How will embracing cryptocurrency bring global financial inclusion?

Cryptocurrency has taken the spotlight of many recent headlines – whether it’s reporting on instances of illicit crime, the volatile market, or emerging regulation across the globe – it doesn’t seem to miss a week when it comes to featuring in news stories. The fascination with crypto has accelerated fast in the last few years and if you aren’t investing in crypto, more often than not, someone close to you is.

Despite its popularity, the crypto market has been volatile and unpredictable recently. The values of different cryptocurrencies seem to fluctuate like the UK’s sporadic weather – from the sticky, harsh beat of the sun to instances of light snow and monsoon equivalent of rain – all in the space of a few hours. Like the UK weather, there does not appear to be a sense of stability in the crypto market and regulators are hoping to change the impact this has on investors. 

There have been recent developments in global regulators developing crypto frameworks to reduce crime and protect those who have crypto assets. The aim of the game is to employ well-targeted regulatory guidance that will instigate trust and certainty in crypto markets rather than speculation – which is easier said than done.

Do the positives outweigh the negatives of cryptocurrency?

Moving onto the pros and cons of crypto…if it was regulated to the T, crypto has the potential to be a prime investment opportunity.

• It is highly accessible and anyone with an internet connection can invest.
• As it is largely decentralised, users can be anonymous – this is good and bad and may change with regulation.
• There is potential for high returns, however, this is dependent on the unpredictability of the markets.
• Widespread use could bring global financial inclusion, meaning underbanked nations can also access financial services for savings, investments and purchases.

Then we have the disadvantages:

• The markets are highly volatile and you may lose what you have invested.
• There can be rapid surges and crashes. For example, in December 2017, its value skyrocketed to $17,738 then in just several months, it dropped to $7,575.
• Crypto mining is bad for the environment as it releases greenhouse gasses, requires a lot of energy and produces a mass of e-waste.
• Because of its decentralised nature, it can be used for criminal activities such as money laundering, funding terrorism and illegal purchases such as weapons.

VMware’s report found that there was an estimated $1.1 billion in cryptocurrency thefts and that crypto exchanges are the most vulnerable target for cybercriminals. As such, consumers and investors are insufficiently protected from fraud, theft or other crypto-related crimes.

At the moment, there aren’t rigid enough controls to deter or prevent crime but with well-thought-out regulations, individuals can be held accountable if crypto was used for illicit purposes. This is relevant in everyday life – a person can choose whether or not to act unlawfully. Despite its dark side, crypto has a certain allure that seems to fascinate those looking for a way to invest and generate high profits. The volatile market could be depicted as a bit of a gamble and somewhat like betting, where you have a 50/50 chance of winning or losing and it is irreversible – perhaps this is the appeal of it. Can the accessibility of it outweigh how up and down the market is?

The crypto world is only going to expand further. At one point, crypto nearly reached a value of $2 trillion and in May 2022, it was valued at more than $550 billion – this is only going to increase as more individuals flock to invest.

The crypto regulatory landscape

Whilst technology advances to all parts of the world, the reach of crypto is only getting more expansive – nations are starting to climb on the crypto train so that it can benefit their economies.

For China, however, crypto is off the cards. Back in September 2021, China declared all cryptocurrency transactions illegal. The People’s Bank of China said that “virtual currency-related business activities are illegal financial activities,” and warned that it “seriously endangers the safety of people’s assets.”

The EU

It’s not all doom and gloom for crypto as the rest of the world is taking steps to embrace it. The European Union (EU) has paved the way by passing the laws under Markets in Crypto Assets (MiCA) – crypto will now be traced much like how fiat transfers are tracked to ensure financial stability and protect its users.

In summary, the regulatory wheels have been set in motion for the EU – pending approval from the EU Parliament. Once approved, there will be more clarity in the way crypto is used in the EU.

Under MiCA, crypto transactions will no longer be anonymous, there will be regulations in place to safeguard consumer assets from theft or loss and protect wallets.

The UK

The government plans to make the UK a global crypto-asset hub. In particular, stablecoins will be recognised as a method of payment and will have regulatory frameworks. This is in a bid to, as ex-Chancellor of the Exchequer, Rishi Sunak, put it “ensure firms can invest, innovate and scale up this country.” As a result, more jobs will be created and “by regulating effectively we can give them the confidence they need to think and invest long-term,” and establish a financial services industry that is “always at the forefront of technology and innovation.”

Stablecoins are seen as similar to fiat currencies and “are intended to maintain a stable value.” The UK is still working on developing regulations for stablecoins.

