Accion is building a movement toward full financial inclusion by 2020. This blog series spotlights financial inclusion efforts around the globe, shares insights from the FI2020 consultative process and highlights findings from “Mapping the Invisible Market.

Cryptocurrencies, especially Bitcoin, the most famous, are the hot topic of the moment. In light of the shutdown of the most popular Bitcoin exchange in the world, Mt. Gox, and a loss of an estimated US$ 400 million worth of Bitcoins, it’s important to take another look at digital currencies, their pitfalls, and their relevance for financial inclusion. Hailed by many as the greatest monetary innovation of our time and by others as nothing but “libertarian exuberance,” cryptocurrencies show the opportunity that exists for financial transactions, especially international transactions, to move from cash to digital form. As someone working in financial inclusion, I have been wondering whether cryptocurrencies have any role to play in the critical path toward greater inclusion, which ultimately requires lower dependency on cash for low-income consumers.

Other cryptocurrencies abound—Dodgecoin, Litecoin, and Ripple are a few of the others—but Bitcoin, which launched in 2009, is the first decentralized mainstream P2P payment network and digital currency. Independent from hard, government-backed fiat currencies, Bitcoin is an internet-based, software dependent, inflation immune currency that can be purchased with cash and exchanged for services or goods with merchants who accept it. The market supply of Bitcoin is fixed at 21 million, meaning that once 21 million “coins” are in existence, the cash value will be fully determined by demand. In the last four years, the popularity of Bitcoin in developed economies has increased considerably, not necessarily because it’s an easier medium of exchange but because it is new, interesting, a source of revenue for Bitcoin miners and speculators, and because it decreases the costs retailers incur from accepting credit card payments. For example, is the first large online retailer to accept Bitcoins, in an effort to minimize the costs incurred from credit card transactions.

Does Bitcoin have any relevance for low and middle-income countries? As in developed economies, for P2P and P2C payments, its greatest benefit is in significantly decreasing the cost of sending remittances to friends and family. Bitcoin transactions are free, meaning remittance senders do not incur significant money transmitter fees.

But what are the challenges?

The challenges to Bitcoin in particular, and cryptocurrencies in general, are substantial. It will be a while before Bitcoin and other cryptocurrencies will be able to substantially help advance financial inclusion in developing countries. In the short-term, Bitcoin might take a significant chunk out of the profits of money transmitters and will definitely underline the appetite for monetary and payments innovation.

Consumer Data Privacy

Bitcoin transactions are public, traceable, and permanently stored in the Bitcoin network. For example, once someone uses a Bitcoin stored in their wallet, anyone can trace that Bitcoin’s movement in the market, see all the transactions conducted using the specific address, and the address’s current balance (basically how much money a given person is holding in their Bitcoin wallet). This poses security concerns for consumers who may not fully understand how Bitcoin works. Banking data privacy rules protect individuals from misuse of their data, but no such rules govern Bitcoin exchanges. To increase security, various measures that the Bitcoin owner is fully responsible for are recommended, making it cumbersome and difficult for people to safely transact in Bitcoin.

Knowledge Gap

Cryptocurrencies are, for now at least, an esoteric subject. The very concept behind them makes them inaccessible to most people, but the fact that they are independent of a specific currency and not backed by any government, will make most people, especially non-techy and risk averse ones, reluctant to use them. As demonstrated by CGAP’s infographic comparing Bitcoin and M-PESA, the transaction process for Bitcoin vs. mobile money is quite complex and although users don’t necessarily need to understand the full process to be able to use it, it’s in their interest to do so.

Limited Market

Cryptocurrencies can significantly decrease the cost of remittances, but once they are sent to someone’s wallet, this person can only use them if they are accepted as a medium for payment by other people and businesses. Otherwise they have to be exchanged for cash, which in developing economies and for low-income consumers is quite difficult. The process of exchanging Bitcoin for cash can either involve a Bitcoin Exchange where a person has to sell the Bitcoin to someone through an intermediary who then deposits the cash in a bank account or an innovator such as Bitpesa. These transactions require a small fee, most often lower than what money transmitters generally charge. In Bitpesa’s case, regulation has prevented it from officially launching operations.


Last but not least, Bitcoin transactions are irreversible. Once the user approves a purchase or transaction, the transaction takes about 10 minutes to execute, during which it is still reversible. Once entered in the Bitcoin public ledger (the network history of all transactions), the transaction is no longer reversible. If someone makes a mistake and enters the wrong address, for example, there is no way to get the cash back. As no banks or payments providers are involved in the process, the sender is at the recipient’s mercy (if they can figure out who the recipient is). By contrast, regulated payment systems are required to have robust error correction capabilities.


The success of mobile based payments systems such as M-PESA was in large part due to enabling regulatory frameworks. I doubt cryptocurrencies will be met with the same level of government support. The United States and other countries, such as Australia, are increasing their monitoring of Bitcoin in an effort to minimize black market activity. This intersection of the virtual with the physical is where governments and regulators will have a lot to say, and the likelihood they will be open and enabling seems lower by the day, posing significant challenges to the mobility and practicality of cryptocurrencies.

All in all, I have to agree with the skeptics that Bitcoin, and cryptocurrencies in general, don’t hold much potential for advancing financial inclusion at this time. That said, many cryptocurrencies exist already and it’s possible that a future one, constructed better than Bitcoin, will tell a different story. What we can learn from Bitcoin for now, is that there is an appetite for monetary innovation that will make the world less dependent on cash, decrease the cost of transactions, and increase the mobility of money. Emerging markets are in great need of such innovations, but as we work to advance financial inclusion, it is important to make sure that the tools we use will not intimidate consumers or leave them vulnerable, but rather encourage them to become less dependent on cash.

Image credit: Jason Benjamin

Have you read?

Our Woman in Milan: Observations on the Intersection of Mobile Money and Regulation

What Technology Can and Can’t Do for Financial Inclusion

Duvvuri Subbarao: On India, Technology and the Importance of Authority

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