GFI Founder’s Update — April 2021
Dear Friend,
Every so often an innovation comes along and changes the world. From the initial bitcoin whitepaper published in 2008 to the IPO of the currency exchange Coinbase this month, cryptocurrency has far exceeded expectations in its proliferation and value over the past decade and change. A single bitcoin has ballooned in value from less than 1 cent in 2010 to nearly $55,000 today. But is cryptocurrency truly the great innovation its evangelists claim? Will it reach the unreachable, bank the unbanked, and promote financial inclusion while bypassing bureaucracy, entrenched interests, and corruption? I say not yet, and maybe not ever.
Coinbase, the largest cryptocurrency exchange, boasts over $456 billion in trades on the platform since it began operating, and $90 billion in assets stored on the platform, representing roughly 11% of the total value of all cryptocurrency assets. But to what end? As they have grown from an idea to a multibillion-dollar reality, cryptocurrencies have remained an asset class largely removed from the productive economy, merely a store of value for investors hoping for returns. Sure, you can buy a Tesla with bitcoin, or buy items on Amazon by downloading a complex third party app which will take your cryptocurrency, trade it for Amazon gift cards on an exchange, and purchase the item for you. But this is not the great equalizer for the developing world that we were promised.
Cryptocurrency’s promise for financial inclusion in the developing world is its decentralized nature, bypassing central institutions and authorities which often present barriers to those trying to access financial services. Unfortunately, though, cryptocurrency has plenty of barriers of its own. Only 40% of adults in developing economies have internet access, and in many countries there is a gender gap of up to 10 percentage points in access to a mobile phone. For those who do have internet access, and the ability to read and write, a whole host of other complications remain. How much is a crypto asset worth? Bitcoin experiences significant price swings on a daily basis, so how does it compare to your country’s fiat currency when you ultimately convert it, and what if you time it wrong? And how are cryptocurrencies regulated? When you transfer it to cash, is it a taxable event? In the US, cryptocurrencies are considered a property by the IRS, and purchasing that Tesla with bitcoin, or even exchanging bitcoin for cash is a capital gains tax event.
A popular proposal for the use of cryptocurrencies in developing economies is for sending remittances. Using cryptocurrency allows individuals to bypass the fees that come with established services like Western Union or upstart competitors like Transferwise. But for billions of the world’s unbanked, particularly those in the Global South and informal economy, the basic technology and connectivity requirements for exchanging crypto are simply not accessible. In the uncommon cases where workers can access crypto accounts what are they supposed to do when they receive it? Like everywhere currently, that worker will have to convert it to the local currency, incurring broker fees, experiencing price volatility and possible regulatory consequences, or worse not be able to do any of this and be stuck with a useless “currency” that can’t pay for even a basic need.
Today, the only cryptocurrency-based proposal that has a realistic chance of increasing financial inclusion in the developing world is Facebook’s proposed Diem. Diem is a “stablecoin,” meaning it is tethered to the price of real-world assets, controlling for the problem of volatility. More importantly though, Diem takes advantage of Facebook’s monopoly on the internet in many developing countries. Converting to local currency is less necessary if everyone you know with an internet connection has easy access to the same cryptocurrency as you through their Facebook browser. This monopoly is a huge competitive advantage for Facebook, and the same reality that has proven to be dangerous and even deadly when left unchecked.
But do we really trust Facebook to shepherd the developing world into financial inclusion? I don’t. Cryptocurrency promoters would tell me that the nature of the technology makes it so that I don’t have to trust anybody at all. But until cryptocurrencies can easily and reliably be exchanged as legitimate tender, no longer needing to exchange to local currency for use, that’s not true. And I haven’t even mentioned its massive carbon footprint.
For now, cryptocurrency is just another asset class, serving to enrich the advantaged and the established elite. The underlying blockchain technology remains a real innovation, and has seen value in lowering backend transaction fees for development institutions. But is it the financial inclusion panacea we’ve been promised? I won’t hold my breath.
Sincerely,
Karen Tramontano, GFI Founder & President
Jacob Emont, GFI Program Director
