Global finance is experiencing a digital revolution that is going to affect the way money circulates. Centralized financial institutions are testing new technologies in order to facilitate transaction processes and reduce costs related to human interference, such as corruption. According to Accenture, blockchain technology will reduce banks’ infrastructure costs by 30% and therefore improve efficiency. In fact, since blockchain engages peer-to-peer operations on a distributed structure made of secure records, no physical entity is required for it to work.
Overcoming this limit has increased the number of startups involved in the spread of customer-friendly banking services. Fewer fees are applied to transactions when implementing decentralized and transparent systems. They become cheaper and faster. Many major institutions are already on it. In 2015, a consortium of more than 70 financial firms, including Goldman Sachs, J.P. Morgan, Credit Suisse and Citi, founded R3CEV, a tech company aimed at researching and developing blockchain usage in the financial system. Thus, the benefits of the race for crypto-techs by institutions in such a competitive environment is going to increase benefits for banked people.
Lack of trust
However, two billion adults still don’t have a bank account. The failure of traditional financial institutions in providing services to nearly 40% of the world population is due to a lack of trust. Most of the time, people from third world countries don’t have access to loans as a result of the absence of collateral and credit history.
Furthermore, due to the level of risk, local lenders impose extremely high interest rates to those who want to open small businesses. There are many cases of deception against borrowers and landowners based on tampering and corruption. So, it is clear that, in line with the poverty reduction scenario, financial inclusion must be a priority on the political agenda.
The combination of blockchain-based cryptocurrencies and microfinance might be the solution. In particular, can this new technology be the key to break down the barriers to microcredit access? Microcredit is nothing new. In 1983, Muhammad Yunus, who was awarded the Nobel Peace Prize in 2006, founded Grameen, the first microcredit institution, on the belief that loans rather than charity could improve economic development.
Grameen – known as the bank for the poor – applied a 20% interest rate, far higher compared to that of traditional banks. In this way, only those who could generate enough surplus were able to afford microcredit.
The crypto revolution is going to change these conditions. As said before, many startups have been trying to implement blockchain technology to their services. In particular, microcredit startups leverage on the traceability of the records through cryptography in order to exchange digital goods as collateral. The whole process doesn’t include intermediaries. Again, less additional fees, and a further step on the road to limit corruption.
Among these projects, Everex stands out. It was developed on the Ethereum network and is characterised by speedy confirmation times (i.e. one minute).
It gives the ability to exchange its crypto cash with fiat currencies. Loan transactions are carried out between different markets – the physical one and the virtual one. As for credit history, it is located and stored on the network chain and generated on the basis of behavioural data.
The unbanked will no longer have to establish contacts with physical financial institutions to create their credit scores. They will not even need to rely on external documentation. In addition, microcredit startups will now give the option of generating smart predefined contracts that cannot be edited. Everything is stored and public, which makes ownership impossible to manipulate, as it is registered and untouchable.
Whether or not it is the first step to end poverty, blockchain is a reality. Major institutions have already learned this. Society is entering a new digital revolution, in which the consequences may forever change the way people interact in a more inclusive economy.
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