The US

The crime aspect of crypto has been a deterrent for many nations. This is especially true in the US, which does not wish to restrict a growing industry but needs regulations in place to prevent crime.

President Joe Biden’s administration has been working on developing regulatory frameworks for crypto. We’ve also been seeing enforcement actions such as the Justice Department seizing $500,000 from North Korean Ransomware actors and their conspirators – the ransom payments were returned to the victims and when the US Securities and Exchange Commission (SEC) charged 11 individuals in a $300 million crypto pyramid scheme.

Enforcement is becoming more frequent, which indicates that regulators are getting serious. Even celebrities such as Kim Kardashian can’t evade the US crypto regulators – she was charged for unlawfully publicizing cryptocurrency and is now unable to promote crypto asset securities for three years. There have been developments in regulating cryptocurrency too. In April 2022, SEC Chair Gary Gensler, stated that the top five exchanges accounting for 99% of crypto “likely are trading securities” and therefore, would need to register with the SEC and follow specific regulations. In May 2022, the SEC also announced that it would increase the number of staff in its Cyber Unit from 30 to 50 as well as rename it to Crypto Assets and Cyber Unit.

In June 2022, the Commodities Futures Trading Commission (CFTC) proposed the Responsible Financial Innovation Act. If this legislation is approved, a fair share of regulatory oversight will be passed from the SEC to the CFTC and crypto will be labelled as commodities rather than securities.

These recent developments demonstrate that the US is gearing up for regulations to be implemented, as will enforcement actions.

Why it is unlikely that crypto will replace money

During the DC Fintech Week event, the Federal Vice Chair for Supervision, Michael Barr, stated that crypto tokens are unlikely to replace traditional currency.

He said “because crypto assets have proved to be so volatile, they are unlikely to grow into money substitutes and become a viable means to pay for transactions,” and that “banks looking to experiment with these new technologies should do so only in a controlled and limited manner.”

Barr also believed that there are “novel risks” if banks were to get involved in crypto and stablecoins, which could affect financial stability. He called for regulators to implement laws before they are embraced by more people. 

Global financial inclusion using crypto

Global financial inclusion does not mean having one currency that is used by all – this would trigger an economic catastrophe. When we discuss global financial inclusion, it refers to providing full access to affordable financial services through digital banking.

Crypto is far from achieving this but there are talks of this happening in the future – in a new era of financial inclusion. There’s a huge amount of work to be done in regard to the negative impacts of crypto such as ESG effects, consumer protection, crime etc. But, it is a possibility and all is not lost.

The World Bank reported that one-third of adults (1.7 billion people) are unbanked, according to the 2017 Global Findex Database. The World Bank believes that to reduce poverty and boost prosperity, useful financial products and services must be provided to all. The crypto economy is attractive because it is highly accessible and does not consider a person’s race, gender, nationality, ethnicity or socioeconomic class when onboarding consumers.

Through collaboration and expansion of financial services, individuals and businesses across the world can have access to services such as savings, payments, credit and insurance. If digital finance becomes widespread, it is estimated that the annual Gross Domestic Product (GDP) could be boosted by $3.7 trillion. Many believe that crypto’s easy setup process can provide a doorway to these services, especially to parts of the world that are unbanked.

Across the globe, we are experiencing high rates of inflation and increased costs of living; economies are also recovering from Covid-19 and the Ukraine war. Could embracing a digital currency improve the economic situation? For the most part, it could be a cost-effective way of helping those who are currently financially excluded.

How can global financial inclusion be achieved?

A study sponsored by BNY Mellon found that 41% of investors hold cryptos, whilst 15% of investors plan to use crypto. It’s only a matter of time before the majority use crypto, therefore, regulators should act fast to ensure the safe expansion of crypto markets – one where investors and consumers are protected.

Financial services are important to day-to-day living and help families to save and prepare for the future – improving the overall quality of life. By enabling the use of crypto or another digital currency across the entire globe, individuals with little or no access to financial services would be empowered financially to buy, save and invest. Ultimately, global financial inclusion would be achieved, leaving no one behind whilst our financial markets progress.

As crypto is already a global currency, it seems like the most affordable and effective currency to fulfil this mission. However, as it is a currency that does not abide by financial borders, regulators worldwide need to team up and devise a set of laws that govern crypto.

By having a mutual understanding, it would be easier to ensure global financial market stability, prevent crime and protect those in need.

If you are worried about the upcoming cryptocurrency regulations, please get in touch.