Why Crypto is not the Solution to Financial Inclusion

Why Crypto is not the Solution to Financial Inclusion

By William Pierre-Louis, Jr.

While cryptocurrency advocates present it as a means to financial inclusion, critics see so many false promises and shortcomings as to call into question the value of an innovation that its backers constantly call “revolutionary.” The recent collapse in cryptocurrency markets, and the impact on communities of color, have only highlighted the importance of skepticism.

Americans for Financial Reform and the Take on Wall Street campaign gathered several experts on July 1 to lay out the multiple ugly truths about crypto and addressed a few reasons why we should not take the promises made by its most enthusiastic advocates at face value, and why regulators need to use the authority they already have to oversee this market.

Crypto preaches financial inclusion outside of the realm of regulated financial services. Its advocates argue that they don’t – or can’t – operate by existing rules to make money. This foundational myth of cryptocurrency has attracted people of color, who have long been denied equal access to other approaches to building wealth, like home ownership or financial assets.

But crypto also offers none of the protective measures that apply to other financial products, as David Golumbia, associate professor at Virginia Commonwealth University, pointed out. “The entire premise of cryptocurrency is that we don’t need public assets, we don’t need regulation,” he said. “We need to exist outside of these systems in order to profit.” 

Crypto also blatantly violates many of the rules and regulations you see in the stock market via an old, well-known method called the pump and dump scheme. “All the trading strategies that are against the rules in real or well-regulated markets in the U.S. are just rampant in cryptocurrency,”  Golumbia added. 

The crypto industry also lures people with a language that promises riches out of proportion to what it can plausibly deliver, as Dr. Darrick Hamilton, Henry Cohen Professor of Economics and Urban Policy at The New School, described it. “It’s a low barrier to entry with a promise of high returns,” Hamilton said. “[The industry] preys on people’s desire to make something of themselves.”

Crypto uses a seductive but ultimately empty slogan: “democratization of finance.” 

“When they use words like the democratization of finance, they are not talking about what would qualify as such, meaning participating in well-regulated markets and banks, and credit unions that are insured, that have low fees and are available to everyone,” Golumbia argued. 

A University of Chicago poll indicates that nearly 44 percent of the Americans who own crypto are people of color. And in reality, this population is now engaged in speculation, not investment. “It is not a tangible asset, but rather one that is a store of value that people are drawn to with the expectation that one can arbitrage the market and attain additional value because more interest is driven in that particular currency,” said Hamilton.

Sometimes this speculation is masked by other activities, like when people borrow against cryptocurrencies, which are ostensibly assets they own, but are just as vulnerable to a collapse in prices as any other, if not more. “In lending on cryptocurrency, there is a great concern for the consumer when they borrow against a currency that gets devalued. They lose money on the currency, and they default on the loan,” explained Nadine Chabrier, senior litigation and policy counsel at the Center for Responsible Lending.

Cryptocurrency also portrays itself as the alternative to the traditional financial system, but in reality, its lack of transparency on how it functions and its limitations could say otherwise. “A lot of crypto boosters talk about it as a way to make faster and cheaper payments,” explained Mark Hays, senior policy advisor at Americans for Financial Reform, “but the reality is in most places, it’s still hard to use crypto to buy anything meaningful.” 

Advocates for cryptocurrency would like to operate in a new regulatory setting that they design in partnership with friendly regulators. But this industry, once embryonic, now involving hundreds of billions of dollars worth of assets, has taken off. And regulators already have considerable powers to police it. They should use them. Once again, we see signs that a financial fad is having disproportionate effects on communities of color. Now is the time for policymakers to do what needs to be done.

Click here to watch the AFR and Take on Wall Street webinar on cryptocurrency!