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The Brookings Institution recently released a report seeking to “debunk” the idea that cryptocurrencies may help with financial inclusion. Yet, the report closes with an unnecessarily strict conclusion—arguing the government alone is best suited for helping financial inclusion.
Tonantzin Carmona, the report’s author, deserves credit for noting early that “it is crucial to emphasize that crypto’s current state and its potential are very different, including when it comes to financial inclusion claims.” More so, Carmona deserves credit for distinguishing between the different groups that are often considered when discussing financial inclusion and for cautioning people against making sweeping claims.
Unfortunately, however, the report goes awry in concluding: “[R]ather than endorse crypto as a tool for equity, we should instead promote and explore policy solutions that can more directly and impactfully achieve and bolster financial inclusion.” In doing so, the report recommends government initiatives like FedNow, Postal Banking, and Fed Accounts as “more direct ways to address financial inclusion.” And therein lies a twofold problem: not only are those policies unlikely to aid the unbanked, but also this proposal overlooks that the government itself has made financial services harder to acquire.
As Aaron Klein, Brookings’ Miriam K. Carliner Chair for Economic Studies, has argued alongside Cato’s own George Selgin, “Payment delays are a hidden driver of income inequality in America” and “the [Federal Reserve (Fed)] itself deserves much of the blame for the slow pace of clearing U.S. payments.” For example, in 2017, it was the private sector that finally began to develop a faster system (the Real‐Time Payments Network) for the country, but the Fed interrupted its progress in 2019 when it stepped in to introduce its own faster payments service (FedNow). In doing so, the Fed stalled the development of faster payments as banks waited to see which network would be the best to join. The Fed has only compounded this issue with the recent announcement that when FedNow goes live in mid‐2023, it will be using its authority to underprice the market—further undermining private sector developments. So thus far, FedNow has only succeeded in worsening the situation by undermining and stalling meaningful changes that could have occurred years ago.
Postal banking is likewise a misguided policy. Only six people used the service when a pilot postal banking program was performed in four cities in 2021 and 2022. And these abysmal results make sense when considering why the unbanked are unbanked in the first place. Postal banking proponents often cite the network of post offices as offering a much‐needed solution to the closing of bank branches. Yet, when surveyed by the Federal Deposit Insurance Corporation (FDIC), the unbanked rank “inconvenient bank locations” as the third least important reason for being unbanked (Figure 1). In other words, financial inclusion may be a problem, but postal banking is certainly no solution.
Finally, Fed Accounts are no solution either. For those that might be unfamiliar, the general idea is to open the doors of the Fed and turn it into the people’s bank by allowing anyone to open an account at the Fed—an idea similar to central bank digital currencies, or CBDCs. While there are many issues with such a proposal, the FDIC survey cited above offers another insight into why this proposal is unlikely to be received well among the unbanked. The three most cited reasons for being unbanked are a lack of funds, a concern for privacy, and a distrust of banks. Although advocates may argue subsidized accounts could alleviate the first concern, lack of income is a broader economic problem that is unlikely to be fixed by lowering the costs of bank accounts. Separately, it’s unclear what the federal government can do to help with the second two concerns. Considering the federal government regularly violates financial privacy and so many Americans distrust the government, it is unlikely that Fed Accounts will be a solution for the unbanked. In fact, it’s likely that many unbanked Americans will actively avoid Fed Accounts.
Even more broadly, it’s important to recognize that the government itself has made financial services harder to acquire. Just as the Fed bears responsibility for the long overdue update to America’s payment system, the U.S. government at large bears responsibility for why so many Americans have left the banking system.
Part of the reason that avoiding banks provides more privacy for the unbanked is because the government has effectively deputized banks and other financial institutions as law enforcement investigators. The history of the Bank Secrecy Act has been a history of the federal government forcing financial institutions to report more and more information on their customers.
Yet, the Bank Secrecy Act regime has not just been a cost to one’s financial privacy. It is also responsible for some of the costs people face when using financial services. It is estimated that complying with the Bank Secrecy Act in 2019 cost the U.S. financial industry $26.4 billion. And this number shouldn’t be shocking since the surveillance regime requires financial institutions to have compliance officers, use specialized software, investigate clients, and file millions of reports—all for little practical benefit.
Looking beyond the factors affecting the unbanked and more broadly to racial exclusion, the Federal Housing Administration (FHA) was one of the chief architects of historic redlining. As noted by Kristen Broady, Mac McComas, and Amine Ouzad in a 2021 Brookings Report, “In tandem, the FHA and HOLC [(a government‐sponsored corporation)] helped lock in existing patterns of racial discrimination in the U.S. housing market.”
While this description only scratches the surface, it should make it clear why the government should not be considered as the only solution for financial inclusion, if at all.
Cryptocurrencies are not panaceas to the world’s troubles, but they do offer many solutions that shouldn’t be dismissed. Even in a market that seems to be dominated by nothing but bad news, the fact remains that cryptocurrencies can assist with the needs of the unbanked through lower startup costs, stronger financial privacy protections, and the opportunity to remove centralized intermediaries. The report does well to point out that there are some challenges with these factors, but those challenges do not warrant abandoning what cryptocurrency can offer.
In fact, I’d simply caution readers with a quote from the report itself: “it is crucial to emphasize that crypto’s current state and its potential are very different…” Rather than abandon the potential for cryptocurrency—as the report concludes—to solely focus on fixing the legacy financial system, Congress should seek to fix the existing system and welcome new alternatives.
History has already shown how decades of restrictive policies have failed the unbanked. Restricting the market further will only continue this history of failure.
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